Indigo Ag: Analyzing What Went into their $3.5 billion Valuation and What Went Wrong

A deep dive on the dynamics of the business of Indigo Ag

Indigo AG Valuation Down 94% to $200 Million in Latest Funding Round - CalCalistech

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Overview

Agriculture tech startup Indigo AG raised a new funding round at a valuation of just $200 million last month, a 94% drop from the $3.5 billion at which it was valued two years ago.

Indigo has been one of the highest-flying agtech startups for years. With the apparent cratering of their valuation according to the above CalCalistech article, it presents an opportunity to assess more specifically why their valuation was too high from the beginning, what went wrong, and what the Indigo future might be.

Index:

1. Indigo Background

2. Tech Valuations and Why $3.5 billion Didn’t Make Sense

   1. eliminating middlemen in the value chain

   2. software-like gross margins

   3. new, market-creating revenues (carbon)

   4. large total addressable market

3. The Cap Table

4. We Shouldn’t Celebrate Failures, We Should Learn from Them

5. What’s Next

6. Final Thoughts

Indigo Background

Indigo is well-known in the agriculture industry for being the highest-valued agtech company.

The valuation and more than $1.5 billion invested over the last decade were largely thanks to early CEO David Perry, who constructed an elaborate vision of Indigo’s potential to disrupt the grain value chain, reimagine how farmers bought various inputs and were paid for their grain, along with what they got paid for, being a catalyst for the carbon credit buzz within agriculture.

This led to Indigo starting various business units and acquiring others from the likes of transportation and storage capabilities, microbial products, agronomic and grain merchandising software and a carbon business. It also had Indigo expanding rapidly around the globe, with operations in the USA along with Argentina, Brazil, and Europe, plus a joint venture in India.

This led Perry to tell AgFunder News in 2020 that Indigo was “five start-ups in one.”

According to Crunchbase, by Q2 2020 Indigo had already raised over $1.2 billion and set the expectations that they were creating a direct-to-farmer relationship and were going to be able to monetize the “2-3 metric tonnes per acre of carbon” that farmers were sequestering each year.

Later in 2020 Perry stepped down from his duties and was replaced by current CEO Ron Hovsepian.

Afterward, Indigo began to consolidate their business units and focus to where they are today:

• Biologicals

• Carbon

• Market+ (grain software)

What is most notable about two of these areas, Biologicals and Market+, is who they sold, what they sold and why that impacts the business valuation.

Tech Valuations and Why $3.5 billion Didn’t Make Sense

When we look at how Indigo got to its valuation, we often hear “tech-like” valuations. I think it’s important to unpack what that means.

The Indigo multi-billion dollar valuation was based upon several assumptions, but to me, four stand out:

1. eliminating middlemen in the value chain

2. software-like gross margins

3. new, market-creating revenues (carbon)

4. massive total addressable market

Middlemen

When it comes to eliminating middlemen, this was to mean input retailers and grain companies with the assumption of Indigo being able to accrue that portion of the margin pool through a grain marketplace, connecting farmers to end commodity users and direct-to-farmer biological sales. It was assumed Indigo could access these profit pools as well as tap into other downstream pools (eg: premiums from CPG’s).

However, if we look at the challenges within the North American agriculture landscape— we know marketplaces do not work, and direct-to-farmer sales are hard to scale, especially without a differentiated product. Acquiring farm customers directly is difficult and expensive. This led to Indigo selling the biologicals into the traditional retail channel over time, which means a similar margin profile to all other biological businesses and the same competitive dynamics for an essentially undifferentiated biological product plus having to overcome the fact that retailers initially viewed them as competitors.

The same goes for Market+. The software is meant for grain origination businesses which means they compete with the likes of Bushel and Barchart and instead of having their total addressable market being every farmer in the United States, their addressable market became only the grain origination businesses.

The Indigo business, as of August 2023, doesn’t allow Indigo to capture dollars from any other company’s profit pool in the value chain. This is “strike one” when it comes to delivering a return to their shareholders at their multi-billion dollar valuation.

Software Gross Margins

When we hear “tech multiples” or “software margins,” this at its most basic means:

1. 70+% gross margins

2. Zero marginal cost (or close to zero)

Investors like software businesses for multiple reasons, one being that a company can “build once and sell infinitely.” Once you build software and acquire a customer, the continued use of that software has a parabolic potential for earnings.

Let’s use the Upstream Ag Professional newsletter as a basic example of marginal costs. Whether I have one subscriber or 10,000, the cost to produce and distribute the newsletter is the same, meaning zero marginal cost to sell more subscriptions.

This is the idea behind software; specifically, if Indigo was to have a grain marketplace like originally conveyed, they build the software once, acquire the customer and then take dollars off of every transaction. Low marginal costs and ideally a high customer retention. This leads to high gross margins.

If we look at two segments of Indigo’s business, they have significant marginal costs.

The biological business has the need to develop, produce, market, and distribute the product. All of these have incremental costs, and while biologicals are known for strong margins (eg: 25% EBITDA margins according to Corteva regarding Stoller), they are not the equivalent to software margins, specifically when they are subscale (low acres leading to lower production volumes).

The same goes for the carbon business. Indigo takes 25% of the carbon tonne sold but then has additional costs to execute— verification of the offset being the most significant one. This includes the sampling costs and paying their market access partners (eg: Corteva).

It’s interesting to consider how positioning oneself as a “tech company” convolutes and disconnects from reality. We have experienced this extensively over the last decade in agriculture. These high were in part fueled by low-interest rates and grow at all cost approaches, but also seem to forget unit economics.

For example, you can technologically augment the customer experience (eg: Farmers Business Network) or leverage technology to enable a sellable product, in Indigo’s instance, to verify carbon offsets, but at the end of the day, these entities are selling something with physical constraints to execute which do have a marginal cost. Not to mention in primarily commoditized spaces.

Indigo is a tech-enabled company, just like Nutrien is a tech-enabled company or WeWork is a tech-enabled company. Given they do not have a business moat either, this means Indigo should be valued in a similar fashion to all other ag companies.

It is worth noting, in July 2022 I broke down what I thought Indigo’s valuation should be using their public carbon numbers and then, using some basic assumptions, calculated their Net Present Value, or the company valuation, to be $210 million, almost entirely aligned with the $200 million valuation announced.

(Note: I came to a similar number, though it seems their revenue is likely below the number I used in my assumptions at that time. It’s actually likely their $200 million valuation is still overly optimistic)

I point to all of this because when a company uses the same channels and has margins and marginal costs aligned with every other business in the industry, they should be valued in the same fashion as everyone else. This becomes strike two for Indigo’s valuation.

With that, we are led to the carbon-specific business.

New, market-creating revenues (carbon)

The other key reason Indigo had the valuation it had is because of being the leader in establishing carbon credits within the agriculture value chain. This was framed using some hyped assumptions (2-3mt /ac of carbon sequestration) and relatively high dollars per tonne (~$40).

While there is still some optimism on the carbon front in various pockets of the industry, the reality is that this market is not coming to fruition at the velocity that had been assumed and baked into the company valuation.

In the January 8th 2023 Upstream edition, I broke out the public carbon numbers shared by Indigo, and the numbers came out that they likely only had revenue of about $1.5 million based on the math of those public numbers.

Massive total addressable market and Boiling the Ocean

In 2020, David Perry (in)famously stated that Indigo was “five start-ups in one” because they had so many different pillars within their business. Being that this was across crop inputs, grain, carbon, transportation and more, the total addressable market that Indigo could sell to investors was massive.

But, this broad based approach was a red flag for myself and many others. And even after focusing their efforts on three business units— it was still too many.

Business strategy and tactics stem from the concept of strategy in war.

A basic understanding of battlefield strategy is that you cannot attack an enemy from every direction. It scatters resources and people, leaving you in a weak or vulnerable position. The aim is to focus resources, play to your strengths, and get small wins, then move from there.

Indigo was doing the equivalent of aimlessly letting soldiers run rampant on the battlefield— this wreaks havoc on a battlefield, just like in a market, wasting resources, not gaining any ground and making it a challenge for the army or business to gain momentum and wins that it needs.

Zero to One by Peter Thiel is a must-read business book. In it, he emphasizes that it is easier for start-ups to overcome competition by dominating a small market rather than a large one.

Any big market is a bad choice, and a big market already served by competing companies is even worse…In practice, a large market will either lack a good starting point or it will be open to competition. And even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cut-throat competition means your profits will be zero.

In other words, dominate a niche.

In order to succeed in a competitive environment, an entity needs to do something that others cannot. A business needs to be 10x better or solve a unique problem which means starting in a very small market.

Once an organization can dominate a niche, it can expand into new markets. This is the fundamental Amazon strategy (start with books), which is a good comparison for Indigo— Amazon didn’t start as “the everything store,” they became the everything store over time after exploiting very niches in a very targeted way.

Indigo was trying to be everything to everyone before being a single thing to anyone.

If we think about Indigo, they took on an incredible amount of capital that had them going in many different directions— not only in terms of types of markets, from grain marketplaces, to transportation, to microbes, to carbon, but they were trying to do this across multiple geographies. Indigo never owned a specific position in the market— although carbon could have been that point, but they were already headed in four other directions, and as discussed, it is still a slower-moving space.

It is challenging to find an example of a company that has been successful at starting in multiple different directions and attempting to “boil the ocean.” My view of their investor and executive team logic was that in order to overcome the oligopolistic dynamics within the value chain, they need to be able to do everything so that they were not hindered at any given point.

The Cap Table

The above might be obvious to many agriculture professionals reading— after all, the majority understand that agriculture companies need physical infrastructure, grain commodities are low margin, farmers like dealing with their local trusted advisor and carbon is unproven all lead individuals with ag industry experience to say, “this is unlikely to work.”

And it is easy to say “Venture capitalists don’t know the ag industry.”

In this instance, I think that is unfair.

Looking at their investors on Crunchbase shows zero of their investors are agriculture-specific investors.

We Shouldn’t Celebrate Failures, We Should Learn from Them

I have highlighted my views on the necessity of outside capital and audacious goals within agriculture in The AgTech Paradox: What Biology and Historians Can Teach Us About the Agriculture Industry.