Indoor Vertical Farming & Venture Capital: A pro’s view on how to get your vertical farm funded

Exclusives from Urban Ag News

Originally published in Issue 11

What a thrill it was to sit down with venture capitalist and ecologically responsible investor, Will Kain of Rusheen Capital Partners for lunch on a warm Santa Monica afternoon in August. RCP is the brainchild of visionary, Jim McDermott (see his latest venture, Fulcrum BioEnergy).

Mr. Kain graciously agreed to meet to discuss the current state of institutional capital flowing into the nascent indoor vertical farming industry, specifically technologies incorporating controlled environment agriculture or CEA. In its most basic definition, CEA is the growing of plants within a closed or semi-closed environment utilizing light emitting diode (LED) technology, irrigation, heating, ventilation and air conditioning (HVAC), and nutrient and substrate methodologies. Hydroponic, Aeroponic and Aquaponic growing techniques and the proven science behind indoor vertical farming answer the challenge of the planet’s finite water, resource and land uses. It is estimated by the year 2050 Earth’s population will increase from 7 billion inhabitants presently to nearly 10 billion. Traditional agriculture is an unsustainable proposition.

Currently, residing in Venice with his wife and dog, Mr. Kain is living the dream, California Style. This is a rather different lifestyle than his upbringing in often maligned Cleveland, Ohio. The added pain of living through so much local sports team sadness has been “a difficult cross to bear” he concedes between bites at The Lazy Daisy Café on Pico.

Entering the work world from the University of Virginia, Mr. Kain spent five years “on a traditional Wall Street track” at UBS Investment Bank, before landing at Nano H2O, the water desalination firm, as one of the company’s earliest employees. Nano H2O would later be acquired by South Korea’s LG Chem in May of 2014. It was with Nano H2O however that he finally found his groove with the understanding that Nano’s technology would make a real and positive difference in the lives of thousands of people…and for a water-challenged planet.

Will Kain

Let’s not mince words; Mr. Kain is looking to save the world.
His goal is simple: Find and invest in those technologies and companies who will markedly ‘improve efficiencies’ and reverse the ecological damage and environmental harm modern agriculture and industry have wrought upon planet earth in the 21st century. Small effort considering Mr. Kain’s focused eye is upon the unproven indoor vertical farming industry. In fact, in mid-2015 there are less than 50 commercial-scale indoor vertical farms in the United States. Those seeking entry into the indoor vertical farming business are challenged with high capital entry costs and everything from unproven business models and grow configurations to a lack of knowledgeable and credentialed master growers and established industry policy and regulatory guidelines.

Admittedly, the sports-minded Mr. Kain understands there will be winners and losers in the vertical farming game, optimistically stating “There are going to be a lot of winners. This is not a winner-take-all business.” Such optimism, however, is tempered by the recent bankruptcy of ‘plant factory’ Mirai Ltd. in Japan ($10mn in losses) and rumblings of another well-funded, US-based vertical farm headed for the chopping block. Insiders know it was hubris and poor management rather than a lack of market demand or adequate technology or a profitable business model that led to the demise of these once-promising companies. As in the dot-com era, there are some poseurs providing a daily dose of reality…and efficacy…to indoor vertical farming.

I asked Mr. Kain a number of questions focused primarily on where his energies (and capital) are directed and what advice he would give to those seeking to enter the indoor vertical farming business either as investors or operators:

UAN: Tell me how you became interested in this industry and what is your overall sense of the viability, “layers”and geographic “hot spots” for potential proliferation of VFs? 

Will Kain: My interest emanates from my most recent experience prior to Rusheen; I was the Vice President of Corporate Development for a company called Nano H2O. We made reverse osmosis membranes for water desalination. That means we made filters that turned seawater into drinking water. Being in the desalination business, you are in the business of managing water scarcity. You don’t have to go very far to understand that agricultural uses take up 70% of global freshwater withdrawals; that’s a staggering number. We understand that water scarcity is a problem that’s coming home to roost in developed countries now, not just developing countries where water scarcity has been an issue populations have been dealing with for years and years.

As you dig into the water story, other resource inefficiencies associated with traditional agriculture [surface], among which about 30% of greenhouse gas emissions come from agricultural sources. You read about groundwater contamination, overuse of chemical fertilizers, the harmful effects of pesticides, herbicides, fungicides, etc. What really occurred to me was the understanding that there is a need for resource efficiencies [in agriculture] as the world grows from 7 to nearly 10 billion people (projected within the next 35 years). 

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UAN: What are the key factors you consider as “must-haves” for any investment in an indoor, vertical farming operation/start-up?

WK: It’s an important question and as with any investment, it’s hard to have a specific prescription: if this opportunity does not meet “criteria A, B or C” we’re not going to look at it… But… You have to have guidelines and general rules of thumb that help to inform the way you think.

I would say… One is technical know-how or said a little differently, domain expertise. [That] doesn’t necessarily mean you have to have someone on your team who is a grizzled CEA veteran because as we all know, there aren’t a lot of those. But somebody who is part of the team who has experience with growing; experience with the distribution logistics associated with getting food from the field to a customer base. Be they traditional growers, greenhouse growers or folks who have been in or around those businesses, I think that’s a really important factor. And it speaks to a larger, overall investment belief that I have which is TEAM is critical. This is one thing that helps to put a good team together, having some of that domain expertise. 

The second thing is you have to have a good sense of what the opportunity is. Some type of market segmentation, whereby you can express to me that you understand what the market looks like.  We’re not just going to grow something indoors because we can and we think we can sell it but “what why and where” are you growing? Who are you going to sell to? Are you going to have a better price? Are you going to help your customers save costs and increase revenues? Will you help them meet some type of regulatory requirement? There are any number of factors that would allow you to offer a value proposition but what is your value proposition? Why are you different? Why would a customer substitute for you?

With my experience in finance, I look at things through a dollar and cents lens  with an understanding of financial projections. They don’t have to be particularly robust. They don’t have to be really detailed and really granular because we’re talking about new businesses and new market opportunities, but a basic understanding of the financial projections for the business would be another thing that’s very valuable for me to see.

UAN: Are you averse to investing in any particular geographic region based on political/social instability?  Regions such as the Middle East.

WK: No. At Nano H2O, in the water desalination business, the Middle East is a very important market. We actually did a lot of business in the Middle East in my time at Nano. So I would under no circumstances write any particular region off. Now, there are some legal ramifications associated with doing business with certain, specific countries that you’d want to avoid but as a general matter, I’d say no. There is not any specific region I’d write off for political reasons, the Middle East being a prime example. You’ve got to be careful. You’ve got to be smart. You’ve got to be diligent as to how you enter the market but without question there is money to be made. Look, there are major water scarcity issues in the Middle East. I don’t know the specific numbers, but they must import massive amounts of fresh produce, etc. so it seems to me there are real market opportunities there.

UAN: Are you of the mindset “I need to get in on this industry while in its infancy” or are you taking a prudent, “Wait and See” attitude?

WK: I think in general if you are in a rush to find a conclusion that supports your own thesis, you set yourself up for some potential trouble. Everybody has their own bias, I look at CEA as an area I’m interested in but if I’m just looking for self-reinforcing stuff, then I think that’s a recipe for getting yourself in trouble from an investment point of view. I’m not in a rush. But I think now is a great time to be looking at the CEA space. I think it’s early, but I think it’s the right kind of early. There are smart people, there’s money flowing into the space, but it doesn’t appear as though there is a Gold Rush yet into the CEA space that would in turn drive up valuations and make it tougher to make some returns. I would say I’m taking a “wait and see” approach, but I am positively predisposed to the business and would like to invest sooner as opposed to later.

UAN: Among the “6 Pillars” of vertical farms (Nutrients, Substrates, Lighting, Irrigation, HVAC and Building/Structure), where do you see the strongest areas for investment?

WK: I would say Lighting, HVAC and Building/Structure and I tend to think HVAC and buildings/structures are pretty closely related. Understanding efficient building structures allows you to potentially bring down your HVAC costs. I think those three are THE critical pieces of the cost structure of controlled environment agriculture, and cost is what I believe we all need to be laser-focused on today. Because if CEA is going to make a big difference and we are going to feed tens of millions of people through CEA, cost has to be chief in our mind.

I also do think, though, from an investment perspective we have to weigh risks and rewards. As an investor if I’m investing in an HVAC or a building/structural efficiency company, there are other potential outlets for those technologies. Lighting, HVAC, building/structural efficiencies all are very large industries within themselves today, so if we’re developing technologies that are helpful for CEA, I believe those are potentially portable into other areas which, from an investment case, that just helps to hedge risk.

The flip side of there being a lot of winners is that there also are going to be some losers. It’s not as though this is guaranteed success for everybody who dips their toe in this controlled environment agriculture space.

This will be competitive and not everybody gets to win. Depending upon what you read, global agriculture is a 3, 5, 7 trillion dollar global market. There’s not any one model. There’s not any one company. There’s not any one solution that is going to be the winner. There will be multiple winners which is good and exciting, but that means that in a market that size there is competition, and with competition you have to execute, you have to be focused on cost, you have to be focused on managing your team in the right way, raising the right type of money…there are a lot of things to making a success.

UAN: In your view, how strongly can technology move the industry forward? Meaning, the use of software, robotics and automation incorporated into networks, server farms (no pun), etc. Based on this symbiosis, are there areas for investment in tech as well?

WK: Absolutely. I think tech has a significant opportunity to move CEA forward, more so than it does to move conventional agriculture through (the use of) precision agriculture or precision farming.

In these controlled environments, advanced sensing, software programs can create instantaneous feedback loops where you understand what is going on at the plant level at all times and (to) be able to adjust things like nutrient, temperature, water or light levels, whatever the case may be. Automation has a huge role to play in indoor agriculture that I don’t believe it can play in a conventional farming setting, if for no other reason than sometimes it rains outside and sometimes the wind blows. There are things that can get in the way in the field, whereas in an indoor setting the automation is left to its own devices.

I think there are real investment opportunities in robotics, infrastructure sensing equipment and (software) programs that leverage advanced sensing in the actual growing chamber and then, as I said, that goes through some type of software analysis. I think there’s absolutely opportunity there…Including genetics and genomic technology. I don’t mean GMOs.

Smart plant scientists understand how to breed seeds and advance plant performance and responses to things like varied nutrient, temperature or light levels. I think there’s real opportunity there that hasn’t even begun to be explored. How do you optimize seeds and plants for growth in indoor spaces? That’s a direction I think is compelling and interesting, but I don’t know if there are specific investment opportunities today.

UAN: What are your thoughts on the recent Goldman Sachs/Prudential $39mn funding of AeroFarms in New Jersey?

WK: I think it’s all great for this business. I think it’s very important. I think it’s a really beneficial initial step into the “spotlight.” Obviously there are a lot of people who have been working really hard in CEA for a long time so it’s not as though AeroFarms is the first one (to receive institutional capital) but it’s the biggest one. It’s got the biggest names in terms of financial backers when you talk Goldman Sachs and Prudential, so I think it’s a great development for the business. I think it’s an important use case for us to continue to look at and I’m rooting hard for them because if they win, I believe CEA in general wins.

UAN: Does the involvement of Eric Schmidt (Farm2050), Syngenta and, again, companies like Goldman Sachs and Prudential infusing capital into this embryonic industry mean there’s hope for mass adoption of the indoor VF and, conversely, the ability for a company like Rusheen Capital to see strong ROI?

WK: Great investors make bad investments all the time. They’ll tell you that! So I don’t think the mere fact of the involvement of that impressive list of names that you just laid out means there is an ROI story for them, for any other investor or a body like Rusheen. But what it does do is it builds attention.  It builds buzz. It gets you into press and starts to help to disseminate the story which I believe as the story proliferates and more and more people see it and understand it and start to recognize these types of names, you have the chance to get smart people and some additional smart money into the space, like an Eric Schmidt and his Farm2050 initiative. When they launched it maybe a year ago, it was on the cover of the Wall Street Journal and the New York Times and that’s great. That catches a lot of folk’s attention. Then you follow that reasonably quickly with Goldman and Prudential investing in AeroFarms. These are all things that just help to build the case that there is potentially something here. And as we know, the way that markets work, if we know there is something in the ‘offing’ in CEA, attention, money, resources go into businesses where there’s potential for ROI. Ultimately, yes, the involvement of guys like Goldman helps.

The author would like to thank Will Kain for his time and insight in participating in this interview. Further gratitude goes to Chris Higgins of Hort Americas and the founder and editor of Urban Ag News.   

Jim Pantaleo works to develop all aspects of indoor vertical farming and writes as an industry advocate.

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