Financing a vertical farm
Vertical farms require high upfront investments, what are your options when it comes to financing your vertical farm?
Farming is expensive. Overhead costs and risk levels can fluctuate based on volatile market forces, supply chains, and even a bit too much rain at the very wrong time.
The need for controlled environment vertical farming became clearer this year due to supply chain disruptions, shortages, and the high transport costs and emissions associated with leafy greens grown thousands of miles away from where they are sold.
But like traditional farming, start up and maintenance costs can be prohibitive, whether you’re just starting out, or expanding an existing operation.
Today we’re exploring how the industry is making strides to lower the barrier to entry on vertical farming operations.
A Viable Piece of the Puzzle
Vertical farming is an important part of a resilient food system. It enables growing 365 days a year regardless of the climate using less land, water, and time. Although not the full solution to building a resilient food system, it is an integral part of assuring security in many communities.
This type of solution stood out during events like #lettucegate - a time when California, which supplies 70% of Canada’s lettuce, experienced a combination of bad weather and a widespread virus, leading to fewer crops available and a quadrupling of lettuce prices.
Vertically farmed lettuce was able to help supply chains weather the storm with its reliable supply and stable pricing.
But this isn’t the first (and probably not the last) time we’ve seen this type of shortage.
A look ahead also shows opportunities for controlled environment agriculture to grow when you consider events like #lettucegate, supply chain disruptions, and if you're in Canada - a weaker currency that makes sourcing local more lucrative.
Canadians heavily depend on the south for leafy green imports, leaving us vulnerable to price shocks when there are supply shortages.
Crises aside, food grown a short distance from where it’s sold benefits the environment and consumer. The hyper-local produce remains fresher longer, requires less transportation, and is traceable back to the source.
However, despite all these advantages, there’s still a need for diverse financing options to support the growth of vertical farming because of the high upfront investment required to get farms going.
Securing capital
When it comes to financing a vertical farm project, there are many avenues at your disposal.
Traditional financing
Traditional financing refers to what you probably think of when we say “financing” such as bank loans or credit unions.
As with any option, there are pros and cons. Financing through a large bank is a good option that is widely available and standardized.
However, at times, this is to a fault because these larger institutions do not know how to make sense of newer vertical farming technology. Is it a building? A piece of equipment? You are also limited if you do not have large assets for collateral.
Banks are also subject to major market forces and can have high rates, which can be a stressful option for many, especially if variable rate products are involved.
Self financing
Those in the clean tech space are keenly familiar that the hardware needed for a climate transition is capital intensive and financing (or investment) makes all the difference to shake us from the status quo.
While not an option for everyone, there are individuals who can self-finance a modular vertical farm or vertical farming project. Some businesses also have capital on hand to invest in expansion projects. The con is you are out of a chunk of money in one fell swoop, whereas financing could be better for your cash flow (and for unforeseen emergencies) in the long run.
On the flip side, if you have the capital to begin with you can do what you want, how you want, without extra conditions on when and how you have to pay back the money if you went with a traditional lender. Plus, no interest.
Even though you may not have interest payments, usually if you are self financing, you are building a way to pay yourself back into your business model. Essentially, making sure you recoup the capital you invested to get the business started.
Grants and subsidies
There are many government programs focusing on supporting agriculture and sustainable practices which align with the goals of vertical farming. These programs exist because sustainable infrastructure requires huge investments.
Government funding helps mitigate the financial risks that come with starting a new venue and enable you and your project to weather any initial challenges. The government is in a unique role to finance innovation because it can.
Those in the clean tech space are keenly familiar that the hardware needed for a climate transition is capital intensive and financing (or investment) makes all the difference to shake us from the status quo.
Government grants can be plentiful, but also restrictive and bureaucratic.
Securing government funding can be highly competitive and the application process may be time consuming and complex. Even if your proposal is accepted, dealing with government agencies and navigating unfamiliar bureaucratic processes can be challenging. At times, hurdles in the process can even lead to a delay in receiving the funds.
Plus, because the government bears a responsibility to the larger public, transparency is critical. What this means for you is limited flexibility with funding. Some grants will come with restrictions on how the funds can be used and when, which limit your project’s flexibility to adapt to changing circumstances.
Crowdfunding and community investment
We go further together than we go alone and crowdfunding and community investment is a perfect example.
There are a few pros when it comes to crowdfunding. For example, the different crowdfunding models (e.x. Reward-based, equity-based, donation-based) give you flexibility to choose the best financial fit for your project based on your goals.
They’re implicitly great marketing opportunities because you have to get the word out to get funding. Crowdfunding campaigns are effective marketing tools because they help you raise awareness about the project before it begins and can even attract you media attention.
Crowdfunding also allows vertical farming projects to tap into a diverse pool of investors and contributors and spread financial support across a community. This model lets people support projects in different ways without having to be a fancy financial institution.
Crowdfunding is a great way to build support for your project early on.
As with all the financing models listed here, there are some considerations.
First, there's no guarantee of reaching the funding goal in a crowdfunding campaign. If the target is not met, the project may receive no funding, and at worst, contributors may be hesitant to participate in future campaigns.
With this in mind, you also have to be realistic about your crowdfunding targets. Can you raise enough funds to launch your entire vertical farming project? Is crowdfunding a starting point to build a foundation and get the rest of the funding from elsewhere? Going in this direction may require additional research into what crowdfunding projects look like in your region and what dollar range has been successfully raised.
If the project realities are not clearly communicated, there is also potential for frustrated contributors. Some contributors may expect higher returns or quick results, and if your project faces any challenges or delays, this could lead to dissatisfaction among backers.