For the past few years, venture capitalists and aspiring, entrepreneurs have been dancing at a financial ball.
“Unfortunately the agriculture sector has not been invited to this party,” Farm Credit Canada executive vice-president Janet Wightman told the Excellence 2003 conference recently held in Winnipeg.
Venture capitalists are suspicious and skeptical of agriculture-based businesses, and farmers don’t like the idea of sharing ownership of their operations.
The result is an industry starved of capital and unable to realize much of its potential.
“You can’t take advantage of the global markets without access to capital,” said Wightman.
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FCC hopes it can slowly fill a hole left by banks and venture capitalists, building up the agriculture industry while expanding its own role beyond lending.
Wightman said venture capital has become increasingly important in financing leading-edge companies, but only about one percent of the $20 billion in Canadian venture capital funds is invested in agriculture.
“There is a financing gap on the equity side.”
That leaves farmers who are establishing large new operations dependent on debt financing. Debt is riskier than equity financing, so this leaves entrepreneurial farmers more vulnerable than other businesspeople.
Some farmers who are building new commercial facilities, such as hog barn complexes, are able to find private investment money from other farmers and local investors. But many cannot find the money at all, and do not expand.
Wightman said young farmers often have the greatest trouble because they have not built up a lot of their own equity, they don’t have much cash, and they do not have an established credit history.
Agribusinesses, such as processing plants, also need lots of equity investment.
“The up-front costs can be huge.”
But venture capital funds usually shy away from new businesses based on agriculture because they know the commodities business has sharp ups and downs.
“Often there can be a period of time before a business like this begins to generate the returns it will need before being able to repay its debt,” she said.
“Lenders are often not willing to take a chance on what seems to be a risky operation with a limited track record.”
Co-operatives, which play a big role in agriculture, also have trouble funding major expansions or new ventures, Wightman said. Because co-ops can’t easily offer shares or equity stakes, which are restricted to members, they can’t easily raise investment capital.
And most co-ops distribute their profits to members, which means they don’t hang on to large amounts of self-generated investment capital, Wightman said.
“They often don’t have adequate (money) to reinvest or to use as security for debt financing.”
Wightman said the unrealized potential for agricultural businesses may be great. The Saskatchewan Agrivision Corp. estimates that $20 billion of new investment capital will be needed over the next 20 years to capitalize on all the opportunities in the agriculture sector in that province.
FCC is hoping to make a small entrance into venture capital funding with its new $50 million fund that is designed for investing in, not lending to, agricultural businesses.
Wightman said FCC hopes to eventually take minority equity ownership positions in start-up businesses Ð the kinds of businesses venture capitalists often focus on Ð but right now it plans to learn the venture cap business by working with existing companies.
“We will look at financing established companies who are looking to expand.
“After this builds our internal expertise we will look at startup businesses with higher risk profiles.”
She said FCC’s venture capital investments will not be as brief nor as impatient as usual venture cap investments.
Instead of investing for three to five years, FCC equity investments will be planned for up to seven years.
Wightman said FCC hopes to invest in about half a dozen ventures per year, with average investments being $1-$2 million.
FCC will not be looking for companies that want capital to do research and development at an early stage.
“What we look for is more than just a good idea or a good concept,” said Wightman. “We look for a product that’s ready for market.”
She urged farmers to develop strong business plans if they hope to access venture capital such as FCC’s. No one is going to invest in a half-baked scheme.
“There is no capital out there … for short sighted and poorly planned business ventures. There is, however, capital to be had for well-planned business ventures.”
