This article has been written by Vasundhra Dhar, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Private equity is a substitute method of private financing, composed of funds and investors that directly invest in private companies or that participate in buyouts of public companies, bringing about the delisting of public equity. These companies are not listed or traded on any stock exchanges. Private equity investors by and large work towards funding new technology and innovation, making new acquisitions, reinforcing working capital and bolstering balance sheets and other accounting reports of companies.
Private Equity firms additionally work in a similar manner as Venture Capitalists, invest in the long term in start-ups to assist them in accelerating and then receive benefits after the companies go public or converge with different firms.
Private Equity investors follow a similar procedure as venture capital funds, except that private equity investors, typically enter at a later point of time in the business cycle and will invest in companies that are as of now at a stable position in the business rather than at the beginning phases.
Generally, they will enter a phase near to an Initial Public Offering (IPO). They will then buy out the angel investors and VC investors as well. In any case, PEs are diverse as, unlike Venture Capitalists who only invest in start-ups they invest in mature and developed companies also that seek funds to improve their performance. Private Equities bring in cash from management fees and also charge performance fees for the sale or turnaround growth of the company.
Food and agricultural start-ups
In India agriculture is more of a ‘lifestyle’ than a ‘method of life’. Viewed as the soul and spirit of the economy, the country holds more than fifty per cent of the population engaged in agriculture and agribusiness, thus making it the single largest source of employment.
Despite the fact, the agricultural sector contributes to sixteen percent of GDP yet at the same time, the sector remains highly unorganised, burdened by a host of problems. The serious issue that has been ailing in this sector is the minimal engagement of modern machinery & technologies and the existing gap in supply chain management.
Observing this worsening and demolishing condition and the immediate requirement to take prompt measures, numerous start-ups have emerged with their inventive ideas to revolutionize this sector. Modelled on the conventional Mandi system, the start-up provides a digital platform for small farmers and merchants to directly purchase and sell farm produce without the engagement and association of middlemen and other market intermediaries. In this case, the farmers receive payment directly in their bank accounts via e-wallet AgriPay.
The Indian agriculture sector throughout the years has step by step opened its arms and accepted innovation and advancements. Considered perhaps the most backward and technology-resistant sectors of this country, farmers have now cut down the mass of wariness towards post understanding what cutting-edge advancements have to bring to the table.
Despite the government and big corporations have done their offer to furnish farmers with technology, it is the start-ups that have been the main impetus of innovation entrance in cultivating. From farm to fork, agri-tech start-ups have been attempting to settle problem areas at different levels, which traditional cultivating neglected to address.
As per a Nasscom report in 2019, there were in excess of four hundred and fifty new businesses in the agritech space in the country. Without a doubt, these numbers have just gone up in two years, as this space has gradually developed, with a pool of financial investors siphoning in reserves. Media reports propose that in any event, during the pandemic year, the agri-tech sector saw 11.9 percent of development in revenue from investors regarding funding.
General funding of agricultural start-ups
The agriculture ministry has funded start-ups in the agricultural and allied sectors with a sum of ₹24.85 crore, under a central scheme in the current fiscal. The government is promoting innovation and agri-preneurship by providing financial aid and nurturing the incubation ecosystem under the Rashtriya Krishi Vikas Yojana (RKVY).
As of late, in any case, there has been a flood in the establishment and financing of start-up companies seeking to develop and apply new technologies in agriculture and the food system. These companies are privately held and have accumulated significant amounts of equity-based investment from venture capital funds and related private sources such as seed, angel, and other private equity investors.
According to industry reports, in recent years up to several billion 3 dollars annually have been invested into such agricultural technology (or “agtech”) start-up companies. While the phenomenon of start-up companies or new technology-based firms (NTBFs) acquainting new advancements with agribusiness is itself not new, both in terms of the numbers of start-ups and the resources being invested in them.
The VC-backed start-up is a proven successful mechanism to contain the monetary dangers of prospecting in the process of R&D, decreasing or managing the technical and market vulnerabilities of innovation and development.
While numerous start-ups fail in their endeavours, some do persist in presenting their advancement to market. An increment in the pace of fruitful start-ups may help to counter recent trends of expanded market fixation in agribusiness, in which fewer larger firms have been accounting ever more noteworthy shares of private sector R&D. Venture-backed start-ups bring about the principle of creative intervention, overriding some current technologies and companies. Without development and innovation, market concentration can prompt manipulative monopolies, yet with advancement, new competition can disintegrate monopoly power.
The venture-capital-backed start-up is an instrument to contain the financial risks of prospecting and thereby deal with the technical and market ambiguities of innovation. The number of start-ups creating innovation for agriculture has expanded substantially in the last decade; not only in developed economies but also in emerging and developing countries.
Venture investments in such start-ups have germinated as well, practically half as much as the estimated measures of worldwide corporate agriculture R&D expenditures. This initial picture has raised extensive representative data on start-up companies related to agriculture and their financial transactions, and it has explored several factors likely to have driven the absolute expansion in private venture investment in agricultural R&D.
Challenges in agri/opportunities in start-ups
Inefficient supply chain
Powerful incumbents control farming and cultivating resources such as finance, seeds, chemicals, distribution, and supply chain. Such frameworks have total admittance to the distribution networks that supply to about 8 Mn kiranas across the country too.
Middlemen and agents
The farmer needs on the demand side are constrained by middlemen and agents who own the fragmented supply chains. They additionally control the product pricing. For instance, organized retailers are estimated to source 20% of their produce directly from farmers, the remainder from mandis. But mandis are not ideal farmers’ markets, Traders require a license to operate within a mandi but wholesale and retail traders and food processing companies cannot buy produce classified as notified agricultural products (cereals, vegetables etc.) directly from a farmer. Notified products are to be brought to the market advisory group and sold in the farmers’ presence. Most of the market committees have neglected to provide a competitive platform to farmers and lack transparency and technology intervention to ensure smooth and just trading.
Lack of financing
Distributors usually double fold as lenders and most farm debt is created because of using chemicals and seeds that are not pest-resistant. Moreover, domestic subsidies and investments announced in policies rarely reach the end customer, the farmer.
Agriculture in India is a fragmented activity spread across 600,000 villages and most of the regions still rely on rainfall for water (~70%). While at the same time, groundwater levels are slowly receding from the 1,000 ft. avg. depth yearly.
Farm size versus productivity
Studies have concluded that there is an inverse relationship b/w farm size and productivity. Indian farms are fragmented and small; 70% are less than 1 Hectare, while the national average is less than 2 Hectares, resulting in significantly low farm yields.
Selling products and technologies to farmers is generally perceived as a major test, and it is one sector where many start-ups have not sorted out a fruitful model. Lining up with farmers’ necessities and requirements, resolving to improve efficiency is definitely not a simple errand, as getting farmers to procure the abilities required to embrace these innovations includes a great deal of exertion. A few more challenges in the way of Agri-food start-ups are:
Low landholding size
Small and dispersed landholdings of farmers lessen the extent of technology and advancement to scale up, resulting in poor cost-effectiveness.
Return for the investors
The pace of profit from innovation speculation has not demonstrated entirely productive in the event of agri-tech start-ups when contrasted with other IT-based new businesses.
Agri start-ups and enterprises are finding it hard to retain technical talent working in this sector.
Long gestation period
Technology adoption and penetration is a sluggish interaction that absolutely decreases financial backers’ advantage and interest.
Costly innovation arrangements are exorbitant for an enormous client bunch, for example, small and marginal farmers.
Making farmers adaptive and versatile to the necessary abilities for dealing with cutting edge innovations requires huge exertion.
Most of the technology solutions accessible are not localised to emerging markets and business sectors.
Regulatory and policy issues
Regulations are favourable but are complex in nature.
Equipment with proven technologies and advancements is to a great extent conveyed by service providers due to the poor last-mile reach of start-ups.
The solution to these challenges
For the private equity investors, moving into food and agribusiness is not without its impediments and ambiguities. There are a limited number of opportunities of this size in this sector. It will require time and space to track down the right opportunities and they are most likely going to have to take a gander at things and consider putting resources into various ways, then when they invest in big industrial companies, healthcare, or other spaces.
Many significant existing opportunities for investment in food and agriculture fall outside the ambit of private equity’s historical modus operandi. Many of the existing opportunities are going to be a little smaller and more initial stage than the private equity investors are used to investing in. The response to causing private equity investors’ attention toward these atypical opportunities lies in discovering approaches to assist them with changing and discovering approaches to set out open doors that appeal to financial backers’ inclinations.
To draw in a private equity investor to a more modest change, they need to assemble organizations and discover fundamental organizations that have an unmistakable capacity to develop where there is a huge market opportunity, and where the organizations have a separate innovation.
At the outset, there will be a timeframe where they are finding out about these changes and understanding these organizations better so they can sort out where on the value chain they need to contribute and how they will discover significant size openings inside their objective reach. What food and agribusiness organizations should introduce to get private equity investors’ consideration is a convincing chance. Private equity investors are not searching for the beginning phase or pre-income/income openings.
They aren’t simply searching for innovation. They are searching for organizations that are creating cash, that is market pioneers, and that present a demonstrated capacity to develop with a requirement for money to help execute that development plan. It will be vital for them to see that the organization creates significant incentives for the farmers, processors as well as shoppers and that the potential market opportunity is sizable.
Private Equity investors search for returns regardless of the space. Private equity is looking for opportunities to at any rate twofold or significantly increase their cash over a sensible timespan. In light of these elements, numerous beginning phase organizations may drop out of the running, particularly when it comes to securing a private equity investment during the Series A, B, C, or D stages.
There are unquestionably funding gaps. They’re going to be dealing with companies that are generating real cash flow and are at least somewhat developed compared with what the venture investors are taking a gander at.
In the course of the most recent decade, the area is being gushed with the surge of educated youth, terminated by the thoughts, enthusiasm and advancements to dispatch more current sorts of innovation and plans of action to lift the substance of agri-food start-ups from crude to hi-tech one. New start-ups are giving missing connections in the agriculture value chain and conveying effective items, advances and administrations to the farmers on one hand and the consumers on the other.
From ICT applications to cultivate mechanization and from climate determining to drone use and from inputs retailing and gear leasing to online vegetable advertising, and from shrewd poultry and dairy dares to brilliant agribusiness and from secured development to creative food handling and bundling its expansion, all things considered, and innovation-driven incredible start-ups set to change the food and agricultural sector of the global economy.
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