The industry is still evolving and has scope for increasing mechanisation, better warehouse management, forward and backward integration and cost reduction.
By Ajay Kakra
The Indian startup ecosystem is all set to grow, thanks to the schemes such as Startup India introduced by PM Modi. The startups in the agri sector have also seen movement in this area, both in the agri-tech and food-tech space.
Let’s first consider the agri tech startups. By definition, an agri tech startup is an entrepreneurial business model covering any part of the crop value chain. Over the last decades, we have seen the business model in agriculture develop around warehousing solutions. It was a sweet spot between trading entities and logistic service providers both of whom found value in integrating these services to their core business model.
However, this niche space faced regulatory and operational constraints initially but with the implementation of Warehousing (development and regulation) Act, 2007 and support by the formation of the Warehouse Development & Regulatory Authority (WDRA), there was a substantial improvement in the warehousing industry.
Nonetheless, the industry is still evolving and has scope for increasing mechanisation, better warehouse management, forward and backward integration and cost reduction.
Dedicated fund support
The last few years have seen the emergence of ‘greenfield entrepreneurs’ in the agri space, bringing to life innovative ideas impacting areas of the value chain, ranging from providing simplistic solutions such as streamlining agri input supply or customised farm equipment supply to high-end predictive weather analytics services and decision support systems.
A lot of these startups were the brainchild of people who have worked in technology companies. This helped them identify inefficiencies in the existing processes, operations and technology in the agri value chains. Designing solutions to plug these gaps was not a big deal for this breed of entrepreneurs. It never has been. The startups required very limited seed capital to start the venture mostly as a prototype or a use case. However when compared to conventional business, the agri tech startups don’t get regular finance, the scale-up is slower and technology adoption benefits are not passed on to end consumers.
There have been 41 deals worth $96 million from 2014 to June 2018. In 2014, $USD 6 million was invested whereas in 2017 $35 million was invested in the agri tech space. However, the funding takes as long as 3-8 years from the time they hit the market. Most startups can’t survive on the owner’s capital till this long. One key expectation from the budget can be to create a special startup growth fund to support the early stage startups.
Most startups scale upon the experiential basis by providing superior value add or superior experience to the end users. However, in the case of agri tech startups, this process is very slow. Every state should develop its own infrastructure for incubation and commercialisation of startups and technologies. This should also include single window clearances for loans, patents and licensing.
This year has been rough for the startups with the IT department issuing notices against the angel funding tax. Such provisions don’t foster growth for startups. In order to bring the startups closer to the conventional business, the government can also look at increasing the income tax holiday from 3 to 5 years. Further, rebates in GST can also prove to be a breather for startups and help them compete with the mainstream businesses.
On the other hand, agri-food startups are a different ball game altogether. They are more urban in nature and have a close connection with the consumers. During 2012- 2017, $1.6 billion was spent on the agri-food startups, through 558 deals. This space is dominated by food service startups, primarily led by Zomato and Swiggy. We can logically conclude that most of the funding has gone to the startups with a consumer focus.
However, after an initial peak in 2015, the flow of funds have reduced. This is mainly due to the cluttering of the space and creation of ‘me too’ entities. Though the model of food delivery startups seems encouraging, most startups face the key issue of developing the delivery infrastructure to meet consumer demands. Further, with pressures of faster expansion, most startups lose focus on retention and thin bottom lines they are working with.
With funding from the private sector coming to only a few food startups, who have innovative business models or have reached the scale, the market will take some time to turn the tides.
The startups in India definitely look forward to the budget and hope for the comfortable ecosystem which allows them to thrive in the competitive world and come at par with the conventional businesses.
(Ajay Kakra is the leader Food and Agriculture advisory practice for PwC India. Views are the author’s own).