Indoor farming, which involves growing crops in controlled environments using technologies such as hydroponics and LED lighting, has been touted as a solution to many of the challenges facing traditional agriculture. However, despite the promises of increased efficiency and reduced environmental impact, many indoor farming startups have struggled to make money. This article explores the challenges facing the indoor farming industry and why investors need to have realistic expectations.
According to a report by Fast Company, many investors are drawn to the most revolutionary technologies in the industry, overlooking more incremental improvements and proven business models like lower-tech greenhouses. The problem is compounded by the fact that it is harder to make money selling low-value crops like baby greens compared to high-value crops like cannabis or expensive produce like berries. As a result, it’s difficult to justify investing millions in cutting-edge indoor farming systems when the returns on investment may not be sufficient.
Furthermore, the competition among indoor farming startups is making it harder to secure placement in grocery stores. Companies that want to charge a large premium for their products will face a limited group of consumers willing to pay more for salad. One possible solution is to scale up fully indoor farms that can be carefully controlled to grow plants for pharmaceuticals, fragrances, or cosmetics.
Despite the challenges facing the industry, there is still hope that indoor farming can be a viable business. Experts like Penn State business professor Edsel Stein are collecting data from farms on their operational cost per pound of lettuce to identify which farms are most efficient and glean lessons for the indoor farming industry as a whole. Stein believes that building a farm with a healthy 20% to 25% margin is a good bet, but it’s not going to be 150%.
One of the biggest challenges facing indoor farming startups is management, particularly for those with little experience in agriculture. Startups need to efficiently grow food using new processes, which can be difficult without experienced management teams. AppHarvest, for example, faced a lawsuit from investors who argued that the company had misrepresented its ability to succeed.
The indoor farming industry faces numerous challenges that make it difficult to make money. Startups need to have realistic expectations, and investors need to recognize that the economics of farming are different from those of Silicon Valley tech. However, with careful management and a focus on proven business models, indoor farming can be a viable business that can help solve some of the challenges facing traditional agriculture.