I am not an expert financier, nor
do I wish to present myself as one. What I am about to share comes from a genuine interest in fostering growth within the biological sector. My aimis to see this field attract an increasing number of institutional investors, ensuring that they become a valuable resource for entrepreneurs dedicated to advancing regenerative agriculture. Many of these innovators, often with early-stage technol- ogies in their R&D pipeline, may require capital injections to bring their visionary projects to fruition.
It is crucial to maintain fair and equitable operations. Failures in this regard could potentially lead institutional investors to view our industry as excessively risky. This per- ception might stem from concerns about a lack of regula- tion, inadequate technological advancement, or other un- certainties. By addressing these issues proactively, we can create a more stable and attractive investment landscape, ultimately supporting the long-term success and sustain- ability of regenerative agriculture.
The field of biologicals has recently attracted substantial interest from private equity and institutional investors. This marks a significant shift from the industry’s early days, not many decades ago, when such interest and capital allocation was almost unthinkable. I find it remarkable how this niche market has evolved to garner attention from reputed financial entities. Today, as a potential investor, I would like to share some thoughts on specific risks and considerations when eval- uating potential company targets in this space.

REGULATORY UNCERTAINTY AND VARIABILITY

One of the primary risks in the valuation of companies within biologicals is the lack of clear and well-established reg- ulations across the main agricultural markets. In some regions, regulations are still evolving, while in others, the regulatory
environment is chaotic. This variability can be a double-edged sword: while it might offer flexibility to market diverse prod- ucts, it often becomes a significant obstacle when scaling a company across new countries with disparate regulatory frameworks. Harmonizing regulations as much as possible will lead to increased confidence amongst investors.
Valuations made using multiples, such as the EV/EBITDA (Economic value/Earnings before interest, tax, depreciation and amortization) multiple, are directly linked to growth expectations and profitability for the asset being evalu- ated. The higher the growth rate and the more robust the profitability—measured in terms of margin, cash flow con- version, and stability—the higher the multiple. The higher multiples will be compared to the universe of comparable companies. Moreover, high levels of uncertainty often lead to lower valuation multiples as investors demand a higher risk premium.
Expansion into foreign markets has direct implications for these valuation considerations. Investors must be pre- pared for the complexities of navigating diverse regulatory landscapes. Due diligence should include a comprehensive analysis of the regulatory environment in all target markets and an assessment of how regulatory changes might im- pact the business.

PRODUCT EFFICACY VERIFICATION

Another critical risk is the inconsistency between product claims and their actual efficacy in the field. Unfortunately, in our industry, there are still companies that promise more than their products deliver. This discrepancy can damage a compa- ny’s credibility and pose substantial risks to investors.
It is essential to conduct thorough due diligence on the product portfolio, scrutinizing not only the scientific claims but also real-world performance data. This due diligence should be rigorous to ensure that the products genuinely meet their marketed claims. Simultaneously, one must understand
that biologicals products cannot be evaluated with the same parameters of the conventional crop protection or fertilizer in- puts becuase of their very nature.

REFERENCE MARKET CONSIDERATIONS

There is often a tendency to overestimate the true market size for a specific product. The agricultural sector is one of the largest in the world in terms of size, and sometimes the mar- ket for a specific product is overestimated. A product might have been tested or is genuinely useful only for certain specific crops and not easily extendable to others. This can lead to un- realistic valuations and overly optimistic growth plans.

MARKET ENTRY CHALLENGES FOR EARLY-STAGE TECHNOLOGIES

Many promising early-stage technology companies in BioAg face significant market entry challenges. These com- panies often underestimate the effort required to position their products in the market, despite the current momen- tum in the sector. Products that are not yet considered es- sential by growers face an uphill battle for acceptance and market penetration.
Some companies believe that securing a distribution agreement with a major corporation in crop protection or fertilizer will solve their market access issues. In reality, these agreements often require considerable time and ef- fort, generally more than expected, to yield results. For in- stitutional investors, it is crucial to recognize that market entry and growth will likely require sustained investment and strategic support.

EXIT STRATEGY CONSIDERATIONS

An aspect that cannot be overlooked is the importance of a clear exit strategy. For institutional investors, a well-planned exit strategy can be more critical than the initial valuation. One of the significant challenges in this regard is the difficulty of pursuing an Initial Public Offering (IPO) as an exit strategy. The publicly traded market, is not yet fully receptive. Despite the declared appetite, there are many constraints for pure-play bi-
ologicals companies, making IPOs a less viable option.

Investors should consider alternative exit strategies, such as mergers and acquisitions, where larger, established compa- nies in the agricultural sector acquire innovative startups. This approach can provide a more reliable and timely return on investment. However, even in this case, the number of major companies are limited and subject to cycles.

FINAL CONSIDERATIONS

The biologicals sector and the broader space of regener- ative agriculture presents exciting opportunities for private equity and institutional investors, but they are fraught with unique challenges. Regulatory uncertainty, product effica- cy discrepancies, technological disruption, new unexpected competitors, market entry hurdles, and exit strategy complex- ities all demand careful consideration. By conducting meticu- lous due diligence and adopting a holistic strategic approach, investors can navigate these challenges and capitalize on the growth potential of this promising sector.