The Path to Profitable Biologicals Investments

In the evolving landscape of commercial agriculture, the biologicals sector has emerged as a critical area of focus for growers, input suppliers, and investors. In recent years, the rapidly growing segment that includes biocontrols, biostimulants, and biofertilizers has gained considerable traction due to a combination of regulatory pressures, policy changes, and shifting consumer demand. 

As biologicals adoption accelerates in response, agribusiness is gaining valuable experience surrounding the advantages of integrated programs utilizing biological products alongside traditional chemical inputs. And as the market adjusts to a resultant influx of biological technologies and players, a clear understanding of the dynamics and profit potential of biological technologies becomes increasingly important up and down the food value chain.

In this article, we will examine the current investment landscape for biologicals including the historical development of this sector, the impact of new entrants (including multinationals), why growers should pay attention to M&A and investment activities in the biological space, and what startups and investors should be thoughtful of as they try to leverage these new opportunities.

Paradigm Shift and Early Investments

Chemical inputs have been the cornerstone of crop protection and crop nutrition programs for decades, helping growers maximize yields and protect their crops from insect pests and disease pathogens. Our reliance on chemical-intensive systems in agriculture has increasingly coming under threat, however, on multiple fronts. Regulatory changes citing enhanced food safety, the need to address climate change, and reduce environmental impact have put pressure on the growers' toolbox, and governments are phasing out certain products and promoting the use of "softer" alternatives.

Behind these changes are modern consumers, who are more informed about how their food is produced and more concerned with the systems that produce it. Their buying decisions influence food processors and food retailers, who in turn drive their growers toward biological products — all with an eye toward competitive advantage. Growers need alternative solutions that can meet these demands without sacrificing productivity and profitability, and use of integrated bio-conventional programs has largely become mainstream. This program approach may include the use of biofertilizers, the use of biostimulants and micronutrients together in the form of value-added fertilizers, alternating conventional and biopesticide applications, tank mixes, or use of macroorganisms. 

As with many other industries, the innovation to meet these demands frequently originates with smaller companies — companies that often lack the resources required to bring their products all the way to market. This is where large companies and investors play a crucial role. By providing financial resources, R&D capacity, and market access, investors and established ag chemical companies enable innovators (and/or their products) to succeed, and deliver these much-needed products to growers.

In pursuit of these objectives, investment activity in the biologicals space evolved significantly over the past decade. While related, the biocontrol and biostimulant industries have followed their own distinct timelines in terms of investment and consolidation. 

The biocontrol sector saw its first wave of consolidation in 2012, when Bayer's acquisition of AgraQuest marked the first major foray by a global company into this space. Other multinationals would soon follow, including Syngenta (Pasteuria Bioscience) and BASF (Becker Underwood) in the same year. This entry of the industry's biggest players into the biologicals market sent a clear, positive signal to outside investors. 

A decade of historically low interest rates and an environment of cheap capital further fueled investor enthusiasm. More recently, a second wave of biocontrol investments saw acquisitions by Nutrien, FMC, Huber, UPL, and many others. Established biologicals frontrunners such as Valent BioSciences, Certis, Koppert, and Biobest moved to broaden their bio portfolios through acquisitions of their own.

Biostimulant consolidation began later, then peaked in 2020 when AMVAC and Syngenta announced the acquisitions of Agrinos and Valagro, respectively. In the span of two months, Corteva made two major biologicals investments by acquiring Symborg and Stoller in 2022. 

This list of deals only scratches the surface, of course, and has spawned a variety of outcomes. 

It has been said that much of the biologicals excitement that took hold during this first decade was based more on hype than on solid data or accurate valuations. That has certainly proven to be true of some investments, but not for others. What is certain is that a number of strong biologicals offerings have now entered the market to deliver significant value to investors, manufacturers, distribution, and grower end-users. This has validated biologicals technology at the field level and has helped to establish its long-term importance to the broader agricultural sector.

We have also seen that one, perhaps underestimated, concern has been the integration of biological products into organizations built to sell chemicals or seeds. Internal pressure to capitalize on these investments within large companies — and to build the necessary expertise to market and sell biologicals effectively — remains a challenge. For the most part, selling biological products requires a more nuanced understanding of agronomy than selling their conventional counterparts. Fundamentally, biologicals tend to be more preventative than curative. This creates the need for a more technical sale, one for which a sales force must be well-trained and incentivized. 

Risk Off, Risk On

The 2020s brought the next phase of consolidation, as well as a global pandemic, debilitating geopolitical conflicts, inventory destocking, inflation, and rising interest rates. Biologicals investments have slowed down in the face of these challenges, but does this mean that ag biologicals investments are dead? 

On the contrary. These pervasive conditions are having an effect across the entire agricultural landscape — and many other industries as well. Yet despite these headwinds, the biologicals sector continues to grow faster than the traditional chemical crop protection market — for all of the drivers we have referenced. The nature of investments has simply evolved.

We now see more mergers and acquisitions than pure venture capital or private equity funding, and many investors managing risk by co-investing with others, rather than going it alone. Today's biologicals investor tends to be more cautious and is apt to value margin over growth with interest rates high. Today's biologicals investor has likely gained experience, good or bad, during the early investment phase. Today's investor is asking tougher questions than five or ten years ago, but that should be viewed as a positive. We expect all of these trends to continue in the short term.

In a steadily growing market, where the level of innovation is high and so many companies are looking for funding, investors have lots of opportunities to choose from. It is a buyer's market rife with possibilities for the savvy investor. 

In order to consummate a successful deal, we recommend the following points of emphasis for companies and potential investors. 

For startups and smaller companies, securing investor interest starts with a differentiated technology and a strong barrier to entry. In our view, the biocontrol market is saturated with biocontrol based on a limited number of microbial species, and the biostimulants market is saturated with products based on a limited number of natural substances. No one is looking for companies to bring a new Bacillus product, or seaweed extract product to market, unless that product offers a clear competitive advantage. 

It is also crucial for startups to thoroughly evaluate their products under real-world conditions, and to be able to demonstrate a clear value proposition to growers. Just because something performs well in a lab or greenhouse does not mean it will perform well in the field, and proof of concept is not a grower's responsibility. We recommend starting development with a systems mentality rather than stand-alone use of your product. How a technology integrates with a grower's system really matters. 

Success begins with business fundamentals, and transparency about potential risks (and your well-developed plan to mitigate those risks) speaks volumes to a potential investor. Biologicals startups should always focus on their core opportunities and avoid overextending their resources. Avoid the trap of convincing yourself that funding you have been fortunate enough to receive is actually revenue you have earned.

At DunhamTrimmer, we always advise our startup clients to actively seek alliances with established distribution channels critical for scaling operations. Some startups come to the table with grand ideas of retaining margin by circumventing traditional channels and selling directly to growers. This approach has rarely succeeded on a large scale. Distribution partners can be valuable allies, helping to navigate the complexities of market entry and scale. A strong distribution partner will also work to create demand (see differentiated offering).

On the investment side of the equation, avoid falling in love with a technology and approach the biologicals sector with a clear-eyed understanding of its complexities. Unlike the fast-paced software industry, agricultural innovations require patience, often taking five to ten years to bring a product from concept to market. If agriculture is not your core competency, find a strong consultant with deep experience in biologicals markets to help you. DunhamTrimmer would be a wise choice.

Keen attention to the regulatory process from the earliest stages is paramount to success, both for the investor and the inventor, as regulatory approval processes vary widely by region. Unforeseen delays can significantly impact time-to-market and the success of an investment. 

Grower input is indispensable, and we always advise our investor clients to staff the company advisory board with people that have ag tech expertise. Avoid pursuing marquee names unless they have the time necessary to play an active role in your success. 

Despite the challenges, DunhamTrimmer maintains that the biologicals sector offers significant opportunities for growers, manufacturers, and investors. Companies with innovative technologies that provide clear value to growers — backed by solid business plans — will continue to attract investment. Investors can remain confident that biologicals sector is poised for continued growth, supported by macro drivers that favor the unique attributes of biological products.

Rick Melnick is Chief Operating Officer and Partner and Mark Trimmer is President and Founding Partner of DunhamTrimmer, the premier consulting and market research firm serving the biologicals industry. Learn more at DunhamTrimmer.com.

This article was originally published in AgroPages magazine 2024 Biologicals Special.