From Spotify to Agritech - what happened?
Investment writer Nikil Narayanan looks at how venture capital funding has shaped business in recent years and the direction it is now headed
When it comes to investment, people are often confused about the difference between venture capital and private equity.
What is venture capital and private equity?
To answer this question, we need to understand how and why companies raise funds. Startups seek financing to buy equipment, speed up growth, and get running; furthermore these partnerships can also provide cost synergies as well as sharing of expertise.
Early on in their journey, they can approach seed stage or angel investors such as those in Dragons Den. This is usually an extremely risky equity (investors get a share of the company, rather than debt) investment, however, if the startup picks up, angel investors often make hefty returns up to around 100 times the initial investment. For companies with a proven revenue model and a sizeable customer base, a venture capital (VC) is the way to go. Venture capitalists such as Andreessen Horowitz invest in early-stage startups with equity or debt and make smaller returns than angel investors, however these deals are less risky than angel investing but they still take substantial risk. As a rule of thumb, venture capital deals are usually in the millions. VCs know that three out of four startups they back, on average, will fail; the 25% that doesn’t makes up the bulk of the return for them. Private Equity (PE) firms, on the other hand, such as The Carlyle Group or The Blackstone Group, typically invest in later-stage companies - however, they do this at a much larger scale by borrowing money and then investing it to maximise their internal rate of return. The risk of losing everything is lower, and they use very sophisticated financial models to screen their investments. In conclusion, there are typically 3 ways to finance a startup: angel investors, venture capital, and private equity.
From Spotify to Agritec: Astanor Ventures - Eric Archambeau, an early investor in Spotify, said “Farms are being pushed more and more for higher productivity on soil that’s depleted overtime, and the costs of nutrients have remained high while the costs of calories decreases.” He was the co-founder of Astanor Ventures, an extraordinary venture capital firm.
He continued, “Five years ago, technology hadn’t touched the agriculture sector,” however, now the industry is revolutionised by innovations such as vertical farming.
VC deals are less risky than angel investing
The Belgian Venture capital firm announced that it will launch a $325-million fund focusing on agriculture, food, and ocean technology. The firm (28 strong) consists of an eclectic mix of chefs, farmers, biologists, and bankers.
They have invested in a rather impressive portfolio of companies so far, for example, Ynsect, an insect protein company which extended its Series-C to $372 million last month. The $14-billion agriculture market is projected to reach a staggering $22 billion by 2025. The VC is looking for “passionate and driven entrepreneurs” in the industry who have a strong focus on positive environmental change. When talking about the motivation for investing in Ynsect, Archambeau points at metrics including “CO2 capture, and things like the tonnes of fish spared each year by switching the feed from fish to insects.”
This shift towards ESG investing can be seen in markets globally with iShares Global Clean Energy ETF being up a whopping 43.81% year-to-date. It’s up to us as investors to become socially and environmentally responsible and it’s up to private equity and venture capital firms to lead deals in a similar direction.
