Can agri-based start-ups transform the rural economy?

Earlier this year, two India-based agri-technology (AgTech) start-ups hit the headlines for raising millions in funding from private equity firms. AgroStar, which provides agricultural inputs directly to farmers, raised $10 million, and RML AgTech, which offers smart farming solutions, raised $4 million.

Securing access to funding for AgTech start-ups has been tough. Yet, this recent spurt may signify growing investor and corporate confidence in this nascent sector, known as farming-as-a-service, or FaaS.

A recent study, carried out by Bain Capability Centre, Bain and Co.’s offshore group supporting its offices worldwide, and the Centre for Innovation, Incubation and Entrepreneurship (CIIE) at IIM, Ahmedabad, pointed to increased activity in the FaaS space by venture capitalists, private equity funds and large Indian firms. Earlier this year, CIIE also launched the Bharat Innovations Fund with AgTech being a key focus area.

India suffers from low farm productivity due to a host of factors, not in the least, the lack of access to technology. Nearly 85% farmers hold less than two hectares of land and earn, on average, a meagre Rs6,400 per month. The demand for food has been growing but the supply is severely constrained due to marginal productivity gains in a majority of crops, shrinking arable land, erratic monsoon patterns, climate change, and supply chain inefficiencies.

The term FaaS has been coined after SaaS (software-as-a-service). FaaS seeks to provide affordable solutions to technical and mechanized farming. It makes the fixed costs variable for farmers, thus making it more affordable for a majority of small farmers. Its services are available on a subscription or pay-per-use basis in three broad categories.

* By far the most popular, farm management solutions is information sharing through SMS, phone calls (interactive voice response systems), e-mail or mobile apps. The services include alerts on weather, input and output market prices, real-time crop monitoring, and data analytics to make all of this information insightful and actionable.

* Production assistance solutions refer to aiding farming activity with technological resources and expertise on site. For example, the ability to rent heavy farm machinery with expert operators at the farmers’ doorstep.

* Access to market solutions provides virtual/online platforms to connect backward and forward supply chains with farmers. These connections help procure quality farm inputs and also cut out several intermediary layers by providing direct platforms between farmers and retailers/ consumers.

Some FaaS solutions are merely reinventions of existing practices, such as equipment rental or sharing. However, under FaaS, equipment hiring is organized, efficient and more affordable. Other FaaS solutions are globally adopted technology-driven inventions tweaked for Indian farmers given their smaller land holdings and incomes.

FaaS could transform the farm sector by making it more efficient, productive and market-driven. Both central and state governments have initiated a string of measures, such as Custom Hiring Centres, that could boost FaaS. Additionally, the government’s focus on enabling cheaper, institutional credit to farmers, improvement of infrastructure and digitizing transactions promises to put farming on a sustainable path.

Increasing mobile and internet connectivity has also spurred start-up activity. Currently, 88% of Indian households have mobile phones, and greater access to 3G/4G-enabled smartphones is around the corner. Large corporates, investors and start-ups have also stepped up innovation efforts to bring mutual benefits to farmers and businesses.

Global investors have pumped in millions of dollars through venture capital and private equity investments, which have grown more than five times in the last five years. The sale of The Climate Corp. in 2013 to Monsanto, in nearly a billion dollar deal, was the tipping point for the sector in attracting global investment. India, too, has seen a sharp increase in entrepreneurial and investment activity in the last four years, with the number of start-ups in the FaaS space doubling during this period. Each of the top three start-ups reaches out to 400,000 farmers on average while investment in the sector currently stands at around $80-$90 million.

Funding of the start-ups beyond the seed stage also indicates growing investor confidence in the viability of the businesses. Corporate investment and entrepreneurial activity is likely to pick up further with big corporates such as Mahindra and Mahindra Ltd, TAFE and John Deere already vying for the opportunity.

Enthusiastic backers for FaaS have been calling this India’s second green revolution.

The sector has lots of potential for investors to transform the agricultural and economic fortunes of rural India, which has for too long been excluded from India’s growth story. In the long term, the sector is poised to create a win-win situation for investors, entrepreneurs and farmers.

Varun Grover is a senior group manager and Shivani Sehgal is a senior team manager with the Bain Capability Centre. Hemendra Mathur is a Venture Partner with Bharat Innovations Fund, a public-private-academia venture platform.