Is the Midwest Food and Agriculture Sector Underfed by Venture Capital?

Just 3 per cent of Americans feed the other 97 percent, a level of food and agriculture productivity no other country can match. World-beating research and development by agriculture and food science departments in American universities are a big reason why.

It is no surprise that a healthy portion of this university research is done in the Grain Belt, home to 14 of the 19 major food and agriculture research centers in the USA (National Science Foundation, 2000).

What is surprising is that the bulk of venture capital investment in the food and agriculture industry is concentrated on the West Coast, home to only one major research center (the University of California at Davis) and where R&D expenditures are no greater than those in the Midwest. Overall venture investment on the West Coast is 20 times higher than in the Midwest (Money Tree Report). It follows that food technology investment is much greater in the region, as well.

So at least geographically speaking, food and agriculture researchers at UC Davis have access to more venture capital than researchers at all the Big Ten universities combined. Is this really true? If so, why?

First, compared to other financial markets, the venture capital industry is relatively new and quite inefficient, allocating much more money to the East and West Coasts than those economies would warrant in an efficient market. The venture industry began in Boston and Silicon Valley, succeeded there and has stayed there.

Second, early venture capital success was concentrated in the information technology and life sciences industries, so venture capital firms stayed with what was working and continue to invest in these industries. Food and agriculture are not even listed in the 16 industries covered in the latest NIST-NVCA survey of venture capital investment (National Institute of Standards, 2008). Although there is some overlap between agriculture and both biotech and consumer goods, food and agriculture make up only a small percentage of investments in these categories

Midwest food and agriculture ventures do get some money, but not much of it comes from venture capital firms. A few venture capital funds such as Finistere in San Diego, Prolog in St. Louis and MidPoint in Indianapolis focus on the food and ag technology sectors but they are exceptions. A couple of funds focused on the consumer products sector invest in branded food products but these are generally later stage.

The money that does find its way to Midwest food and agriculture ventures comes from private equity funds located chiefly in Chicago and Minneapolis. “While venture investing in the food industry is sparse at best, private equity investors have more actively engaged this industry with a large degree of success.” (Sam Guren, Managing Director, Hyde Park Angels). The fact that private equity funds are much more prevalent and well-established in the Midwest, especially in Chicago and Minneapolis, than is venture capital has in no small way contributed to this phenomenon. Of course, the problem with private equity firms is that they are later stage and more risk averse

As a result, the Midwest food and agriculture sector, while not completely starved of investment capital, is definitely underfed compared with other industries and the same industry on the West Coast, especially when it comes to early stage funding. Given the huge research and development efforts carried on in the Midwest, greater venture capital activity is undoubtedly warranted in the nation's breadbasket.

What should be done?

First, venture capital firms should stop ignoring America's most successful industry and give serious consideration to funding innovations in this sector. Capital markets would become more efficient and less vulnerable to industry and regional economic downturns if venture capital firms were to expand geographically into the Midwest and include the category of food and agriculture in their portfolios. Midwest venture capital firms in particular need to stop emulating their coastal counterparts and play to the region’s strength by focusing more funds on this underserved industry.

Second, food and agriculture researchers must adopt a more entrepreneurial culture. For example, this year UC Davis started a one-week entrepreneurship academy for researchers in all fields relevant to food production, the kind of program other schools should participate in (or emulate) if they hope to commercialize the results of their huge research efforts in the sector.

Third, pension funds, endowments and other institutional investors need to recognize the opportunity in this sector and be open to investing funds in qualified partnerships focusing on something different than information technology and life sciences.

Fourth, people in the food and agriculture industry need to compete for "mind-share" in the venture capital industry by raising awareness of the sector as a promising investment opportunity. Toward this end, we created the non-profit American Food Venture Forum (AFVF), the only venture capital conference in North America focused primarily on the food and agriculture sector. The 20 companies presenting at this year's October 13-14 conference in Des Moines come from across the U.S. and Canada.

Ironically, people from other countries don't need to be convinced of the importance of food and agriculture research. The same week in October, scientists, government officials and aid workers from across the globe will gather in Des Moines for the Word Food Prize, an award that honors those who contribute most to feeding the world's hungry. Inspired by Norman Borlaug, the Midwesterner whose crop research started the Green Revolution (the one that feeds people), the World Food Prize has become the "Nobel Prize" for food and agriculture.

Without venture capital, however, some of this important research may be adopted too slowly or even ignored -- bad not only for the Midwest but for the whole world.