Looking to commercialize an innovation? Three keys to venture capital funding success
Farmers are no strangers to borrowing when it comes to financing their farm business. The game changes, though, if you’re trying to bring an innovation to market, as it can be a struggle to find lenders who will support the start-up activities of a newly established business.
One solution is venture capital funding, a type of private equity financing that investors provide to start-up companies and businesses they believe to have long-term growth potential.
Venture capital funding is an evolving space and an area that is growing.
Venture capital (VC) typically comes from organizations with multiple partners and a sophisticated investment management structure, but it can also come from angel investors – individuals looking to support innovation opportunities they find promising. VC funding is still in its infancy in the agri-business world.
“Venture capital is for early-stage, high-growth opportunities,” says Dave Smardon, CEO of Bioenterprise Canada. “The agri-tech, ag innovation and food tech innovation space is all very new; it hasn’t been going on since the 1980s and 90s like high tech or life sciences.”
Business accelerators specifically focusing on agriculture and food technologies — like Bioenterprise — are a logical place for entrepreneurs to learn more about venture capital opportunities. Attending innovation-focused events can also help with making connections and learning about how the VC process works.
Successfully accessing VC funds is different from applying for a bank loan, Smardon notes. It requires a higher degree of effort and commitment, and the investor will become a partner in the business.
“This is a challenging, labour-intensive undertaking, so you need to make sure you are willing to do what is necessary to go after that money,” he says. “A VC is like your marriage partner, and you’ll have that relationship for a number of years.”
It can take up to a year or more for a VC fund to commit to an investment. This means entrepreneurs need to start looking for money long before they need it – and according to Smardon, only five percent of requests are eventually funded.
To support opportunities in the sector, FCC has set up its own program to invest in venture capital funds with an agriculture, agri-food or agri-tech focus, with 12 active funds and growing.
“It’s an evolving space and an area that is growing; a lot of venture capital funds traditionally weren’t focused on the ag space, but we’re seeing more becoming established in the last few years,” explains Rene Benoit, Director of Venture Capital at FCC. “We want to be able to provide capital to funds that invest in the agriculture ecosystem and help new companies grow so they can then transition to traditional bank financing.”
Bethany Deshpande is an entrepreneur who has successfully raised venture capital funding, including from two funds supported by FCC – Ag Capital Canada and The51. She’s the CEO of SomaDetect, a technology now available in North America that provides real-time, automated analysis of milk quality for early detection of mastitis in dairy cows.
Some early competition wins, particularly the high-profile 43North accelerator, helped bring SomaDetect to the attention of venture capital and angel investors, who have provided much-needed funding and support.
“We needed time to develop the technology, which takes multiple millions of dollars, and as a new business, you don’t have access to the type of loans you would need,” Deshpande says, adding a number of farmers had also come on board as angel investors. “VCs are willing to put their money behind a dream, and they’re an important source of capital for entrepreneurs.”
Here are three key elements to help secure venture capital funding:
The innovation must be proven to work, and market research must show demand for it and that people are willing to pay for it. Entrepreneurs also need a rock-solid business plan and a good understanding of how to market.
“The expectation is that you are coming to a VC with a defensible, compelling and impactful business opportunity that will generate returns for the investor,” Smardon says, adding that typically, farmers themselves don’t have relationships with venture capital investors. “You have to give up your farming career and become a business manager if you want to be a CEO – you can’t do both.”
Investors are looking for ventures that will yield high returns, and they’ll take their time to do their due diligence. Ensure you have a strong team that knows what you’re trying to achieve and has the leadership and knowledge to sell that vision.
“Investors invest in the opportunity and the person or the team, so make sure you or the people you surround yourself with have the credibility to carry your story,” advises Smardon.
When preparing a pitch, Deshpande goes to existing investors and trusted advisors for feedback and tries to anticipate all the possible questions that could come her way. And even with extensive practice, it’s a process that still yields far more rejections than approvals.
“It can take years to find the right partners, and earlier stage companies will hear “no” a lot, but “no” isn’t always a bad thing – it’s important to get it right,” Benoit says.
“It’s important to find people who get what you are doing; you want investors who are committed to what you’re trying to achieve and share your vision,” Deshpande adds.
Article by: Lilian Schaer
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