Lessons from vertical farming bankruptcies, layoffs, and closures in 2023

There's been a lot of trouble brewing in the vertical farming industry as of late. The sheen has worn off on controlled environment agriculture (CEA) and vertical farming for the investment community. Pre-2021 darlings such as Agricool, Kalera, Appharvest, Fifth Season, Iron Ox, Infarms, Upward Farms, and Aerofarms are now facing heavy losses, bankruptcy, or even closing up shop. And it's not over yet for this young industry. We are definitely in the "trough of disillusionment."

Why? We can point to three major issues within the CEA and vertical farming industries:

Easy money discouraged efficiency
This factor wasn't just limited to CEA, but it is definitely magnified in a front-loaded, capex-heavy industry like ours. When the industry had "free money" in the form of low-to-no interest rates, everyone from the VC firms to the CEA companies themselves levered up to give themselves cash and at frothy valuations.

For example, Plenty was valued at a whopping $2.3B at one point. And flush with cash, most vertical farming companies didn't bother to spend it efficiently, either in capex or opex. They overbuilt expanded their presence or their CEA products too quickly, and all the while not minding their burn rate. Many assumed, and not without reason, that they could just get more money.

And what happened when the interest rate environment turned and the cash spigot turned off?

• Investors and shareholders demanded that expenses be trimmed. But their growth plans, especially their existing capex commitments, didn't allow for that.
• They were asked to do way more (continue their growth to justify lofty valuations) with way less (reduce burn rate with dwindling cash reserves).
• These organizations, with a surplus of employees, weren't structured to operate in a lean manner.

"In short, most of our CEA colleagues didn't plan to build for resiliency, they built for ease. And the economic environment fueled this behavior."

Questionable business models
In a recent Chapter 11 bankruptcy in the vertical farming space, a basic business question arises: do they have a sound business model but just structured poorly? Or is it a fundamentally bad business model to begin with?

When you start a venture, it can be easy to get the product dialed in and just as easy to misread the market size and cost to scale. To meet those expectations, organizations tend to stack on more debt and expand their operations and scope. The natural end, though, is that their growth plans hit a wall, and their revenue doesn't catch up to projections. And unless these companies have more access to capital, they reach a negative inflection point of burn rate. That's a bad sign, and every entrepreneur or business leader knows the deep, gnawing fear of that inflection point.

In some of the CEA ventures we are seeing in the news now, especially with the "easy money" mentioned above, many failed to take the time to engage in a robust product-market fit exercise. In that exercise, the general idea is: build it first and then figure it out as you go. That's a normal process, but a wise sage also once told me, "Spend the least amount of money in the beginning because that's when you make the most mistakes." Finding product-market fit is the **first** and most essential part of building a successful venture. But this also takes patience and money. You need to establish the former and the latter in order to allocate significant resources to technical and commercial proofs of concept. Unfortunately, many of our CEA colleagues did the reverse. They built big proofs of concept (think 20-acre, fully automated facilities) without actual pressure testing the "market" side of the equation. It's unfortunate that we are seeing that play out in real time, but it serves as somber "lessons learned" for the rest of us in the industry.

Fundamental unit economics
Many CEA companies' growth plans didn't include things like "positive unit economics." If your unit economics is a negative number for whatever reason (already a bad sign), then you have to determine what the "escape velocity" or volume of sales + production costs is that turns that number positive. For many CEA and vertical farming companies, unit economics wasn't seriously talked about or tested.

On the sales side, many of those same companies' projections on what their target consumer would be willing to pay for a head of lettuce (or herbs or berries) were predicated on loose pricing pressure or rosy pricing estimates. They forgot that it's just lettuce. Now that inflation has hit and consumer spending is down, those numbers are quickly called into question. If the unit economics on a head of lettuce doesn't work, then the unit economics of a greenhouse or indoor facility doesn't work either, and thus your entire business model becomes suspect. Many of our colleagues have tried to shift their product offerings to things such as microgreens, mushrooms, or salad kits, which all have higher margins. But that pivot requires capex allocation for additional equipment and processes, and it also requires time to shift sales teams and merchandising efforts. But all in an environment where the burn rate has to go down, and their runway has to be extended.

The path forward in CEA and vertical farming
Make no mistake, CEA and vertical farming have a bright future as a whole. There are too many environmental factors (long-term water issues along the Colorado River, climate volatility), supply factors (enduring, increasing transportation and labor costs), and demand factors (continued demand for majority plant diets and increased healthy eating habits) that cannot be fully addressed by traditional agriculture. So, what do we need to improve moving forward?

Build deliberately and efficiently, even if it is slower
We at Eden Green have taken a focused approach over the past five years, getting our first set of patents issued and then proving out our technical and commercial proofs of concepts. On the flat-tray greenhouse side of CEA, we've seen colleagues such as Paul Sellew at Little Leaf Farms (founded in 2015), Viraj Puri at Gotham Greens (founded in 2009), and others take a long-term approach to growth. Meanwhile, we are trying to lead with patient growth on the vertical farming greenhouse side of the spectrum. For "black box" indoor vertical farms like Plenty and Bowery, I believe the timeframe to prove and scale demands requires even more patience. And we are rooting for them to get there.

Focus on the fundamentals
The winners in this space will need to focus on establishing and optimizing unit economics, both at the plant level as well as at the facility/farm level, before they can scale up. We at Eden Green (and some of the colleagues I mentioned), have taken the time needed to develop and test product-market fit. We strongly encourage new entrants in the CEA space to do the same. The other big "fundamental" is the unsexy part: operational consistency. Some of our competitors have been dinged for dodgy or incomplete SOPs, poor training combined with high turnover, and food safety and environmental controls not being up to par, much less at high standards. Lastly, I suspect you will see overall burn rates come back down to reality, too.

As an industry, we need to hone in on strategic, intentional resource allocation only into those operational or R&D efforts that have a high probability of return.

For the investment community, this focus on fundamentals is actually a sigh of relief. The valuations are lower, but it's a sign that the CEA industry is healing from a valuation bubble pop and that rational thinking and "optimistic realism" are back.

There is endless pressure to deliver big returns in a short amount of time, but our collective work to transform CEA and vertical farming is a marathon, not a sprint. As GT Thompson, the chair of the House Agriculture Committee, remarked recently, "CEA will definitely supplement, even if it doesn't supplant, all conventional farming." We tend to agree with that overall sentiment. But the only way that happens is if we take a long view of things.