As early as 2010, even before the continent got hooked on the fintech frenzy, there existed a small group of new-age firms that set out to reimagine agricultural endeavour in Africa.
These firms came to be known as agritech startups. Even though they had first found turf in countries like Kenya, Nigeria, and Ghana, they have multiplied across the continent, especially since 2016, and now number over 100.
Their plan was simple. Simple, not easy. Basically, the idea now, as it was then, is “to increase productivity and efficiency in the agriculture value chain by deploying some form of technology.”
The words quoted above form the bedrock of most of the agritech business models operated in Africa today, and these models are typically built around such facets as financing, produce distribution, farm inputs, market access, crop monitoring, storage, mechanisation, and extension services.
Given that lack of sufficient funding is considered the primary impediment to efficient agricultural practice in Africa, much of the effort of local agritech startups have revolved around plugging the prevalent agricultural financing gaps.
“A lack of infrastructure and funding remain the biggest gaps to attaining scale by agric business, ” says Ayodeji Balogun, CEO of Nigerian agritech company, AFEX.
“Infrastructure requirements from logistics and poor road networks can increase operational costs, and funding can be difficult to raise,” he adds.
And for most agritech startups looking to fix finance, plugging those gaps meant adopting the crowdfunding or crowd farming model which seemed to have become quite popular in Nigeria especially, at least until the pandemic happened.
The calm before the storm
Agritech encompasses a small but growing segment of the startup universe that’s seeking to improve or disrupt the global food and agriculture industry.
Agritech also implies the use of technology in agriculture with the target of improving sustainability, efficiency, and profitability.
According to AgTech, agritech is a USD 7.8 Tn industry. Industry Wired reports that agritech companies across the globe garnered up to USD 17 Bn in investments in 2019 alone, though African agritech startups are still far down the fundraising leaderboard.
When it comes to innovating for agriculture, startups outside Africa have been more successful in integrating more advanced technology, including drones, intelligent analytic tools, automated irrigation, etc., while optimising production and supply.
In Nigeria specifically, much of the effort of local agritech startups have centered around sourcing and pumping in funds to improve yields, and streamlining distribution to boost earnings, via online platforms.
And since 2014, the continent’s most populous nation has witnessed the proliferation of agritech startups enabling investments into the agric value chain.
Farmcrowdy and Thrive Agric are probably the most recognised ones among the 60+ agritech firms in Nigeria that have built their business around the crowd farming/crowdfunding model.
This model loosely translates to getting individuals, many of whom are typically otherwise engaged, to chip in on farming schemes.
The crowdfunding model seemed to work well all these years. Basically, startups got gainfully employed, vetted individuals to invest specific sums in crop and animal farms, and earn anywhere between 10-40 percent returns at the end of a farming cycle.
The companies source the farmers, insure the farms, provide necessary farming inputs, monitor the produce, supervise the harvest, cater for distribution, and ultimately see to it that everyone on the value chain — from the farmer to the “crowd farmer” — gets paid, typically via an online platform.
It’s not the most frictionless of endeavours, but the companies made it work; they seemed to have thought of everything — everything but COVID.
Crowdfarming flaws unmasked
No one saw the pandemic coming and no one has ever lived in a world threatened by the novel coronavirus before now. And so, when the virus struck and entire nations were forced to stop functioning as normal, things got rocky for both individuals and businesses.
Months after the pandemic forced cessation of movement in parts of Nigeria, agritech companies championing the crowd farming model found themselves in a fix.
Thrive Agric, HO Corn, AgroPark, and Payfarmer, Menoroha Farms, and Growcropsonline, are just a few of the firms that have struggled because of COVID, as the companies claim.
The YC-backed startup, Thrive Agric, came under fire a few weeks ago when aggrieved investors, which the company calls “subscribers,” lamented the non-payment of due returns and issued strong statements both online and offline.
Although some progress has since been made on that front, the storm caused Thrive Agric’s Co-Founder/CEO, Uka Eje, to step aside. Eje was replaced by Adia Sowho who has been tasked with steering the company through the crisis.
Thrive Agric has put forward a 12-24 months timeline with respect to clearing the backlog of payments owed to subscribers whose returns are now overdue.
It says the timeline is the extreme case scenario based on how many farming seasons it would take to pay out all pending subscribers. However, the company maintains it has made a lot of progress in the last few weeks and is optimistic that it can payout all subscribers well before the stated time frame.
“It is important to note that business operations are fast returning to normal. There is an ongoing harvest as we speak,” the company told us. “We also brought funds into the business via institutional investors who recognize the track record of Thrive Agric to hasten repayments.”
They also claim that harvest operations have kicked off in earnest and they are pre-selling and activating the sales pipeline earlier than usual.
But what really went wrong?
The crowdfunding model that is favoured by Nigerian agritech startups typically involves pooling funds from an often heterogeneous group of individuals with the aim of carrying out what is deemed a high-risk activity: the agriculture business.
So, when things go south with the produce, things get messy. In this situation, however, it could be argued that the pandemic didn’t exactly ruin things but merely exposed long-standing flaws in the system.
COVID laid bare the limitations that have been sidestepped all these years; that of completely relying on the continued success of a plan that can be completely tanked by one unmitigable wrong turn of events.
In the Thrive Agric case, for instance, it all began with the lockdown, as the company told WeeTracker. The movement restrictions thwarted the movement of and access to farming inputs and everything pretty much went downhill from there.
“The COVID-19 pandemic caused movement restrictions within Nigeria and across borders. This caused a great hit on our business operations. First, the border restrictions significantly reduced availability and access to farming inputs from feed, fertilizers, and agrochemicals,” the company says.
“Second, the price of farming inputs fluctuated frequently, making it impossible to support the number of farmers we were working with at the scale we planned to at the beginning of the year.
“For example, a bag of urea fertilizers cost NGN 5.9 K (USD 15.64) in June and increased to over NGN 7.4 K (USD 19.62) in a week. The price increases meant we could only support fewer farmers and communities with our budget,” they claim.
There were also logistics challenges that worsened matters and deepened the already bleak situation. And it happened that they lost an entire planting season.
“The restricted movements created transportation and logistics challenges. This made it difficult to physically reach our farmers and give them the needed inputs required for farming operations at the right time,” Thrive Agric explains.
“Agriculture is a time-sensitive business. Planting and harvesting seasons are fixed. If you miss the right time to plant, it’s hard to catch up; and once the opportunity to send in inputs was gone, we lost a whole planting season.”
Besides all that, Thrive Agric also found that its major off-takers (the buyers of produce) had to stop or reduce production in their factories and businesses as well, in order to design safety measures and equipment for their staff and communities.
This reduction in production capacity affected produce sales to its established off-takers, thus reducing revenue even further.
All of these factors have had a ripple effect through the organisation and significantly stalled its operations. The pandemic and its consequences were a combination of more expensive and limited access to inputs, restricted distribution, and constrained markets.
To sum it up in their own words, they had processes in place and insurance coverage for the farms and their activities, but like many other businesses, nothing prepared them for COVID-19. Since April, it’s been a rollercoaster for Thrive Agric, and many other agritech businesses like it.
“In mid-April, we realized many factors were beginning to infringe on the business’s ability to fulfill obligations and generate revenue as projected. We knew we had to take stock and build more extensive risk management procedures and business structures to quickly put the business on a path to full recovery,” the company explains.
“The warning signs were the breakdown in the agriculture value chain. From the inability to send inputs and field workers to our farmers to the inability to secure off-takers for the produce that survived. It’s important to see how linked the relationship between farmer’s produce and off-takers buying.”
It sure can be better
Crowdsourcing funds to boost investments and increase productivity in the agricultural value chain has its perks, but it also comes with quite the collection of quirks.
“The cost of funds is the chief issue with the crowdfunding model. Crowdfunding platforms are raising money from groups of individual investors to carry out what is often perceived as a high-risk activity,” says Balogun.
“To make the offers attractive, most crowdfunding platforms offer up high returns/interest rates to the public that add on to the cost of the funds raised. These high costs of funds can affect the sustainability of initiatives as platforms have to continuously raise funds for operations on tight repayment timelines that are often a mismatch with market realities.”
Although normalcy has returned to some extent, the world is still dealing with the pandemic. And even though fearing another pandemic of the scale of COVID in the future borders on the pessimistic, it would just be wishful thinking to assume that such a devastating occurrence won’t happen again.
So, what alternative financing models can agritech startups embrace to shield themselves from a future storm of this magnitude?
Well, for one, there’s the commodities exchange model that companies like AFEX are attempting to perfect.
“We got our license from the Securities and Exchange Commission in 2015 and began deploying a commodities exchange model for West Africa that first involved the deployment of ancillary infrastructure to support the development of an efficient market place for physical commodities, but now also for tradeable commodity-backed instruments,” claims AFEX’s CEO, Balogun.
This model, which might be a little bit more complex than crowdfarming, prioritises the creation of a platform that facilitates effective trade and settlement on commodity transactions with the use of technology.
It might also come off a tad esoteric as this model supports securitisation and structured trade finance for agricultural commodities, which allows investors to diversify their portfolios with innovative commodity-backed products.
AFEX claims it has raised USD 12.5 Mn through the Nigerian capital markets and reached 113,000+ smallholder farmers since inception. As it is, smallholder farms reportedly make up 80 percent of all farming efforts in Sub-Saharan Africa.
As Balogun reckons, their mode of operation is more airtight and elegant as contracts are structured to mimic classical investment instruments like fixed income and money market instruments that investment bankers and fund managers can understand, relate with and invest against.
Others like Farmcrowdy, which claims to have pioneered agro crowdfunding in Nigeria, seem to be pivoting into other newly-launched verticals in digital agriculture in what looks like a structured attempt to wean the business off of crowd farming.
