Growth, Innovation + Investing
from A Round to Apple Inc.

We’ve been delivering authoritative market analysis and perspectives, week-in and week-out for more than a decade. Sign up so we can update you with new releases of A2Apple and our other daily and weekly publications — sent straight to your email.

And make sure to keep a close eye on our research and commentary arm, GSV Tomorrow, where you’ll find original GSV insights, plus curated content revolving around our key Growth Themes. Just complete this form and they’re yours to use and share.

GSV's weekly perspective on Growth, Innovation + Investing...
from A Round to Apple Inc.
Sustainability
July 16, 2017

Eating the Farm?

Save to PDF

Market Snapshot

Indices Week YTD
GSV 300 1.80% 42.10%
S&P 500 0.70% 9.10%
Dow 0.60% 10.40%
NASDAQ 0.80% 16.40%
Russell 2000 1.40% 1.50%
MSCI P/E Fwd P/E/G
Valuations 25.8x 0.7x
GSV 300 17.6x 2.3x
S&P 500 Now YTD
I-Rates 2.17% -11.40%
10-Year Note 1.03% 102.00%
3-Month Bill - Current
Sentiment - 28.1-38.3
Bull-Bear - 0.97
Put-Call - 11.28
Vix Now YTD
Inflation $1 12.50%
Gold $47.86 -11.10%
Oil - Week
Mutual Funds - -$3.40
Fund Flows (bil) 00-09 09-Now
Growth-Value -34% 218%
Growth 87% 133%
Value

In 2011, venture capitalist Marc Andreessen famously penned his essay “Software is Eating The World,” arguing that all companies will eventually become software companies.

Today, Silicon Valley is betting that software will eat the farm. From sensors that track soil health to drones and “nano-satellites” that gather data from the sky, entrepreneurs and corporate R&D labs alike are racing to reimagine agriculture from the ground up.

Why now? On one level it was just a matter of time. Everybody eats. McKinsey estimates that food and agriculture is a $5 trillion industry and growing.

But agriculture is also at the intersection of the world’s greatest challenges. The planet’s population is projected to rise from 7.5 billion to over 9.7 billion by 2050 and the United Nations estimates that food production will need to rise at least 70% to meet baseline demand. Globally, the agricultural sector already consumes approximately 70% of the planet’s accessible freshwater. And for the 70% of the world’s poor who live in rural areas, agriculture is the only form of employment or subsistence.

What do all these 70s add up to? A massive opportunity to be sure. But it’s also a reminder that the most impactful innovation will focus on the big challenges first. Incremental ideas wrapped in technology are unlikely to bend the curve. At the crux of the agricultural challenge and opportunity is the fact that most land suitable for farming is already farmed. Growth, in other words, must come from higher yields.

As The Economist noted in a 2016 technology quarterly focused on innovation in agriculture:

Farming has undergone yield-enhancing shifts in the past, including mechanization before the second world war and the introduction of new crop varieties and agricultural chemicals in the Green Revolution of the 1950s and 1960s. Yet yields of important crops such as rice and wheat have now stopped rising in some intensively farmed parts of the world, a phenomenon called yield plateauing.

But for over one billion small farmers — particularly in the developing world — it is as if the “Green Revolution” never took place. The “Yield Gap” — the astonishing difference between developed and emerging country farm production — continues to widen.

THE YIELD GAP
Bushels of Maize Produced Per Acre in African Countries vs. The United States

Source: Food and Agricultural Organization of the United Nations (FAO) 

The is one of the all-time great global arbitrage opportunities. Focused technology and business model innovation will further catalyze the transformation of agriculture. We’re on the verge of the next great Green Revolution.

SOFTWARE EATS FRUITS AND VEGETABLES?

According to CB Insights, venture investments into agricultural technology, or “AgTech,” have topped $820 million across 271 deals since 2012. The Climate Corporation’s acquisition by Monsanto in November 2013 for $1.1 billion was a starting gun for a flurry of investment activity. The first quarter of 2017 was a new high water mark, with more than $105 million invested across 16 deals.

AGRICULTURE TECHNOLOGY GLOBAL FUNDING

Source: CB Insights

Much of the innovation and investment activity has focused on three core areas: 1) Data Analysis + Monitoring, 2) New Farming Models, and; 3) Hardware + Smart Devices (e.g. Sensors). Drones and low-cost, low-orbit “nano-satellites,” which enable aerial monitoring, are a related category. Data and imaging from these vehicles enable trends analysis, forecasting, and early warning indicators.

FARM MANAGEMENT PLATFORMS: ACTIONABLE DATA & INSIGHTS

Source: FarmLogs

Notable emerging companies include Farmer’s Edge, which has raised $104 million from a syndicate headlined by Kleiner Perkins and Mitsui. Founded in 2005 and headquartered in Winnipeg, Canada, Farmer’s Edge has developed an integrated farm management platform that helps farmers boost crop production and improve sustainability through actionable data analysis. It currently serves growers in the United States, Canada, Brazil, Russia, and Australia. Y Combinator graduate FarmLogs, based in Ann Arbor, Michigan, has raised $37 million to build out a competitive platform. Its network of farmers, based predominantly in the United States, cultivate over 65 million acres.

TOP FUNDED “AGTECH” COMPANIES

Source: CB Insights, Crunchbase

As fertile cropland grows more scarce worldwide, startups are also looking to reimagine the farm completely. Founded in 2015, Bowery Farming, for example, is creating indoor farms, relying on LED lighting, robotics, and computer software to grow vegetables. Bowery is able to cultivate without pesticides and uses 95% less water than comparable farms. And its able to grow 365 days a year. The company locates its farms close to large cities to cut down transportation costs while increasing access to sustainable produce. Bowery recently raised $20 million in June 2017 from investors including Google Ventures, GGV, and General Catalyst.

This week, Parisian startup Agricool raised $9 million from investors including Daphni to grow fruits and vegetables inside containers. The company manages the temperature, humidity, chemical levels and color spectrum to optimize growth.

MOST ACTIVE VC INVESTORS IN “AGTECH”
Ranking Based on Number of Investments Made in 2011-2016

Source: CB Insights

The most active venture investors in AgTech over the last five years include Andreessen Horowitz, Khosla Ventures, Google Ventures, Middleland Capital, and Y Combinator (YC). In January 2017, YC President Sam Altman signaled that his platform would increasingly recruit water technology startups for its accelerator programs, including those focused on smart irrigation systems and broader efficiency in agriculture.

Corporate VCs have have also accelerated investments into agriculture technology startups in recent years. In 2016, 24% of AgTech deals included a corporate investor, compared to just 6% in 2012. The venture arms of agriculture giant Monsanto and chemical company BASF have been the most active, completing approximately twenty transactions apiece since 2012.

CORPORATE PARTICIPATION in “AGTECH” DEALS
Percentage of AgTech Deals With a Corporate Investor (2012 – 2016)

Source: CB Insights

Swiss agriculture business Sygenta comes in a close third, with its venture arm completing 15+ deals since 2012. Additionally, Sygenta has acquired at least five AgTech startups since 2012 including farm management software company Ag Connections, and seed companies Sunfield Seeds, MRI Seed Zambia, and Lantmannen.

REALITY CHECK

While the future of the farm may be digital, most Silicon Valley startups are operating in the realm of proof of concept. Agricultural ecosystems are highly complex environments that cannot be mapped or understood by dropping a few sensors in the ground.

Dale Huss, a senior manager at Ocean Mist Farms — the largest grower of Artichokes in the United States — put it like this in a panel at the recent Forbes AgTech summit:

The reason that we don’t use these sensors is because the ones that we’ve used up until now are inconsistent… One of these days, there will be one that we trust, and we’ll take a look at it but this smoke and mirrors stuff and the computer diagrams and all the crap that we see out there – it doesn’t work, and we need something that works.

To understand the complexity of an agricultural ecosystem, consider the complexity of the human body. You can’t just embed a sensor to understand how it works. Advanced medical applications using emerging technology are building on generations of research from both the public and private sectors. Agriculture has historically received a fraction of the attention.

The National Institutes of Health (NIH), for example, has grown to become the largest single public funder of biomedical research in the World. Over $600 billion of Federal dollars have been allocated to the NIH R&D over the past twenty years — about the same amount as NASA, the Department of Energy, the National Science Foundation, and the US Department of Agriculture (USDA) combined.

OVER THE LAST 20 YEARS, The NIH HAS RECEIVED OVER 10X MORE R&D FUNDING THAN THE USDA
Federal Funding towards R&D at Non-Defense Agencies (1997-2017)

Source: NIH, Department of Energy, NASA, NSF, USDA
*Funding amount allocated towards “Science and Energy” at the Department of Energy

Federally funded NIH research has produced staggering gains. The NIH’s Human Genome Project alone has resulted in an estimated $1 trillion of economic growth. NIH funded research has also led to the development of the first cancer drug, cochlear (ear) implants, and meningitis and childhood vaccines that have saved tens of millions of lives.

Agriculture R&D has largely been stagnant, and as a result, it’s at least a generation behind human biotechnology.

It also doesn’t help that corporate agricultural R&D budgets have been allocated more towards “developing” incremental improvements to the same old solutions rather than “researching” game-changing new ideas.

Monsanto developed their genetically modified seeds twenty years ago, reshaping the farming industry. Since then, the agriculture giant has mainly been on cruise control, churning out incrementally better seed varieties to increase top line revenues. Other big companies are taking a similar approach, focusing on increasing earnings as opposed to allocating resources towards finding the next groundbreaking agriculture product.

A related challenge has been that most of the new Ag Tech startups are focused on advanced technologies that could only be plausibly adopted in the developed world, due to prohibitive costs, technology complexity, or both. But this won’t help close the yield gap, the area of the largest opportunity.

MIND THE GAP

To mind the gap, we believe that innovations in three key areas will lead to exponential benefits to farms worldwide.

1. Water Efficiency

To survive in a desert, the last thing you’d think to do is pour water into the sand. Yet, that’s exactly what farmers in California are doing where droughts have long since become the new normal. Almonds, one of California’s largest, and thirstiest, cash crops, consume approximately one gallon of water for every nut produced. That translates to 10% of California’s agricultural water supply per year.

Water efficiency — from planting the right crops in the right place to adopting technologies that reduce water waste — is an immediate imperative. Agriculture already consumes approximately 70% of the world’s reachable fresh water supply. Increasing farming output to reach accelerating demand in a world where an estimated 2.7 billion already live in a state of constant water shortage will be impossible without an emphasis on improvements in water efficiency.

Water data platforms such as WaterSmart, Utilis, CropX, Valor Water and Pluto AI, are helping farmers, homes and businesses better analyze and optimize their water usage. We expect to see acceleration innovation and investment activity in this space.

mOasis, based in the Bay Area, is pushing the envelope with a soil polymer that helps farmers reduce water usage without sacrificing production. Just the size of a single grain of sand, a mOasis polymer can soak up to 250 times its weight in water and release it into the soil. According to the company, the use of this hydrogel could lead to higher crop production while reducing water usage up to 20%.

2. Soil Science

The Fertile Crescent was once home to some of the earliest human civilizations, the same civilizations that invented the wheel, developed writing, and built the foundations of mathematics and astronomy. It flourished in many parts thanks to superior soil quality, which led to the development of modern day agriculture.

While often ignored as just dirt beneath our feet, the soil is a complex ecosystem of bacteria, fungi, and minerals that has a direct impact on the health of crops and plants. If healthy soil has led to the creation of human civilizations, unhealthy soil has led to the demise of others. In fact, it has been argued that the Mayan Civilization fell mainly due to soil runoff and erosion.

As Trace Genomics cofounder Poornima Parameswaran stated in an interview, “Think of soil as the immune system for crops.” Borrowing a page out of 23andMe’s book, Trace Genomics analyzes soil samples, tests the sample for organisms like bacteria, viruses and fungi, and returns a “health report” to guide interventions.

EMERGING SOIL SCIENCE STARTUPS

Source: Crunchbase

TPG backed Inocucor develops sustainable biological products with the goal of improving soil health, and by extension, crop yields. Synergro, the company’s flagship product, is a formula of live bacteria, yeast, and fungi, designed to work symbiotically with existing soil microbiomes. The company has shown early promising results in stimulating plants to their full yield potential while improving fundamental indicators of soil health.

3. Biomaterials

While chemical pesticides have protected farms from harmful weeds and bugs, they also result in serious health risks in both humans and the environment. Chemical pesticides have been linked to increased risk of cancer, Alzheimer’s Disease, ADHD and even birth defects. Pesticides also strip fertile farm lands of valuable nutrients and microbes and leech into groundwater, contaminating fresh water supplies.

We’re seeing a growing number of startups focused on biological and organic solutions to chemical pesticides. Indigo Agriculture, for example, uses plant microbiomes and bacteria to strengthen plants against disease and drought. Khosla-backed BioConsortia and NewLeaf Symbiotics are tackling the same problem by developing naturally proliferating, microbial alternatives to synthetic fertilizers. Marrone Bio Innovations is working on a biological alternative to chemical pesticides and has developed four biopesticide products for use against insects, fungi and weeds.

EMERGING BIOLOGY AGTECH STARTUPS

Source: Crunchbase

Furthermore, labs are working on a variety of moonshot organic defense mechanisms against weeds and bugs. Researchers, for example, have created genetically enhanced male Diamondback Moths that kill female larvae, sabotaging reproduction of the pests, which damages upwards of $5 billion of crops annually worldwide.

Still in the early days, the search for biological alternatives to chemical products faces challenges due to a lack of understanding of soil biomes and microbes. While corporations have spent decades synthesizing and understanding how chemicals affect plants, soil and humans, the study of soil microbes is relatively nascent.

WHAT’S NEXT

While the next Green Revolution represents a massive opportunity, the greatest gains are likely to occur at the intersection of technologies and practices that can reduce the yield gap, applied thoughtfully in places where the needs are most acute.

In this case, the recently-launched Shared X offers an important window to the future. Founded by former Kleiner Perkins partner John Denniston and Tony Salas, the former Head of the Peruvian Agriculture R&D Institute, Shared X is growing high-value specialty crops on farms in emerging countries. It deploys advanced, sustainable cultivation techniques to close the agricultural yield gap, and then openly shares them with neighbors.

Today, Shared X has little need for the latest sensor technology or digital farm management platforms. It is focusing on the first things first — applying proven, sustainable farming techniques in areas that have yet to adopt them. And in the process, it is generating a powerful social impact in the communities around its farms by lifting smallholder farmers out of poverty.

Bubblin'

by Luben Pampoulov

Musical Chairs Game

Over the last five years, Uber’s competitive landscape has continuously increased around the World. It all began at home, with Lyfts innovative introduction of the peer-to-peer ride sharing model. At that time, Uber only had its high-end, limousine-like service. Given Lyft’s instant success, Uber soon copied and entered into a capital intensive war against its much smaller competitor. (Disclosure: GSV owns shares in Lyft).

Elsewhere in the World, local startups saw the opportunity and emerged with raising significant amounts of capital. In China, Didi Dache and Kuadi Dache became the two competitors, one backed by Tencent, the other by Alibaba. In Southeast Asia, Grab Taxi emerged with backing from GGV. In India, Ola Cabs raised capital from Tiger Global, and more recently in Indonesia, Gojek emerged as a highly popular bike-sharing service.

In 2014, Uber raised an eye-popping $1.4 billion financing led by Fidelity, and aggressively began to expand across the globe. Its major focus was on all the major economies: US, Europe, China, India, and Southeast Asia.

Uber’s big financing also triggered an investment frenzy into the red hot ride sharing economy. Large investments began to flow into each and every ride sharing company given their tripling, quadrupling or even quintupling year-over-year. It was clear, this was one of the biggest industry shifts, with peer-to-peer ride sharing disrupting a decades-old Taxi industry in what seemed to be split seconds. Given the growth dynamics, investment firms were comfortable pouring billions into businesses with 200% negative EBIT margins. The Musical Chairs game was on…

The Ride-Sharing Economy — A Musical Chairs Game

Uber’s hyper-aggressive tactics paid off initially, allowing it to gain significant market share in new territories. But competitors remained strong, operating in smart ways while matching Uber’s big subsidies. At home, Lyft’s brand and culture kept millennials sticking to its service. In China, Didi and Kuaidi decided to merge and created a strong competitor to Uber. And in SE Asia, Grab found a strong partner with SoftBank, allowing it to stay ahead of Uber. Additionally, Lyft, Grab, Didi and Ola entered into an anti-Uber alliance to keep the giant away from gaining additional marketshare.

And then, the music began to stop…at least in China. After burning through billions of dollars in a cutthroat competition, Uber had to concede the Chinese market and sold its division to Didi. Last year alone, Uber was estimated to have lost over $1 billion from its China operations. The company then said it will shift focus and resources towards India, SE Asia and to continue to focus at home.

But as 2017 rolled in, things for Uber changed drastically. A long list of issues arose, including sexual harassments, bad internal culture, and revelations of nasty and illegal tactics against Lyft. It seemed like Karma was getting back to Uber…

The global competitive landscape is also shifting. Uber’s popularity in the US has been dropping, especially so among drivers who have opted to drive exclusively for Lyft. In just a few months, Lyft gained significant market share against Uber, now being about a third its size. It used to 1/7th its size a few years ago.

In Southeast Asia, Grab has been gaining market share as a result of additional capital raises, and because of Uber’s subsidies slowdown. Singapore, Malaysia, Vietnam and Thailand are large markets, with high growth rates, and strong potential.

And then there is Indonesia — its own distinct market when it comes to ride-sharing services. Indonesia, is the most dynamic market in SE Asia, with a 255 million population and an emerging middle class. Given the local traffic, the majority of ride-sharing is on motorbikes rather than cars.

Last year, Indonesia’s ride sharing battle was a three-way race between local startup Gojek, Malaysia’s Grab, and Uber. For a while, the three competitors were throwing big subsidies at customers, making ride-sharing almost a free service. But Gojek remained the best in terms of strategy and execution, and began to offer other logistics services within the app, including food delivery, groceries, on-demand massages, mail delivery, etc. Most importantly, Gojek launched Gopay — its own payment system, right within the Gojek app.

Given Indonesia’s largely under-banked population, Gopay quickly became the quasi-banking service for many Indonesians. Gopay allows users to earn, spend, and transfer credits just like with a credit card, and the credits sit in the Gopay account, just like money sits in a bank account. The credits have a currency value and can be used just like money. This is a huge incentive for the unbanked and underbanked Indonesians, and it has resulted in a surge of users for Gojek.

Every-time I go to Jakarta, I do the “eye test” and count the number of Gojek vs. Grab vs. Uber motorbikes I see on the street. Last year the ratio used to be something like 55-35-10, respectively. But on my trip to Jakarta last week, I was somewhat surprised as that ratio had changed dramatically — it was about 80-15-5, clearly indicating Gojek is winning.

The Streets of Jakarta

As for Grab — Indonesia has always been a big priority, but it seems Grab is now shifting more focus and capital to the other geographies in the area, giving it much better chances to win against Uber.

Also in SE Asia, the music is stopping, and some are being left without a chair…

In another sign of the times, Uber ceded its Russian operations to competitor Yandex last week, marking Uber’s second major global retreat. The new JV will have Yandex invest $100 million and own 60%, and Uber invest $225 million and own 37%. The new company will be valued at $3.7 billion. Yandex shares surged 16% on the news on Thursday.

Clearly, Uber needs to quickly change its global strategies and to focus on a select few geographies. The pressure for an IPO is rising, but given the high burn rate, the current lack of a management team, and the issues around the Waymo lawsuit, there is little chance for Uber to raise capital in the near-term.

For some, the Musical Chairs game is coming to an end.  

Pioneer Notes

by Li Jiang

The “Theory of Everything” in Technology

The theory of everything (ToE) in physics is a hypothetical framework that connects the very small of quantum mechanics with the very large of gravity to explain the four fundamental forces of the universe.

The Technology Theory of Everything:

My “theory of everything” in technology connects critical trends in both hardware and software to explain the evolution of the technology industry and its relationship with society.

A lot of people have talked about the trends of “connected devices” and “the Internet of Things” and “big data” and “robotics”. I would propose that all of these trends are interlinked as one megatrend, the “theory of everything”, that is also a positive reinforcing loop that feeds on each prior link in the chain.

Sensors from connected devices creates massive amounts of data which feeds machine learning, resulting in more intelligent AI which directs robots to perform more precise actions which triggers sensors and the loop is complete. Here are the six steps:

“Theory of Everything”

1. Sensors generate Data

In 2014, the number of devices connected to the Internet exceeded the number of people in the world. Cisco predicts that by 2020, there will be 50 billion connected devices. Many of these devices will have sensors built-in, perhaps using Electric Imp, or added on externally through an Estimote beacon.

Sensors from devices creates a massive amount of data on an unprecedented scale.

2. Data feeds Machine Learning

In 2020, an estimated 35 zetabytes of data will be created, which is 44x greater than the amount of data created in 2009. This massive data, both structured and more likely unstructured, can be processed via machines to gain enormous insights. Enter machine learning.

3. Machine Learning improves AI

Machine learning relies on processing data and finding patterns to allow computers to learn without being explicitly programmed. While machine learning has been used since the 1950s, it is experiencing explosive growth today.

Both the amount of data and the computation power available today is driving the breakthroughs in machine learning.

As an example of machine learning’s sheer powers, Google mapped the exact location of every business, every household, and every street number in the entirety of France using it. Instead of sending a huge team to canvass the country for months, Google had a researcher circle the street numbers on a few hundred street view images. The rest of the work was assigned to a machine-learning algorithm to figure out what’s unique about the circled items, find them in the other 100 million street-view images and then read the numbers it finds. The entire project took 1 hour.

4. Artificial Intelligence directs Robots

As computers are already better than humans at chess, Jeopardy!, and street signs, there’s reason to expect more in the future. As more sensors picks up more data which optimizes more machine learned algorithms, it’s logical to conclude that computers combined with robotics will become exponentially more capable to performing human tasks.

There is a difference between artificial intelligence and artificial consciousness. I don’t mean that computers will have emotions anytime soon but they certainly will continue to add more to their repertoire.

5. Robots perform Actions

Not only are hundreds of startups and established companies creating robots for every job, these robots will become smarter and capable of performing any number of actions that we can dream up through advancements in AI.

Rethink Robotics

6. Actions trigger Sensors

Actions performed by machines triggers more sensors to collect data and the cycle is complete.

More sensors collects more data which create more computing intelligence to direct more robots to perform more precise actions which triggers more sensors. That’s my “theory of everything” in technology.

While the Industrial Revolution multiplied our physical capacity to do work. We’re now in the early stages of doing the same thing to our mental capacity — infinitely multiplying it by virtue of digital technologies. I guess this is all the prelude to the Singularity.

This also poses a more fundamental question: what will humans do?

That is a good topic for another post 😉

Market Update

Week ending July 16, 2017

World Indices

America Index 9/20/2017 YTD Week
U.S. GSV 300 107.4 42.1% 1.8%
NYSE 11812.0 6.8% 1.0%
Dow 21813.7 10.4% 0.6%
NASDAQ 6265.6 16.4% 0.8%
NASDAQ-100 5822.5 19.7% 0.5%
Russell 2000 1377.5 1.5% 1.4%
S&P 500 2443.1 9.1% 0.7%
Brazil Bovespa 71073.7 18.0% 3.4%
Mexico IPC 51373.2 12.6% 0.6%
Canada S&P TSX 15056.0 (1.5%) 0.7%
Euro-Asia Index 9/20/2017 YTD Week
China SSE 3331.5 7.3% 1.9%
Heng Seng 27848.2 26.6% 3.0%
Singapore Straits Times 3259.6 13.1% 0.2%
Indonesia JKSE 5915.4 11.7% 0.4%
Japan Nikkei 225 19452.6 1.8% (0.1%)
India Sensex 31596.1 18.7% 0.2%
Russia RTS 1979.1 (11.4%) 2.5%
France CAC 40 5104.3 5.0% (0.2%)
Germany DAX 12167.9 6.0% 0.0%
U.K. FTSE 100 7401.5 3.6% 1.1%



U.S. Indices Snapshot

Valuation P/E Est. P/E/G Price/Sales
LTM NTM Growth LTM NTM LTM NTM
S&P 500 24.2x 17.6x 7.60% 3.2x 2.3x 2.4x 2.1x
NASDAQ 25.2x 17.5x 7.90% 3.2x 2.2x 2.6x 2.2x
Russell 2000 24.7x 17.6x 6.30% 3.9x 2.8x 1.9x 1.6x
GSV 300 50.6x 25.8x 38.40% 1.3x 0.7x 5.5x 4.0x

Saving...