Venture Capital Makes Headlines. But What Are the Other Pathways for CEA Financing?

Editor’s Note: This is an investigative article from Agritecture’s Economics and Data Analysis Intern on the biggest risks and challenges for financing urban farming ventures, and non-venture capital backed financing paths that have brought some of the biggest CEA farms success.

Written By: Ryan Glanville

What is the most challenging thing about starting a commercial urban or controlled environment farm, or “CEA Farm”? 

Agritecture gets asked this question often. The answer, of course, is that it depends on the specific circumstances of each individual project. However, one challenge that nearly every project will come across is financing– and it’s a topic that we find many entrepreneurs may have only a partial comprehension of.

With that in mind, this article will walk entrepreneurs through the different financing options available, will give examples of successful farm financings, and will provide a sense for when each type of financing becomes most applicable to a new CEA business. The analysis will be higher level since the type of funding best for each CEA Farm depends much upon the type, size, and location of the farm as well as each project's current backing and progress.

Launching a vertical farm comes with significant financing requirements to cover feasibility research and market testing, equipment and technology, a site or building, product R&D, and the "operating j-curve" (this refers to the negative profit made until a farm is operationally break-even). 

Sources of funding most common for the CEA "startup to growth" period include: self-funding, equity from friends and family, "sweat equity" from founders and experts, institutional equity (this includes venture capital), vendor financing associated with equipment, government grants and loans, revenue based financing, and traditional bank loans.

While many large-scale CEA Farm projects have gained funding from institutional VC investors, such equity funding is usually only available to operating management teams with multiple successful businesses under their belts, or simply for a project that is further along and has a clear line of sight to national or international scalability. For this overview, we will focus on early-stage/startup funding sources, which are generally more available to those not yet "institutionally qualified". 

Initial upfront background research and feasibility study costs would usually be covered by entrepreneur cash and sweat equity. In the industry, the suggested best practice is to start a CEA Farm using entrepreneur equity until the CEA Farm has proven— on a pilot or small scale basis, at least — its unit economics, and that it can operate as a viable farm with clear demand.

“It’s also much more likely that by hiring an expert like Agritecture to run a feasibility analysis, demonstrate a clear market need, and minimize mistakes through professional farm design and equipment selection, entrepreneurs can raise a pre-seed equity round from angel investors or are more likely to qualify for grant programs,” says Agritecture’s Founder & CEO Henry Gordon-Smith.

Depending on the project’s scale and the management expertise required to execute the plan, sometimes key operating managers and other experts will provide early-stage services in exchange for ownership in the venture. Or some may elect to defer payment for their services until the CEA Farm has the generated cash flow or raised sufficient capital. Vendor finance for a portion of the hard capital expenditure requirements can also be negotiated, though less experienced entrepreneurs might struggle to convince vendors to take that risk.

Vendor finance is a form of funding in which an equipment vendor finances an order from a customer to purchase that vendor’s equipment or product, allowing the CEA Farm to pay for the equipment over a period of time. Interest rates for this form of financing typically vary from 5-10%, depending on the supplier you are working with, but the “true cost” of vendor finance must also take into account the effective purchase price. Vendor-financed equipment is often more expensive than non-financed equipment, which is certainly something to consider when planning your CEA facility. 

Another drawback of the vendor financing option is that vendors often require full payment earlier than would normally be the case for a traditional bank loan, usually after 1-3 years. And even though vendor finance can be a more accessible way for startups to purchase equipment, such financing does not cover land costs, construction, utilities, or other operating costs required to launch and begin operating a CEA Farm. In this sense, vendor finance should be viewed as a partial solution to the equipment portion of CEA funding, and the significant down payments required through this type of financing may still be a roadblock for some CEA startups.

Once operating performance credibility has been established, loans could allow for more rapid expansion of the CEA Farm without diluting the ownership of the business, as would happen when adding more equity investors. Both bank lenders and institutional equity investors will require a thorough business plan that provides realistic operating performance projections. They will look for production and operating statistics as well as financial statistics. Any bank lender will also focus on security for its loan, either in the form of unliened equipment collateral, personal guarantees from key owner-operators, or other collateral as available including owned land. And, these financing sources will be difficult to obtain for most early-stage CEA Farms.  

Part of the funding needed for an entrepreneur’s farm may be filled by government financing, including grants. Government-backed financing is a popular option pursued by CEA operators as you can see based on Figure 1. There are many government-led programs that can help finance a CEA Farm, in particular farms that are located in areas targeted for economic growth funding. 

First, the US Department of Agriculture’s Farm Service Agency (FSA) offers farm ownership loans with up to 100% financing for a maximum loan up to $600,000. This Farm Loan Discovery Tool from the USDA can help CEA businesses identify loans that they might qualify for. Another helpful platform for finding and applying to government grant and loan programs in the US is FarmRaise, a member of the Agritecture Partner Network.

The USDA FSA’s microloan program was used by CityFarms Alaska, a vertical farm in Anchorage, to finance an expansion of its farm (pictured right). The micro-loan program provides small loans for non-traditional farming operations including hydroponics and aquaponic operations. These micro-loans range in size up to $50,000 and come with a shortened application process and reduced paperwork. 

Along with these USDA programs, entrepreneurs should check each state’s specific farm and energy development programs. NYSERDA, the New York State Energy Research and Development Authority, is one such program that helped Gotham Greens, by providing $1 million in funds to expand their Brooklyn-based greenhouse while reducing the farm’s energy consumption. 

Government loans typically have an interest rate between 2-4% with a term length between 1 and 7 years. These loans can be difficult to apply for and often have very strict policies on what type of farms, and in what locations, can qualify. 

Some more creative government-backed financing strategies include conduit bond financing. This funding structure was used to Vertical Harvest L3C’s new facility in Maine, which is currently undergoing construction. Conduit (municipal) bond financing is used when raising capital for large-scale public-oriented projects. Vertical Harvest raised over $45 million through the issuance of these municipal bonds. 

Once a farm has established revenues and can forecast future sales more accurately, revenue based financing (RBF) becomes an option. Generally, a farm can only look into RBF if they have strong gross margins along with consistent revenues. RBF pledges a certain percentage of your future earnings in order to gain upfront funding. Borrowers usually make monthly payments, and the fact that RBF is tied directly to revenues allows borrowers to pay less during periods of lower performance.

Being a non-dilutive financing option, RBF is a desired option for businesses even though it typically can only be attained once higher margins and revenues are established. However, one Agritecture Partner Network member, Mainvest, is making revenue based financing more accessible to brick-and-mortar startups, including indoor farms, through their digital platform and wide network of investors.

As mentioned, traditional bank loans are another path when looking to finance an indoor farm. Interest rates differ widely, and are subject to change based on current economic conditions, the risk of the project, and the background credit of the applicant. Interest rates vary from around 5% to mid-teens (or more), based on the risk of the project and the general interest rate environment, with longer payback periods ranging from 5 to 30 years. 

Many larger CEA Farms have used bank loans to finance expansion after having demonstrated core operating skills and cash flow. Little Leaf Farms, for example, has used funding from Bank of America in multiple funding rounds to expand its farming operations. In 2020, Little Leaf received $38 million in debt financing to double its greenhouse farm capacity. For most entrepreneurs seeking to finance their first CEA Farm, however, bank financing is likely a bridge too far— at least until the CEA Farm in question has proven its operating capabilities and has shown cash flow positive financial results. 

There are various ways you can finance a controlled environment farm, and there is no golden rule when determining how you should finance your farm. Weighing all your options once you decide the specifics of your farm is most important. 

Before entrepreneurs dive too deep into the development of a farm and before key decisions and commitments are made on location, crops, equipment, hiring, and scale of the operation, it is recommended that entrepreneurs take advantage of project modeling tools. 

This is precisely why Agritecture built the world’s first online platform for planning and modeling CEA farms: Agritecture Designer. Working with a modeling tool like Designer is instrumental in helping entrepreneurs define their capital needs based on Agritecture’s long experience with CEA Farm development and will ensure that the key questions and issues associated with a potential CEA Farm and location are asked and investigated in advance of getting started.

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