Canada: Farmers And Founders: Legal Considerations In AgTech

Located in the heart of the Canadian prairies, Saskatchewan is home to more than 40 per cent of Canada's cultivated farmland¹ with a tech sector that has grown 38 per cent from 2010 to 2015 and 19 per cent from 2015 to 2018.² Saskatchewan is investing heavily into the development of its agriculture technology sector offering an increasing number of strong incentives including the AgTech Growth Fund and last year's commitment to a $15 million investment into AgTech development. With continued support from the province, commitment to research in agricultural innovation, and talented startups, Saskatchewan is poised to emerge as a global leader in the booming industry of AgTech.

Thanks to Artificial Intelligence (AI), drones, the Internet of Things (IoT) and big data analytics, among other technologies, AgTech solutions aim to disrupt the way people produce, manufacture, process, distribute, and consume food products. It is a unique space that blends the traditional culture and values of farmers and agri-businesses with advancing technical innovations and the evolution of Canadian agriculture.

Navigating this intersection, natural tensions between industry and innovators and AgTech founders may experience challenges unlike other early-stage technology companies. The following are four common issues that AgTech companies need to consider:

1. Connecting with Industry
2. Increased Capitalization Needs and Lifecycle
3. Intellectual Property Strategy
4. Smart Money

Connecting with Industry

With early-stage tech in general, but especially in AgTech, identifying real problems in one's chosen industry is pivotal to long-term success. Traditionally, the agriculture and technology sectors do not converge. Up until about five years ago, farming was not an area that was typically tech-enabled. Due to this lack of historical integration, AgTech companies may find it more challenging to connect and communicate with their customer base than their early-stage counterparts. Understanding this as a challenge and focusing on increasing these opportunities for exposure between both industries should be considered and targeted. Identifying common commercial relationships and key contacts, assessing legal contract risk, and considering improved contract management in advance are simple steps to avoid wasting these opportunities once found.

Increased Capitalization Needs and Lifecycle

Due to a typically risk-averse customer base, AgTech companies often require more time and capital to generate revenue and create long-term shareholder value. Proven acceptance of transformative AgTech innovations is time-consuming and will require substantial initial development and increased testing in the market. As a result, AgTech companies will likely need larger initial investments to cover lengthy product development and field testing until additional investors feel comfortable participating.

Furthermore, AgTech companies, perhaps more so than other startups, may seek to partner with government agencies, universities, or other third-party researchers to develop their technology. Through these channels, diligence and papering the arrangement could take more time than with traditional funders (angel investors, venture capital firms) and standard SAFE or convertible note documentation with abbreviated diligence that immediately grasps the disruptive concept.

AgTech founders should plan for a longer road to profitability.

Intellectual Property Strategy

Though not specific to AgTech, AgTech companies are often reliant on proprietary innovations to anchor their startup. Proper protection of proprietary innovations is important, and it is critical that an intellectual property (IP) strategy is developed early on to cover the creation, acquisition and protection of such IP. Identifying where intellectual property is created, and associated risks will help determine what level of protection and strategy is warranted. Strategies often start with an IP assignment with employees and advisors and/or consideration of copyright, trademark, and patent registrations as applicable. It is prudent for AgTech founders to understand the importance of having an IP strategy early on and seek professional help as needed.

Smart Money

As the AgTech wave grows, financing and capital entering the space increase. Like any startup, as more and more capital deployment opportunities present themselves, the founder will have to consider what is right for them, their company, and their growth stage as they focus on building a sustainable business. If the intention is to raise money, in a best-case scenario, founders will attract "smart money", which is typically investment from a sophisticated person or fund that has prior experience in the startup's industry. For an AgTech founder, generally, this could mean assessing the investor landscape for those familiar with the AgTech ecosystem, farming, agri-business, and the agriculture sector.

As noted above, AgTech companies will often require more capital at the pre-seed and seed stage than other early-stage companies and may wish to seek investors who understand that nuance and align their support and expectations accordingly.

Conclusion

There are many inherent challenges of launching a startup not addressed in this article, but we hope this list sparks further consideration, conversation, and excitement. As a result of COVID-19, there has been an increased spotlight on the food supply chain and with more attention on AgTech innovations and the pipeline of investment; it is an exceptional time to be in AgTech and particularly so in Saskatchewan.

Footnotes

1. Saskatchewan.ca, Agriculture and Agri-Value, online: https://www.saskatchewan.ca/business/investment-and-economic-development/key-economic-sectors/agriculture-and-agri-value.

2. Innovation Saskatchewan, Annual Report for 2019-20, online: < https://innovationsask.ca/pub/documents/publications/IS_Annual-Report%202019-20-%20WEB.pdf >

Originally Published by Industry West Magazine.