Agri-tech innovations offer immense potential to address many of the most pressing challenges confronting our farmers today, namely rising input and production costs and threats to sustainability due to climate change, intensive cultivation and improper nutrient replenishment. They can help smallholder farmers overcome issues such as shortage of labour, limited mechanisation, and a low share of the final price of produce. Next-generation agtech businesses are empowering farmers with better information and technology and enhancing resource efficiency, thereby providing opportunities to improve their incomes, better their livelihoods, and engage in more sustainable food production.

While Indian agtech players initially concentrated on business model innovations to disintermediate the agriculture sector’s fragmented supply chain, tech innovations in other areas of the agricultural ecosystem – sustainable inputs such as bio-stimulants, digital in-farm solutions, novel farming systems, seed-to-fork traceability, and agri-carbon – are expected to drive the next phase of India’s agri-tech growth, in line with the focus of most global agri-tech activity.

Limited potential

These players, often start-ups, require investor support to scale promising innovations and create large-scale impact. Agtech start-ups with a dual bottom line – those seeking to balance profit with social good through innovative business models aimed at making agri-tech solutions affordable and accessible for smallholder farmers – may find it challenging to attract investments compared to purely profit-driven ventures. This might be due to investors’ perception that socially responsible agtech ventures are riskier than traditional investments. This perception can stem from concerns about the scalability of impact-driven businesses (e.g. targeting smallholder farmers instead of the large farmers) and challenges in measuring the social and environmental impact of investments. Unlike in the case of angel or venture capital investing in mainstream business ventures, there is limited potential for outsized financial returns within a timeframe that is acceptable to most investors to compensate for greater early-stage risk and small deal sizes. As a result, investors may be more cautious in supporting these ventures, limiting their access to capital.

This also has unintended consequences. Most enterprises funded right now are tacking low hanging fruits (such as disintermediation, basic technology, or digital infrastructure) rather than addressing the key (agroclimatic and price) risks to farms and farmers.

Investors were guarded in deploying their capital in FY23, accumulating a vast amount of dry powder in response to volatile market conditions driven by economic uncertainties and geopolitical tensions. Between FY22 and FY23, investments in Indian agtech fell by a staggering 45 per cent to $706 million. Domestic VC firms have been particularly conservative, a trend that has persisted into FY24. Investors will likely continue this cautious approach, and direct their limited funding toward established business models, such as follow-on funding for companies in the mid-stream agri-tech category and companies with strong unit economics and a clear path to profitability.

Factoring ecosystem scaling barriers

As investors hopefully look to get back into the sector, stakeholders need to move beyond traditional risk-weighted approaches to stimulate socially relevant disruption across the agri-stack, especially around farmers’ pain points. Impact investors can provide the patient, risk-tolerant capital that social-impact-driven agtech start-ups need. They should factor in ecosystem scaling barriers (such as limited access to quality data, trust and knowledge deficits of farmers, and the fragmented agricultural ecosystem) when considering their investment decisions and deciding how to support their portfolio companies. Impact investors should recognise that start-ups could face scaling barriers that they may not be able to address on their own, even with the help of significant funding.

Blended solutions that involve investors, foundations, and government are needed in the sector. As the investors cannot undertake industry facilitation activities to resolve key scaling barriers, they should engage with foundations, aid donors and governments. Such blended interventions should also cover blended finance solutions.

Agtech start-ups must develop a comprehensive view of their scaling challenges. Companies should carefully examine ecosystem scaling barriers and assess how they might or might not be able to resolve these. Engaging with industry facilitators and stakeholders can help resolve key scaling barriers. While success or failure in serving smallholder famers ultimately rests on the companies themselves, others can help. Therefore, companies should actively engage with industry facilitators to work towards common goals. Additionally, they should be open to dialogue and cooperation with competitors, if necessary, to address specific industry-wide barriers.

Finally, agtech companies must strive to differentiate themselves through unique offerings that address specific pain points. With VCs taking their foot off the pedal, it has become critical for social impact start-ups to be even more focused on demonstrating their business model’s viability and potential for growth. Given the increasing scrutiny of start-up business models, they must be able to clearly articulate how their social mission aligns with their financial goals and demonstrate a clear path to profitability.

Ultimately, aligning agtech investments with social impact goals can make farming in India more profitable, sustainable and climate-proof.

(The author is Managing Director, Head-Asia, FSG)