The Indian food economy (domestic consumption and international trade), estimated to be $800 billion, is likely to surpass $1 trillion in the next three to four years. The foundational layer of this food economy is India’s significant production advantage in agriculture (approximately 1 billion tonnes of food produced and consumed a year). However, the farmer’s share in consumer price continues to be low, at 35 to 40 percent (farmgate output of agri and food products is estimated at $300 billion to $350 billion) and the majority share of the food economy goes to post-harvest participants in the value chain, including processors, distributors, traders and retailers.
More than the size, the importance of the food economy lies in the fact that it is one of the few sectors that connects ‘Bharat’ to ‘India’, with about 150 million farmers from 600,000-plus villages growing food to feed over 1.3 billion Indian consumers and exporting (approximately $50 billion) to the rest of the world. With just 20 percent share of the Indian GDP, agriculture continues to be the primary source of livelihood for about 800 million people in rural India.
The food supply chain is characterised by multiple layers (five to eight) between the farmer and the consumer. The multi-layering adds to fragmentation, cost and wastage. However, despite its complexity, the chain continues to be resilient, as proven during the unprecedented Covid-19 pandemic. The coming together of farmers, farmer groups, traders, aggregators, transporters, distributors, retailers, industry, startups and the government at multiple levels in a pandemic situation to keep the food supply chain running is nothing short of a miracle.
Talking of startups’ contribution to Indian agriculture, it is small in dollar terms (combined GMV of all agri startups is less than $10 billion) but holds huge promise in the times to come. The origin of the Indian agri-tech sector, which catapulted the startup culture and the use of digital technology, can be traced back to 2010. While the agritech sector has remained unnoticed for over a decade, agritech startups got the attention and respect they deserved during the pandemic, on the back of exponential growth curves riding on accelerated technology adoption by farmers.
As Indian agritech transitions into its third phase, this article attempts to reflect on the journey so far and what lies ahead.
The past: Evangelisation, experimentation and digitisation
The first phase of Indian agritech (2010-2016) was characterised by evangelisation, concept proofing and experimentation, to solve for the farmers’ challenges in accessing markets, quality inputs, credit, insurance, data and advisory. This phase was also the beginning of the digitisation journey of the Indian food supply chain, driven by a few dozen startups (such as Cropin, BigHaat, AgroStar, DeHaat, Innoterra, Stellapps). During this phase, the scepticism in the ecosystem outweighed the founders’ optimism with doubts on the possible adoption of digital tools by farmers. The investment pace in this period (with less than $500 million invested) was a trickle, driven by a few impact-oriented investors.
2017 was the inflection point and the beginning of phase 2 of Indian agritech, catalysed by the entry of a large number of tech-entrepreneurs to take innovation to another level, building full-stack solutions for Indian farmers. The prominent startups that emerged in this phase include Samunnati, WayCool, S4S Technologies, SatSure, Behtar Zindagi, Agrowave, Otipy, Jai Kisan, FarMart, SuperZop, Hesa, Freshokartz, Inficold, Captain Fresh, Vegrow, Unnati, Promethean, Our Food, etc. The number of post-POC startups ballooned to over 1,500 in a short period in the last four years.
The adoption of agritech solutions soared with improved data access and smartphone penetration in villages. The cumulative venture capital (VC) investment in the sector crossed $3 billion, with about $1 billion invested in 2021 alone. Agritech is no longer an alien for most VCs in India.
The unique characteristics of startups in the first two phases was the frugal and collaborative mindset of founders, which ensured the mortality rate of startups was under 5 percent. Interestingly, not many agritech models used discounts and promotions to drive scale, unlike their urban counterparts. The core focus remained on value creation for farmers and value chain players for customer acquisition and retention.
The Present: Platformisation and Fintechisation
The scaling potential of agritech solutions lies in leveraging farmer connect to diversify revenue streams. Many players selling inputs to farmers have started to procure from farmers and, likewise, startups in the farm-to-fork leg have started supplying agri inputs to farmers.
The pivot to full-stack platform, serving multiple farmers’ need, is an organic extension of the prevalent unidimensional agritech models. Building a full-stack platform ensures end-to-end crop-life-cycle-engagement with farmers. Typically, farmers sell crops twice in a year and buy agri-inputs over the entire crop cycles (Rabi/Kharif). The engagement frequency is higher for startups with farmers in the horticulture and dairy sectors with weekly/daily touchpoints.
The unit economics improves with models pivoting to platforms and that is why we see many mature, well-capitalised startups as mentioned above turning into platforms. However, the transition to platforms has its own challenges, given the need for diverse skill sets and a strong technology backbone. Though every startup aspires to become a platform, only a few are likely to crack the code.
Another pivot, which is underway, is the convergence of agritech and fintech. Fintech solutions from agritech startups cater to the working capital needs of farmers and value chain players, farm asset financing and financing of ancillary industries (especially dairy, aqua, poultry, fibres). The estimated fintech opportunity in the agricultural value chain is upwards of $500 billion per annum. Young startups such as Upaj, Agrifi, Kivi, IBISA are building digital platforms of farmer financing/insurance, whereas mature agritech are integrating digital tools for value chain financing.
The key driver for the pivot to fintech is increasing interest from large banks such as SBI, HDFC, ICICI, Kotak, BoB, and Yes Bank in building alternative digital interfaces (vis-a-vis conventional branch banking) for farmer onboarding, KYC, risk assessment/mitigation, underwriting and loan recovery. It’s a matter of time when a large share of lending to the agricultural sector will go digital and agritech startups will have a pivotal role to play in this transition.
The Future: Focus on Profitability and transition into rural-tech, deeptech and climate-tech
There is a good chance that India will have over 10,000 agritech startups by the end of this decade, many of them originating from smaller towns and rural India, thus, democratising the Indian startup ecosystem. Also, it is unlikely that agritech will see any sort of monopolisation by a few startups, with multiple winners emerging across segments, crops and geographies.
An investment flow of over $10 billion in Indian agritech in this decade is likely with improving investors’ confidence. The potential listing of a few agritech startups in the next three to five years can possibly change the investment trajectory for good or bad, subject to post-listing performance. Like for other tech stocks, the listing of agritech will also bring sanity to valuations in the sector.
Also read: 5 agri-fintech startups powering agriculture in the hinterland
In times to come, the fulcrum of investment would hinge on the startups’ ability to prove unit economics at least on four dimensions—on one hectare of farm (which is the average farm size in India), at multiple levels of supply chain (input dealers, aggregators, processors, distributors, retailers and consumers), environmental factors (through optimisation of natural resources, especially soil, health and water) and at their own business level by becoming profitable while delivering on the first three. In order to achieve the above, six fundamental shifts are anticipated in the agritech ecosystem:
1. Focus to move from GMV to GM
Most of the supply chain agritech startups have largely focussed in building traction and demonstrating Gross Merchandise Value (GMV) growth in the range of 2x to 4x year-on-year. Investors were willing to pay valuations as much as 3-5x GMV incentivising the founders’ disproportionate prioritisation in building top line over bottom line. However, given the hyperlocal nature of sourcing/distribution and supply chain fragmentation, the economies of scale in agriculture do not yield margins as much as in a manufacturing/services setup.
With the arrival of a funding winter this year, the agritechs are in the process of recalibrating businesses to bring Gross Margins (GM) into the positive zone and pushing them further into a double digit band. Like in other sectors, the path to profitability is becoming a hygiene factor for raising the next round of funding.
2. Service to Product orientation
A majority of agritech models is about servicing the farmers more efficiently than the existing channels. Though this approach helped in building scale, the profit margins continue to be thin, which necessitates a product development approach.
Fortunately, there is no dearth of product opportunity in both farm-to-fork and direct-to-farm models. Building a farm-level processing infrastructure for value addition, sorting, grading, packing can help startups in building products/private labels for end customers. Likewise, there are many white spaces in the agri input supply chain to build innovative products in mechanisation tools, animal feed, biologicals etc. About 20 percent contribution of the revenue coming from own products can significantly improve margin health for a startup.
3. Platforms to Partnerships
The success of platforms in the agricultural space depends on partnerships at multiple levels with a) buyers (including modern trade, ecommerce, institutional, Horeca, mom-and-pop stores); b) aggregators, traders and processors; c) village-level ecosystems such as Farmer Producer Organisations (FPOs), village-level entrepreneurs (VLEs); d) academic institutions, especially state universities and Krishi Vigyan Kendras (KVKs) for field trials; e) government bodies, especially the village and district administration; f) financial institutions and insurance companies; f) regulatory bodies for compliances and approvals; g) other startups offering complementary services and products.
Startups realise it is foolish to build everything on their own. Platforms cannot scale without the right mix of partners. Startups have started to redefine the core (which they are building) and peripheral (which partners will build) parts of their business models.
4. Generalist to Specialist
The conundrum of scaling horizontally or vertically is omnipresent among agritechs. The horizontal expansion (multiple crops, geographies, customer segments) drives scale but vertical integration (going deep into few supply chains) unlocks margins.
Given the heterogeneity of sourcing and differential perishability of commodities, it is next to impossible to build farm-to-fork models across multiple categories at the same time. The vertical integration (from seed to production to farm sourcing to retail to consumer) requires focus on fewer crops. The quest for vertical integration will see emergence for crop/category specific startups (examples—ReshaMandi, Numer8, FreshR, Eggoz, Greenik, Parvata Foods).
Also read: Ergos: Grain as an asset and currency
5. Databasing to Agristack and Analytics
A majority of startups have developed proprietary databases of farmers in the crops and regions they operate in. These databases typically include farmer name, contact number, farmland area, crop etc.
The proprietaryness of a farmer database will dilute with availability of public datasets such as Agristack, developed by the Government of India under the Indian Digital Ecosystem for Agriculture (Idea) framework. Linking of the farm and the farmer ID through Agristack will be able to facilitate first/last mile connect with farmers. Once these public datasets are available, the startups will be able to focus their energy on building analytical engines through AI/ML tools to improve algorithms for mass scale adoption by farmers and value chain players.
6. Supply chain tech to ruraltech, biotech, deeptech and climate-tech
A majority of supply chain tech startups have focussed on building techstack for supply chain components such as procurement, inventory monitoring, demand aggregation, route optimisation, post-harvest loss reduction etc. Given the multi-layering of supply chain, it takes a few iterations and sometimes years to get this right. Startups who hired CTOs from the beginning have done better than others.
We are likely to see supply chain tech diversifying to rural-tech to cater to the non-agricultural needs of the farmers. Also, we will see integration of deeptech solutions in supply chain models; the solutions could include an array of products for rapid soil testing, quality assaying, figuring out harvest schedules, detection of crop signature, crop yield estimation etc.
Agri-biotech is another potential high-growth category for the future, with increasing emphasis on natural farming and food safety. Climate tech, which was on the periphery of agritech, will take centrestage given the unprecedented need and opportunity to build climate-smart solutions.
To conclude, phase 3 (2022-30) of Indian agritech is likely to see more than 80-90 percent penetration among farmers. This will result in improving farm economics, generating millions of rural entrepreneurship opportunities and driving food/nutritional security for the country. Agritech startups, will continue to drive innovation agenda for the benefit of farmers as well as consumers.
The author is an investor, mentor and board member with foodtech and agritech startups in India and overseas. He works as venture partner with Bharat Innovation Fund, is co-founder of ThinkAg—a platform for accelerating adoption of innovations in agriculture and food space—and chairman for FICCI task force on agri startups. Views expressed in this article are personal.
Check out our 75th Independence year discounts on subscriptions, additional Rs.750/- off website prices. Use coupon code INDIA75 at checkout. Click here for details.
(This story appears in the 09 September, 2022 issue of Forbes India. To visit our Archives, click here.)