Building AgCrowd — FinTech startup improving funding for agriculture
Finding the problem to solve
I grew up with one of my best friends James Kilby and spent a lot of time each holidays working on his family sheep farm in New South Wales, Australia. We learned the industry well as we mustered and drenched sheep, constructed fences and planted trees to improve the land quality.
A few years later I was mid-way through a finance/economics degree and had started trading shares on the stock market. In heading down to the farm one summer I was curious and calculated the financial return on the mob of sheep that we were drenching, which seemed to outperform the stocks that I was investing in. I wanted to invest in the mob of sheep but couldn’t find any way to do so as a retail investor (a non-professional investor). After some research it became clear that it was difficult to invest in agriculture in general, and this problem extended to high net worth (sophisticated) and institutional investors too.
At the same time my research showed that the agricultural sector significantly lacked funding, especially for innovation. When comparing Australian vs United States investment into agricultural innovation, Australian agriculture as a percentage of GDP is double that of the US, yet Australia’s investment in AgTech (agricultural technology) is $0.12 per capita compared to $6.82 per capita in the US (United States Studies Centre 2016).
The problem became clear: the agricultural sector needed funding and I wanted to invest, yet there was no current way to bring the two sides of the market together.
The original idea
My friend Henry showed me a new startup accelerator program that the University of Sydney (USYD) was setting up. I stayed up late the night before applications were due writing a 4 page document explaining how I’d try to solve this problem, which ended up being far from the concept we took to market.
The original idea was inspired by the fractional property investment model, where a retail investor can invest as little as $100 in a property and generate returns in the form of capital appreciation (increasing value of the property) and dividends (annual rental income).
I thought we could apply a similar model to a mob of sheep. A retail investor could purchase a lamb for approx. $100 in Year 1. Each year for 4–5 years this initial lamb breeds a new lamb until your initial $100 investment is worth $400–500 in Year 5 (without taking into account the cost of maintenance, land, food and labour). This return would act as the capital appreciation for the investor. On top of this, a shearer is paid approx. $3 per sheep to shear a fleece of wool worth a market value of $50. This happens once a year so would be the investors dividend payment.
For the farmer, they would be able to access funding to expand their farming operations without the large upfront capital requirement to purchase the sheep. In return for managing the sheep the farmer would receive a management fee plus a performance fee, similar to an investment fund. My marketplace business would take a small transaction fee for buying/selling shares in the sheep.
The goal would be to expand this portfolio to include thousands of mobs of sheep across the world in order for investors to get liquidity so they could buy/sell as needed, then expand to other dual-purpose animals such as cows (meat and milk) and chickens (chicken and eggs) so that investors would receive both the capital appreciation and dividend.
Bringing on co-founders
There were many flaws in this idea but somehow the USYD accelerator program accepted me as a sole founder with no team. I turned up to the first meet-up and was asked to present my idea to the cohort of founders. I called it “MyFarm Invest” and was stumped when one of the other founders asked me why I didn’t have a co-founding team given every other startup had 2–4 co-founders. The next meeting I showed up with 2 co-founders, James and Nick, who brought skills and experience in agriculture, finance, tech and legal. We complimented each other well.
James would lead sales and provide industry expertise as Head of Projects, Nick would lead operations and finance as Head of Operations, and I would lead business and product development as Managing Director. Ultimately we all wore many hats and helped with all business functions.
Finding the real problem
We started attending many industry conferences and interviewing industry experts which exposed us to the rising trend in AgTech companies: the use of technology in agriculture to improve yield, efficiency and profitability for farmers. The number of AgTech focused accelerators had grown rapidly in the last 12 months which provided startups up to $100k in seed funding. But once the AgTech startup would graduate from the accelerator program they’d often struggle to raise follow-on funding from Venture Capital (VC) firms as 1) agriculture was a difficult industry to understand for traditional VCs, 2) AgTech products take longer to validate than other verticals e.g. there is only one harvest per year, 3) often these AgTech startups didn’t have the traction and customers requires to make an investment.
This created a seed funding gap called ‘The Valley of Death’ where AgTech startups would not have enough cash flow or funding to grow. This resulted in either the startup going bankrupt or experiencing an incredibly rocky and uncertain funding roadmap which distracted the team from solving their customer’s problems. This scenario seemed to be a recurring theme which extended to FoodTech, BioTech, CleanTech and Renewable Energy startups. Yet nobody seemed to be solving this funding problem.
We started speaking with many potential customers. A few AgTech founders told us they’d previously paid a financial advisor $60,000 upfront to raise $300,000 funding for them with no guarantee — this was absurd to us. On the flip-side, many retail and sophisticated investors told us they wanted to invest in sustainable technology companies, particularly in agriculture. Investors also said they would sacrifice financial return for social return (impact), which showed us the potential for a growing impact investing market in Australia.
After lots of coffee meetings, video calls and conferences, we found that:
We thought we could meet these needs by building an online investment marketplace which focused specifically on the agricultural sector.
The business model
We wanted to find a business model that supported our target customers in the early stages of their journey and enabled us to generate enough cash flow. We landed on our main commercial model taking a 6% success fee on total funds raised which would only be payable if we were successful in hitting the funding round target, and an upfront fee to cover initial due diligence costs. Enabling customers to pay on a success only basis seemed far better than the 20% upfront fee that some founders told us they previously paid.
The vision
We started building out our vision based on customer interviews and market research, it looked something like this:
- Start small. Enter the market by focusing specifically on AgTech venture investments. Build our competitive advantage in agriculture and capture the Australian market
- Expand vertically. Expand beyond AgTech startups and target larger deals and a broader investment mandate including land assets and farm businesses
- Expand globally. Expand our investment marketplace to service the agricultural investment market globally
- Expand horizontally. Enter the renewable energy, BioTech and other ESG industries. Position our business as the ESG (impact) investment marketplace globally
- Expand vertically again. Launch a venture fund to assist our investments (e.g. AgTech ventures) with follow-on funding
Vision: to unlock global innovation in agriculture and energy.
But first we needed to find a way to enter the AgTech market and work towards product-market fit.
Getting an Australian Financial Services Licence
During 2017 the equity crowdfunding legislation was passing through parliament. It hadn’t been approved yet but Nick saw it as a path to enter the market.
To raise capital via an equity crowdfunding model in Australia companies require an Australian Financial Services Licence (AFSL) granted by the Australian Securities and Investments Commission (ASIC). This was a major process. It required you to complete a 10–18 month application process, hire two Responsible Managers (RMs), complete a mountain of documents and hold $50k ‘Surplus Liquid Funds’ in the bank as a minimum cash requirement. I had no idea how we were going to find all of this — we had no money or corporate experience.
A few months prior we’d come across Jill who spoke at an event representing her rewards-based crowdfunding platform ReadyFundGo. Jill was previously a Partner at KPMG, Arthur Andersen, Deloitte, and would make a great RM. But she said no when we first asked. Fair enough. We were 3 people with only a big problem we wanted to solve with no funding or traction. On top of this, the market rate for an RM was $50k and we needed to find two of them if we wanted a chance at being granted an AFSL.
After many long meetings, calls and emails back and forth, Jill finally called me and said yes. She believed in the problem and we were able to prove our commitment to solving it. Jill became a Director and a Shareholder. We were stoked.
Another person that had a great impact on us was a lawyer called Amit, who took an initial meeting and listened to our story after I sent a message via his company’s Contact Us page. DLA Piper law firm agreed to act on our AFSL application and Amit became a great friend who helped us throughout our journey.
During this process James found one more RM, Hamish who was CEO at a leading wealth management firm. We now had 2 RMs but still needed to find funding for the legal fees and $50k Surplus Liquid Funds.
We wanted to minimise legal costs so the agreement was that Nick and I would do the heavy lifting and write the documentation and policies, DLA Piper would review them and approve before submitting to ASIC. This seemed to work and our AFSL was granted within 10 months. Big win!
Raising funding
Before this point we were taking a big risk trying to time our vendor payments with our anticipated funding round timeline, given we didn’t have money to spend. We were pre-product, pre-revenue and pre-AFSL so the risk of investing in AgCrowd this early on was enormous. This proved to be true in our fundraising efforts, receiving many more than 99 no’s during investor pitches. But we consistently gathered all the feedback we could and adapted our pitch each time.
Our first yes came from Marcelo, CEO of Cohort Global which had recently been acquired by ASX-listed Pure Profile. After he invested Celo introduced us to his business partner Malcolm, who also said yes. Celo and Malcolm were game changers for us. They understood the problem we were solving, our vision, and were always there for us through every difficult time with the advice and experience we needed.
Securing lead investors in the round now made it easier to generate buy-in from other investors. After another round of investor pitches, Beau, Martin, Daizy, Fiona and Andrew made investments in AgCrowd too. It took far longer than expected but we managed to close our $205,000 seed funding round with 7 angel investors.
We ran lean. Nobody from our team took a salary or compensation. We paid for our desks in Stone & Chalk (a FinTech startup hub), website, emails and domestic travel to prospective customers out of our own pockets for the first 24 months.
Building our product
We networked hard to find a tech lead. We were lucky to find Indaka and Ravi in Sydney and started scoping the product requirements for our investment marketplace. By this point we had a pretty clear idea of what was needed in our first iteration of the product. Our plan was to engage a team across both Sydney and Sri Lanka to keep our costs down, so Indaka and Ravi brought in 5 software engineers and a product designer and we began building.
We created a focus group of prospective customers to give us feedback on the product during each stage of development. Early design iterations included sketching ideas on a piece of paper and then working with Samanalie, our designer, to bring it to life. We wanted our UX and branding to really convey the meaning behind investing in AgTech: that you are helping to improve the way the world produces food and clothing so that we can meet people’s growing needs in a sustainable way.
We built a great relationship, I’m still friends with Indaka and Ravi to this day. Building the product was a massive learning curve as I had to rapidly get up to speed on design processes, agile methodologies, technologies and cloud infrastructure, integrations, payments, security, KYC, anti-money laundering, privacy and much more.
But it was incredibly rewarding. We managed to get our investment marketplace to market within 4 months: a cloud-based investment marketplace that enabled companies to raise capital efficiently and provided investors with access to opportunities in agriculture and energy. We were really proud of what we’d built.
Building a pipeline of companies and investors
All whilst building the product, completing the AFSL application and raising funding, we were building our sales pipeline. This was tough with only 3 people working on AgCrowd. We sought to partner with organisations to improve our speed and to reach segments of the market that we couldn’t quickly access ourselves. Our strategic partner pipeline looked a little like this:
We started to build a brand around AgCrowd by hosting events (2 events x 100 people each) with industry experts, content marketing, thought leadership, weekly newsletters and podcasts. It was a hustle.
The greatest challenge was building up both sides of our investment marketplace. We essential had two sets of customers: companies and investors. As our equity crowdfunding model was new to the market, educating customers was a key part of our sales cycle. We were constantly getting rejected. Even when we received a call from the CEO of one of our dream AgTech companies, who offered us a favour to get us off the ground by letting us raise the last $200k of their $1mil funding round within a week, we fell flat on our faces and couldn’t build up the investor interest in an unproven investment marketplace.
We pushed forward and managed to eventually build a community of 130 registered companies and 650 interested investors.
Our first paying customer
A lot was banking on our launch to market being a success, so we needed to be careful in who we selected as our first customer to raise funding via AgCrowd’s investment marketplace. We decided the characteristics this customer should have included: early revenues, a product that is easily understood by retail investors, established Venture Capital relationships so they could raise follow-on funding and the possibility of a high investment return. We chose to focus on B2C companies as we could deliver the most value to them in the early days, given investors acquired via our product could become customers too.
GoMicro became our first paying customer, an AgTech company that uses 3D-printed microscopes to identify pests and diseases far more efficiently than traditional lab testing (they’ve now entered other verticals too). GoMicro solved problems such as the Queensland fruit fly causing an economic loss of $300 million per year in Australia.
We were introduced to CEO Sivam by Ulric, Principal Investor at a leading Venture Capital firm. As we had no track record of raising funding for companies, we needed to deliver as much value upfront as possible which included providing introductions to our network, business advice and accounting advice as we built trust.
When Sivam and COO Jarrad were ready we began working towards launch. This involved a long due diligence process and the creation of an Offer Document (similar to a Prospectus or S-1 but for equity crowdfunding) for investors.
Launch
After 3 months we launched to market and couldn’t have been more excited. We achieved 215% of GoMicro’s funding goal on our investment marketplace within 30 days of launching and received a note from CEO Sivam:
“So many people asked us why we would want to launch on an untested platform? But we believe that success depends on the quality of the team and the dedication to the mission. We judged correctly that the AgCrowd team had both. We were not wrong. We were 215% right”.
Beyond funding, we introduced the GoMicro team to a large agri-business in South-East Asia, an angel investor who shared their product with their angel investment groups in India, helped grow their brand and formalised their finances. This was an early insight into the industry advantage that AgCrowd could achieve through specialisation.
Following GoMicro, at the forefront of our pipeline were 8 AgTech companies ready to raise between $500k and $3mil each. These companies spanned across crop optimisation, water conservation, meat quality testing, indoor vertical farming, robotics, soil health and agricultural compliance. But there were a few things we needed to validate before moving forward.
The challenges
The biggest challenge we faced was trying to build an efficient sales cycle on both sides of our investment marketplace.
Acquiring companies (B2B): on one side AgCrowd was trying to acquire AgTech startups and scale-ups as customers, who would raise funding via our investment marketplace. Startup founders generally have their eyes set on raising Venture Capital funding. As they hadn’t usually seen equity crowdfunding as a proven funding alternative before, the educational process was long and costly for a small startup like ours. When we managed to acquire a customer the onboarding process took 3 months given the heavy legal due diligence we were required to do as part of the AFSL. It was challenging to justify this effort for smaller deal sizes given the amount of revenue we generated per transaction (6% of total funds raised).
To break down the unit economics for companies: between $200,000 to $2,000,000 is typically raised via equity crowdfunding which means AgCrowd would earn anywhere between $12,000 to $180,000 with a 6% success fee on total funds raised. Our direct costs included ASIC checks, director bankruptcy and police checks, labour involved in due diligence and Offer Document creation, and legal fees for each company who raised funding with us.
Acquiring investors (B2C): on the other side we were trying to acquire investors. We found that firstly, the market size for investors in Australia is not that big in general. Secondly, this market shrinks when you’re trying to find investors who will invest specifically in startups. Thirdly, this market shrinks even further when you’re trying to find investors who will invest in agriculture-related startups. We believed that we could significantly contribute to this growing market given the global trends in impact and socially responsible investing, but the timing wasn’t yet right and we needed to build cash flow in the early days to build a sustainable business.
To break down the unit economics for retail investors: the average investment amount was $2,500 and our direct costs included marketing/acquisition, 3rd-party compliance and anti-money laundering checks (KYC/AML) and payment fees per investor.
After analysing these unit economics we realised that both the AgTech deals and investors we initially targeted were too small to warrant the amount of effort we were putting in.
Initially we factored these costs into our financial model with a small upfront fee from companies raising funds to cover them, but the labour time required to perform manual due diligence and create the Offer Document was something we failed to recognise until we had completed the first capital raise ourselves.
Our conclusion: we needed to move upmarket and target larger AgTech deals and higher net worth investors (sophisticated and institutional investors) to make the unit economics and ROI worth it.
Joining Antler startup accelerator
Anthony, one of our advisors had just accepted a new role as Partner of Antler, a global startup accelerator and fund. We spoke with our investors and mentors and decided that joining Antler could be a great opportunity to gain mentorship, fresh perspective from other founders, grow our international network and increase certainty over our funding roadmap. After interviewing with the Antler team we were accepted into their first Aussie cohort.
Antler helped us take our design thinking and validation to the next level. Our validation of the B2B side of the marketplace was great, we had plenty of AgTech companies wanting to raise funding, but the B2C validation for investors wasn’t comprehensive enough. Customer interviews and surveys didn’t tell the full story. In our initial research retail investors had indicated they wanted to invest in AgTech companies and would forgo some financial return for social return (impact), but when it came to the crunch time of making an investment this interest did not convert into the investment levels we had anticipated.
The pivot
We decided to experiment and pivot our hypothesis towards sophisticated and institutional investors wanting to access the AgTech industry. These types of investors were more experienced, had a clearer idea of which opportunities fit within their investment mandate and would generally invest larger amounts per investment ($25,000+) which radically improved our unit economics.
After many customer interviews our initial signals were positive. Investors told us that they had existing portfolios in industries such as mining, finance and telecommunications and wanted to diversity into agriculture. This would help them reduce portfolio risk as agriculture is generally uncorrelated with other assets. Investors also believed in the positive social impact that investing in agriculture could have on sustainable food and clothing production, and saw the potential for high returns.
But as we moved further into the market and spoke with more high net worth investors we realised AgCrowd was moving away from the business we had set out to build. We set out to solve the agricultural funding problem via a scalable investment marketplace. As we pivoted in order to solve this problem we realised we were becoming more of a boutique investment advisory, where we would handpick the investment deals, do a heavy amount of due diligence and then handpick a number high net worth investors to close a deal. This wasn’t the business we had envisioned.
The cross-roads
Many people had told me the importance of bringing “smart money” into your company, which involves choosing great investors who bring more value to your company than just money. I realised how important this advice was.
We called a meeting with our investors and brought them in on our current situation. Our investors were awesome. They immediately understood the situation and we created a Plan A, Plan B, Plan C and Plan D:
- Plan A: Continue with our original plan and target AgTech companies and retail investors as our customers. But we would need to raise additional funding to continue the business and based on our findings we didn’t have high confidence that this was the right option.
- Plan B: Pivot the company upmarket and target larger deals and high net worth investors. We saw some initial success with this option as described in ‘The Pivot’, but realised we were becoming more of a boutique investment advisory rather than a scalable investment marketplace as we pivoted to solve the problem. So we closed this option.
- Plan C: Pivot the company towards a broader impact investing (ESG) marketplace which focused not only on AgTech companies but also on CleanTech, BioTech, EdTech and HealthTech. This seemed promising based on the growing trend of impact investing (+34% in global ESG funds 2016–18) but it meant starting from scratch in each of the ESG industries and raising more funding. We also weren’t confident that our existing equity crowdfunding model was the best way to solve this problem, so we closed this option.
- Plan D: Look for a strategic sale of AgCrowd to another organisation.
After careful consideration and attempt of each plan we called a board meeting and the majority of our team and investors voted for Plan D.
The acquisition
We’d really put every last bit of energy into this company. We started to package the company up and spoke with many prospective buyers. Some were agricultural debt lenders and we thought there may be some interest in them expanding to an equity offering too. Others were financial institutions who we thought might be interested in the agricultural industry specialisation, the equity crowdfunding AFSL and/or the investment product. Once agricultural lending business in Melbourne even offered James a job after he called them. He still works there to this day.
In the end Jill had a connection in Melbourne who was building a capital raising marketplace. They saw value in purchasing our business to obtain the AFSL which enabled them to skip the 10–18 month regulatory process that is required to operate a financial institution in Australia.
The sale process was long. They did due diligence on every part of our business which included the AFSL, financials, investment product, our backgrounds and much more. We engaged auditors and Amit to act as the lawyer for our transaction as we negotiated the price and share purchase agreement back and forth until we landed on an agreeable deal.
Finally the deal was complete. We were able to return the seed funding we had raised back to our 7 angel investors. It was a big win to make them happy for all the support and help they had given us.
Conclusion
It was an incredible journey. Ultimately we didn’t achieve our vision of unlocking global innovation in agriculture and energy, and I really felt the weight of this disappointment with a strong feeling that I had let a lot of people down who believed in us.
This was a difficult time, but failing really is part of the journey and it made me a much strong and more resilient person. It taught me countless invaluable lessons about people, myself, business, tech and much more. I know James, Nick, Jill and our customers, investors, advisors, responsible managers and partners felt the same.
Thank you to everyone who helped and supported us on our journey. You made a big positive impact on us and we honestly couldn’t have done it without you.
Reflections:
Things we did well:
- We collaborated effectively as a co-founding team. Beyond our strong work ethic and skill sets complimenting each other, we were able to have those ‘difficult’ conversations and give each other candid feedback so that we could improve quickly. This was essential for a 3 person team trying to prioritise and execute a mammoth of tasks.
- We were naive but smart about it. This meant that during our AFSL process, capital raising, product development and sales cycle we didn’t have laundry lists of reasons for why we couldn’t do things. We came from a fresh perspective and hustled to find out what was true for ourselves.
- We committed to the problem. Whilst we prematurely landed on the equity crowdfunding business model as our first iteration of the solution, we recognised that this wasn’t the right solution and pivoted in attempt to find product-market fit.
- We networked heavily which opened many doors. At the start of the journey our professional networks were non-existent, but through many meetings and industry events we built trust with people and our network grew over time.
- We were self-aware and identified our skill and experience gaps, then brought on or built relationships with more experienced people who complimented us.
Things we could’ve done better:
- Our early customer validation was not comprehensive enough. We learned the hard way that investors saying “yes they would invest in agriculture” and “yes they would sacrifice financial return for social return (impact)” didn’t necessarily convert into an investment at crunch time.
- Our naivety sometimes bit us in the bum. For example, we were burned by our initial tech leads before we met Indaka and Ravi, and we had no idea who were the right investors for us so we couldn’t focus our conversations in the early days.
- We could have been better at prioritising, automating our outsourcing tasks in early days. I was still posting on our Instagram channel 2.5 years in to build our brand, which was a time consuming activity that could have been traded-off for higher priority tasks.
- Supporting a remote co-founding team. James and I were based in Sydney and Nick was based in Auckland NZ whilst working his day job at ANZ bank. Nick was an incredibly hard worker and didn’t let this affect our work but we still faced challenges that were sometimes out of our control. For example, investors wanted to meet all co-founders and we needed this to happen quickly in order to close the funding round and move fast.
- We spent too much time trying to turn a ‘no’ into a ‘yes’ for both customers and investors. We should’ve moved quicker to focus on our early adopters and the next set of customers who had the burning problem and believed in our vision.
There were countless invaluable lessons that I will take through to my next venture. My main learning was that your team and people are your most important asset, so choose who you want to go on the journey with well and take care of them.
If you’ve made it this far, thank you for reading. Please feel free to connect or message me over LinkedIn: https://www.linkedin.com/in/hindsmatt/
Matt
