Venture Capital’s AI-Run Lettuce Farms Start to Go Bust
The pitch for vertical farming had all the promise of a modern venture capital dream: a new way to grow crops that would use robots and artificial intelligence to conserve water, combat food insecurity and save the environment.
But after firms poured billions of dollars into these startups, pushing valuations into the stratosphere, the industry is now facing a harsh new reality: funding is drying up, profits remain elusive, and creditors are circling.
AeroFarms Inc. last week became the latest, most high-profile example of the challenges facing the business, filing for bankruptcy after building a massive new facility in Virginia that drained its cash, according to court papers.
Its collapse comes on the heels of lettuce grower Kalera seeking court protection in April. And in May, publicly traded AppHarvest Inc., which operates high-tech greenhouses, received a notice of default from one of its investors, according to a regulatory filing. The company contests the default notice, but if it can’t reach an agreement with its creditors, the firm warned it could become “bankrupt or insolvent.”
“We really were in a hype cycle,” said Vonnie Estes, vice president of innovation for the International Fresh Produce Association. Venture capitalists entered the scene in a frenzy, likening these companies to software firms, and expecting comparable returns. “There was a lot of money that rushed in without really understanding that this is actually just farming.”
Industry experts still say that indoor farming is a crucial piece of agriculture’s future, especially as climate change spurs more destructive wildfires and floods. Nonetheless, the ability of vertical farms to carve out meaningful market share on a national scale could be years away, they note.
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Dozens of the startups popped up over the past decade, with a handful enjoying an almost endless parade of funding rounds. Companies like Kentucky-based AppHarvest saw their valuations surge well into the billions.
In 2021, AeroFarms, an early vertical-farming pioneer based in Newark, New Jersey, had plans to go public through a blank-check merger that had an equity value around $1.2 billion. The growth potential seemed limitless.
But as interest rates began to climb, investors started to scrutinize profitability in a way they hadn’t for years.
Last year more than $1 billion was raised for vertical farming, according to Adam Bergman, the global head of AgTech investment banking at Citigroup Inc. This year, that figure is under $100 million, he said.
“Capital flows went from being more readily available to less readily available,” Guy Blanchard, the president and chief financial officer of AeroFarms, said in an interview this week. Video conferencing in from the company’s Newark facility, he said AeroFarms is focusing the company’s resources on building its microgreens business, which is expected to be profitable by the end of this year.
Investors had previously viewed vertical farms as a “limitless frontier of innovation,” he said. “But now, it’s ‘show me a profitable business.’ They’re more interested in good old businesses that are going to make money.”
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AeroFarms’ bankruptcy came shortly after AppHarvest was sued by lenders threatening to foreclose one of its largest tomato-growing facilities.
AppHarvest on-the-vine tomatoes. Source: AppHarvest
Source: AppHarvest
“We believe that we are in full compliance with the loan terms,” Travis Parman, AppHarvest’s chief communications officer, said in an email response to questions, adding that the company is working to resolve the issue and operations continue as normal. “AppHarvest is transitioning from construction of capital-intensive infrastructure to a focus on the ramp up of production.”
Still, AppHarvest’s shares, which once traded above $40, have cratered over the past two years, closing Thursday at 40 cents.
Kalera, a company based in Florida that focuses on local vertical farming facilities, filed for Chapter 11 protection in April. It had been struggling for months, with its German unit initiating restructuring proceedings in November, and the firm separating its international and US businesses in an attempt to stop burning cash.
A Kalera representative didn’t respond to requests seeking comment.
‘Potential Lifeline’
Vertical farming falls under the umbrella of so-called controlled-environment agriculture, a broader approach that incorporates horticultural engineering to make it possible to grow year round in places where it would be otherwise impossible. Some industry experts have turned their attention to high-tech greenhouses, which rely on the sun as opposed to LED lighting, as a less capital-intensive option as investors start to disappear.
Source: AeroFarms
That doesn’t mean they’ve given up on raising fresh financing, however.
Interest is emanating from the Middle East, according to Citi’s Bergman. The region’s grappling with both food insecurity and the effects of climate change, but also enjoys cheap energy and is home to countries looking to invest in industries beyond fossil fuels.
“This is where the potential lifeline to vertical farming comes in,” Bergman said.
In the meantime, executives and investors are training their sites on so-called unit economics, the cost and revenue for each crop produced.
AeroFarms is shifting production to its new Danville, Virginia facility, “an entirely different magnitude of scale” from its existing locations, according to CFO Blanchard, and one he says is overwhelmingly focused on commercial output as opposed to innovation.
“These aren’t your little farms. They’re very complex modern corporations,” said Eric Stein, the founder and executive director for the Center of Excellence for Indoor Agriculture. “Even if you get the unit economics on the production side, and the gross margins are good, when you look at your operating margins, that’s where a lot of these companies are failing.”
(Updates with additional context on AppHarvest’s default notice.)