Investing in Regenerative Agriculture and Food
Investing in Regenerative Agriculture and Food podcast features the pioneers in the regenerative food and agriculture space to learn more on how to put our money to work to regenerate soil, people, local communities and ecosystems while making an appropriate and fair return. Hosted by Koen van Seijen.
Investing in Regenerative Agriculture and Food
398 Thekla Teunis and Gijs Boers - Regenerative practices deliver higher quality and way higher prices in year one
Regenerative practices lead to higher quality and much higher prices in year one and, over time, to lower costs, which makes the regenerative business case in certain cash crops that are exported (spices, tea, coffee, etc.) so strong that it almost spreads on its own. Nothing is easy, but this is really hopeful. In this conversation with Thekla Teunis and Gijs Boers, founders of Grounded, Grounded Ingredients and Grounded Investment Company, we discuss why quality is intimately linked to regenerative practices.
We talk about why we don’t need transition finance in many cases, but we do need philanthropic capital to figure out what regenerative looks like in specific circumstances. When that research and development (in other sectors we would call that R&D ) is done, it can be rolled out profitably and relatively easily with more commercially focused, return- driven capital.
We talk about why it’s easier to act regeneratively in many places in the Global South (easier, not easy). And we talk about the why of super hands-on investing. Knock knock- there are regenerative barbarians at the gate. What if we do private equity right and use it as a tool for good?
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In Investing in Regenerative Agriculture and Food podcast show we talk to the pioneers in the regenerative food and agriculture space to learn more on how to put our money to work to regenerate soil, people, local communities and ecosystems while making an appropriate and fair return. Hosted by Koen van Seijen.
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Regen practices lead to higher quality and way higher prices in year one. And over time lower quality. Which makes the region business case in certain cash flows which gets exported, spices, tea, and coffee so good that it spreads almost on its own. No, nothing is easy, but it's really, really hopeful. In this conversation, we discuss why quality is intimately linked to region practices. We talk about why we don't need transition finance in many cases, but we do need philanthropic capital to figure out what regenerative looks like in specific circumstances. When that research and development in other sectors we would call that RD is done, it can be rolled out profitably relatively easily with more commercially, financially returned focused capital. We talk about why it's easier to act regen in many places in the global south. Easier, not easy, obviously. And we talk about the why of super hands-on investing. Knock knock knock, they're regenerative barbarians at the gate. What if we do private equity right and use it as a tool for good? No, don't worry. This is not a hallelujah story about how capitalism is going to save us all. But we are talking to two very experienced entrepreneurs, company builders, now turn super hands-on investors in East and Southern Africa. In their context, it's always context-specific, don't worry. A super hands-on investor and involvement actually makes sense. They invest in processing companies which buy and process spices, coffee, tea, you know, all those things that make your kitchen and cooking more interesting and your mornings bearable. It's their third time on this show, and we talk about all their lessons learned, building companies across the African continent for the last 12 years. And why, despite all of the scars and RD cost paid, they are super, super optimistic. How do they design their investment fund from the ground up instead of top down? And how their story is landing with quite skeptical investors. Really? We don't need regen certification and transition finance in many cases. Again, in this context, regen makes sense from day one, and now it's time to scale and replicate. This is the Investing in Regenerative Agriculture and Food Podcast, where we learn more on how to put money to work to regenerate soil, people, local communities, and ecosystems while making an appropriate and fair return. Welcome to another episode. Today, in person, which I really always prefer and enjoy, and with Taeklein Feyes, and had the pleasure of listening back to our earlier conversations, which have been very interesting, nice, and funny because you were episode 8, which is 2017, actually April 17, so it's a lot of years ago. Eight, eight and a half years ago, it's now November 25. And it's funny to hear my own voice, it's funny to hear your voices. I've been following your journey for quite a while. And then we did two other interviews, one together and one with Ghais on his own. But the last one was in 2022, June. So it's been a few years, and I know because we've been in touch, a lot has changed. So I'm really looking forward to unpack that in person today. So welcome, welcome back on the show, both of you.
SPEAKER_00:Yeah, thanks. Nice to be back.
SPEAKER_05:Thank you for having us again, Natun. This is a new record, I think. If I look at the number, we have a few people, two or three times, definitely not two people coming multiple times. But it has a really good reason because you are the co-founders of Grounded and have been on a mission to make regenerative ag the norm on the African continent, and or actually by paying farmers much better. And it has been an interesting journey to say the least, the ones with ups and downs. But you are finding a lot of things. You are definitely having traction now with a lot of different projects. And I'm looking forward to unpack that across the different countries you're active because you're seeing some very interesting things, which I think are often not neglected, but just not known outside the little bubble that we are part of, or outside the bubble that you're part of in terms of region, food and ag in mostly East Africa and Southern Africa. So I'm looking forward to this spell some myths, you're really good at that. On LinkedIn, which I will definitely link below, take like you're often going viral with posts recently about transition finance. But just as a check-in, of course, I will link the episodes we've done before below, but just as a short intro, whoever wants to take it, what is grounded in a few sentences? Because you've been pitching it a lot, you've been talking a lot to a lot of people, so you must have honed your few sentences by now. For people that didn't listen to the ones before, what's the best intro into the world of grounded? If people are like, what do you do in a daily? What keeps you busy?
SPEAKER_00:Yeah, we're not the best at maybe uh pitching very short. What somebody once told us we invest in regenerative agriculture in Africa. I think that's the shortest way to say it. But uh, maybe what we do is we work with processors. So we've previously built processing companies ourselves, and now we invest in processing companies on the African continent, and then we help the farmers that supply to those companies switch to regenerative farming practices. I don't know if I missed anything.
SPEAKER_05:Yeah, and now we've become so fund manager. Yeah, because you're not only investing your own capital, of course, at the beginning, you had some capital, a small amount in the company, and you found some interesting processing ones. We will talk about spices, we'll talk about tea, coffee, and many other things. But yeah, that ran out pretty quickly. So you said, okay, and we talked about it last time as well. Let's set up an investment company and let's gather some other funding and investments to do that at a larger scale, which is happening, which is very cool. It wasn't happening last time, I think. And so you became fund manager with but with deep hands-on not interventions, but with deep hands-on work. It's not that you invest in a processing company in Tanzania and say, okay, good luck, see you at the next board meeting in a year.
SPEAKER_03:Well, maybe in short, we started obviously with consultancy, looking at several smaller farming training schemes and witnessing the success of natural inputs for inputs versus conventional inputs. Then realizing that the gap is not per se increasing production that is complex, but that's manageable. But what's not manageable is to make sure it's properly linked to markets. And yeah, from there we started what is needed to get these products to market and what ingredients in what regions. And eventually, after setting up our own companies, we were in we started trading, so that's something we still do with brown ingredients. So we started to buy ingredients from processing companies we loved. Originally was the idea to be also selling a lot of indigenous ingredients because the more diversified the supply chains, the easier it is for region act to work.
SPEAKER_05:We're a part shareholder with the generation of the ingredient company.
SPEAKER_03:Yes, but not easy in these niche markets. But we got super impressed by a lot of the entrepreneurs that are already working, and we thought, okay, we're setting up companies from scratch, but how can we support these entrepreneurs on the ground? And what is it that they need, and how can we support them? And we've built our own team of agronomers, so we knew region egg, RD, and just a trial and error. In the end, it's always trial and error, but it's there's a lot of information out there if you're connected to the international networks and our agronomer, yeah, we've implemented a lot of region, and we failed a lot. So that was something we could support other entrepreneurs, and then with entrepreneurs, I mean in particular the agri-processing companies. We also thought they can often use support on marketing sales, so as that's what's where we came in from, helping our own companies but also other companies to access better markets, different markets, and money. There is a lot of there are a lot of investment funds active in early stage, majority is debt, so you get a lot of over-leveraged early stage companies, and then those debt providers say, Yeah, we want a stronger balance sheet, and where's the equity, etc. Where's the equity? And so, yeah, we thought of money, so it's markets, money, region, egg.
SPEAKER_05:And then similar to some other players we've heard. Like we were talking previously on MAD, which of course started as well on the market side, started with money, support, and markets, and you're implementing a similar, a similar strategy. And just then, too, what is the thesis of the fund? We'll talk about how it has changed, not the thesis, but the structure, and why is it so exciting? You've been talking to a lot of investors. The fund seems to be coming along, which is very exciting. It's not an easy sell, I think. First of all, regen is still unknown to many people. We talked about in another episode where you said, okay, more and more people start to at least hear the word, but there are a lot of narratives that are not really helpful. We'll get into that as well. Then, oh, you're doing that in in Africa and we're investing in processing companies, and then I think most people fall out of the Venn diagram very quickly.
SPEAKER_00:So, what is No, that is the thesis.
SPEAKER_05:That is the thesis. And why is that so important? You're touching a lot of farmers, but why is it also an interesting investment opportunity? If we start with that, of course we'll get to the impact side, but why is it investing in these processing companies, which most people I think sound like, oh, that sounds extremely difficult, but why is it from pure financial such an interesting entry point into somewhere in the value chain? Because you've played with the idea and you did it to a certain extent as well to build brands. You've, of course, set up these processing companies yourself, and now you're saying, no, we're investing in existing ones. Why is that such a such a logical entry point as an investor?
SPEAKER_00:I think because it's in the area where we focus, it's highly underinvested. And there is actually a very big, also just commercial opportunity to develop these companies further. So to just paint the picture, there are many small-scale processors operating on the continent that source from maybe 500 to 2,000 farmers. They'll have a revenue of between 500,000 and a million US dollars, they'll actually export and they'll sell some produce on the domestic market. So these are processors that we focus on is high-value non-perishable crops. So those are things like coffee, tea, spices, nuts. But they are super fragile. So this means if they operate on a revenue that I just described, if something goes wrong with a big contract or they have quality issues or whatever, they are immediately at risk of actually just going bankrupt. But at the same time, if you can capitalize them well, they have a lot of potential to grow, but also to up their game on quality often. So there is a big potential upside in quality grades that they can get into. We can explain later, but it means you can get higher gross margins. So you can basically the business case is you can, if you do it well, you can increase gross margins because you get higher quality, maybe certifications, and you can scale your revenue. Yeah, and that's so that's yeah.
SPEAKER_03:Yeah, and maybe to add there is what we see in general is that the international market, and also because of climate change, is more and more looking to diversify their sourcing. And there's a lot of strict regulations on chemical use, chemical residues. So we see a lot of buyers very keen to give African processors a chance and to diversify sourcing. So we have even been approached by a large buyer that we've been working with to invest in one of the companies that they or do a takeover with a couple other investors of a company that can supply them and is actually really well positioned, so they can reduce sourcing from China, India, and move it to the African continent. Also, because they have a large Africa market, so now it goes, ingredients sometimes go from all over, shipped all over the place, so they go from India to Belgium and then back to Rwanda, for example. And they have very it's a family business, they're very keen on regen egg, but they're massive. Their buyers are not paying for a regenerative product. This comes from an intrinsic motivation from the company to be significant for the coming generations, so it's really a family business, so they think in generations, and they have approached us to say, listen, this is a great business, we can't for source from it in its current state. But would you consider an investment with us as an as a new buyer? So we can flip the skills on this company, really increase sales. And I think another multinational also started buying now, so we've working with them to do some trials. If that's a success, we'll try to probably invest in that business. So it's it shows that it's not only from a local perspective, but also from international perspective. People, and especially for the crops that are these crops that we just described to the international market, and that's the one thing, and then it's uh increasing local market. So, for example, we have a spice company in Tanzania: cinnamon, cardamom, black pepper, and cloves. And last year we've experienced that the local prices for the best prices for the black pepper was on the local market. Wow. Just because there's a couple hundred million people who are clothing in that East Africa region, and a lot of eat black pepper is also a good market for the local cardamom and the pilau rice that they eased a lot. So we also see a lot of increased demand from the local markets. And this company just started to sell some of the lower grades black pepper, but cleaned up. I think we pasteurized them in smaller packages so that the local traders can easily distribute them. And it there's not a top price for top quality, but it's in the mixture, and that's actually the game of these businesses. And we what do you do? And maybe we'll get to that.
SPEAKER_05:Let's unpack that a bit because this sounds and we'll get to the region part, and this is a good segue into that actually. What is grading? You mentioned it a few times. I think if you're in certain crops, of course, there are different grades of quality. In some commodity crops, it all gets blended, and then you hope you get hit the right protein levels in grain, etc., and wheat. But in these kind of crops that you described, from the spices to the coffee to the peppers to tea, and I think olive oil to a certain extent as well, grading is very important and really can make your year or break it. So, what is grading and why is it such an undervalued or neglected piece?
SPEAKER_00:Yeah, it's actually relatively straightforward. So the market defines what a quality is, so that actually depends on what buyers want.
SPEAKER_05:But it's been like that for a long time.
SPEAKER_00:There's no and there is usually a set standard on okay, a high grade means, for instance, for black pepper, a certain density of the black pepper corns. And then there are all these different grades that basically come below the highest grade. And it also links to how many like dust particles are still in the mixture, so how well is it cleaned, etc. So if a far a farmer has black pepper on the farm, they will harvest it and they've got a couple of bags, let's say. Then in those bags, some of the black peppercorns will be really high grade, and some of them will be low grade, and then everything in between. So the trick of the processor is to be able to source all sort all of those so that you get the highest quality grades, you can sell them separately, and then they're lower. Because then you can optimize your margin. Exactly. Because then for the highest grade, you can get the highest price, and then for the lowest grade, you still want to actually be able to sell it so that you don't lose it. But those are usually the off-grades, you call them like this just waste product, basically, that you still want to sell. And if you do that well, then you can make money. So this is really a business where we operate. I also I think I once wrote about that. This is super competitive, these markets, of course. We operate in these commodity markets, everybody in the whole world is basically growing these crops, not really, of course, but in many regions. And so, because it's so competitive, by default the margins are going to be thin. So the only way you can actually get good margins is if you outcompete on quality.
SPEAKER_05:And how just for to give us an understanding, how big are the differences between different grades? Like how important we talked about it actually with Fernando Russo on coffee. Like it's very, and there you also see, and we get to that region practices lead to better quality. Of course, you have to process well, clean, etc., and be able to sort, which is not rocket science, but still not super easy. But how big are the differences? Like life-changing differences in terms of for processing and thus for farmers, or small percentages of like how do you make sure your let's say your year, your peppers come in, and how important is it that 20% is in the highest or 10?
SPEAKER_03:Oh, the price differences it depends a lot for the crop. But and coffee is obviously everybody knows coffee, so that if you go to your specialty shop and you see what you pay versus what you pay in the supermarket, that's an extreme example. Yeah, that's an extreme example. But let's take black pepper. Yeah, those prices are super volatile over the past years. But let's say it's eight dollars in the seven, eight dollars in the top grades, or and then five, six dollars in the mid grades, and I think locally it's we probably sell around four or five dollars, but it's super volatile as well.
SPEAKER_05:Significant differences, it's like significant.
SPEAKER_00:It's not percentage, but multiples. Multiples. In T, we've seen I think the between the lowest and the highest grade, it can go like five or ten times multiples, just for one processing company. So it's not that this is then a different company, it's just what the competition is. It's just what came of the land that yeah.
SPEAKER_05:And then connecting it to practices because then it gets interesting. Because, of course, it is just a lottery, like okay, this year the quality was X, of course, there's climate and weather, but what you're seeing, or what I know that you're seeing, is that region practices have a huge impact and very quickly on the quality. And that means you can actually influence it quite a bit, of course, with all the luck and all the weather, all of that. But you have quite a bit of agency there as farmers, and thus a lot of potential.
SPEAKER_00:Yeah, yeah. So we see, we actually, I don't think we expected this when we started. This was not our thesis, so this was more a surprise. But what we see indeed is that there is a correlation between product quality and regenerative farming practices.
SPEAKER_05:Shock. Everybody drops their mic. No. Okay, okay, very interesting.
SPEAKER_00:I think it's partially because of the farming practices, but also in our case, because we combine the regenerative farming training actually with post-harvest handling training, quality management training. So the farmers who are doing regenerative agriculture are also often organically certified. We make sure that they clean well, that they don't dry in their kitchen where they also make a fire. So there are also other reasons, but you do see in general that, for example, because on the black pepper you can make a compost that can suppress diseases, so you get higher quality black pepper pots from the same trees, so then you get a higher quality pepper, you also actually get more. And so there is a link between doing regenerative agriculture for the farmer and having a higher quality crop. And then the trick is if you have the same kind of processing equipment that you had and you're not able to put that produce of the farmer into a higher quality market, then there's still there's actually no real difference except that the farmer had a higher yield and maybe has lower costs, but in this case it's probably not really the case. So the trick is to make sure that the processor can also sort really well and access these markets and has the financing, etc. That's the whole complex. That's what we do on a daily basis, is make sure that they can actually translate this into value, into actual money coming back to the processor and thus to the farmer.
SPEAKER_03:Yeah, so summarizing. The businesses we support and invest in, they have a whole team running around, agronomous and sourcing team. They're often very closely together, making sure the quality that comes in is as good as it gets and comes in and that improves every year. So the agronomy and our agronomy team in grounded identifies, for example, the different regions, different soil types, different climate zones, because there's obviously large differences. So we we adjust recommendations, so a bit of the RD that feeds into these programs. Then the teams in the factories have to make sure that it's well cleaned, graded, all the paperwork is there and shipped on time. And to market teams and the processing teams have to decide how do we grade this batch and where do we sell what? And that's when also our trading arm comes in. So the ground ingredients and what we do this year is we slightly pivoted a bit from the complete niche crops and trying to put new indigenous crops on the market more and more into also these mainstream markets. What is because of the climate, because of the season, every it will it's never the same. So each year difference. If we have a bad, dry year in Tanzania, maybe our regenerative farmers produce something okay, but they won't have many of the top quality grades. And that's why all these importers in Europe exist. They have a vast network of suppliers and they just buy. Sometimes the season is good somewhere in that location, sometimes in other cases, so they buy a lot of just whoever wants supplies. Our ground ingredients is slightly different, so they look at the business and they help find the best clients for the grade that you have in that specific year and for that specific market. And that is a slightly different approach to the new trading and importing companies. So ground ingredients is set up to import, to further process clean, etc., to take away a bit of that risk. And I think that's an different perspective, is that as a processing, it's also hard that you need a vast network of buyers to make sure every year you can find the best buyer for whatever you produce.
SPEAKER_05:You can sell everything because you cannot just sell the specialty coffee, you need the other grades as well, because the difference is big, it's massive between the specialty and the lowest grade, but it doesn't mean you shouldn't sell the lowest because it will exactly.
SPEAKER_00:So the special we invested in a company that does actually specialty coffee, but they also have off-grades that, in their case, they're lucky they can still sell those off-grades at a good price, and that is the ideal business model, but you still need to sell the off-grades, and they're not gonna go into a premium uh market, they're gonna go to an espresso or something. And then especially in markets where I won't say where they end up, they're gonna pod somewhere.
SPEAKER_03:But especially in in the markets like tea and coffee are you on its own because the high grades can have a very good margin. But if you go more in the mainstream, the spices industry, I think 80% ends up in marinades, etc., and a few percentages end up on the shelves and in restaurants, and there it's even more important that you optimize free quality. So sometimes the black pepper organically certified waste ingredients can go to an organic cheesemaker, something like that. Oh, for me it's great because it's organic or natural uncertified, and I needed to coat my cheese, and something like that. So but yeah, I think also for us, I think there's even still a world to be one of those clients that that have a very specific demand, the bigger that network. And obviously, if you are an entrepreneur in the middle of Tanzania, in the middle of nowhere, a couple hours from your main city to find that international network or even regional network, that's a lot of work, and that's where we can bring something. Not saying that every entrepreneur takes all the package that we have and all the users, all the functions that we have, but I think there's a lot there too. To be one, yeah.
SPEAKER_05:And and how has that message of this makes sense financially, impact-wise, because every of these processing companies touch a lot of farmers, and if they grow, they touch even more. A lot of money flows back to these farmers if quality improves, quality can improve with region practices and a low-hanging fruit. There are better markets to be accessed. We don't need, in this case, nutrient density research, like quality has been established a long time ago, and if you choose to play in that world, these are the rules, like you have to get to this level of pepper density, etc. etc. How has it been landing with investors that are maybe used in region ag with a different story, like it's always hard, or even in in impact investing worlds or in general, like everything is difficult on the African continent? Like, how has this message been landing while you've been fundraising for your fund?
SPEAKER_00:I think it has changed a little bit over time. With so in the beginning, when we had the idea and we thought it was gonna work, it was very difficult to raise because indeed nobody believed us. Only maybe one or two people.
SPEAKER_05:And your family and your child.
SPEAKER_00:So what we did is we're gonna make it. So we did a raise and build strategy, you call it, for raising a fund. So we gathered whatever money we could basically gather, and then we thought, okay, we're gonna invest this. So we invested in two companies: a coffee company and a spice company, the spice company in Tanzania and the coffee company in Uganda. And then we had to make sure that those actually can show results because then we can convince investors was the idea. And then we've been lucky, I think, and maybe we did something well. At least we didn't screw up, because those first two companies actually do well. So the coffee company, you know, I think it's almost doubling in revenue every year since we invested. They are profitable.
SPEAKER_03:Yeah, let's say 50% growth in volumes because obviously coffee prices spiked.
SPEAKER_00:So that's maybe the more to be honest. But exactly. But so they are helped by the increase in the coffee prices. But it's good because they are yeah, they're profitable, they share the profits with their farmers, they increased their farmer supply base from 2,000 to 5,000 farmers. They're implementing a full region egg program, actually, also together with one of their buyers, and we are assisting them with that. That's very impressive.
SPEAKER_05:From 2,000 to 5,000 farmers. I think it comes back also to the point of investing in existing ones. You can scale way quicker if it goes than setting up a coffee company or a coffee processing company from scratch. This is the the speed of onboarding farmers, of course, is completely different if you are already at 2,000. Or you still don't have to be able to do that.
SPEAKER_00:Of course, for I don't know, I think five years or something before we invested, and they were not profitable. And then with our investment, they could push to profitability, and now they are scaling, so that's going very well. And then in the SPICE company, they've also grown their revenue from about 500,000 when we invested to I think 1.4 million or something like that. They had a small dip last year because of a change in regulation in organic certification in the EU. It was a bit of a setback, but some other struggles. But we're expecting them them actually to get back on track as well. And they have been massively increasing their gross margin. So that's to that point of what's actually the business case for quality. So when we invested their average gross margin was roughly zero percent.
SPEAKER_05:So even if your revenue grows with that, it's not for that. Exactly.
SPEAKER_00:It's just because they had many quality issues, so they sometimes had complaints from a customer and they have to pay penalties, etc. And now we are expecting for this year their average gross margin to be 19%. Why not lose for three years? So that's substantial, of course.
SPEAKER_05:And then 3x revenue that means there's money in the company.
SPEAKER_00:Exactly. So you can see, and we are expecting that company uh to also hit EBDA positivity next year. So I think that's that made the difference, and then at the same time, we have we can talk about it as well. This farm in Zambia that we set up ourselves, which is doing vegetables for the local market and chilies for export, and that one we've been running for much longer, and there we have actually a lot of data on how region A can work for smallholders. I think those all combined made our pitch just much more convincing, of course. So, with that, we've been able to, I think, attract investors on the impact case because they see this can actually have a lot of impact, also on just, of course, the environmental impacts, the social impacts on farmer income, but also that this actually might be viable as a fund. And then the most difficult part, I think, has been that still our fund structure is not a common one, and so that always requires a lot of okay. Let's unpack with that design, but let's unpack the stuff.
SPEAKER_03:Yeah, let's go to the uncommon fund structure in a bit. But mainly what's good to understand, I think what the audience does know, is just before we went into the interview, we talked about the growing interest in agri-processing for the reason the quality, the reach farmer reach, and that it's something that is not per se applicable for the African continent, but is widely applicable. And there's very good examples of other people starting to do this and looking into similar models. I think there's a couple things that are different for the African continent. The first one being is that there are thousands and thousands of very small companies and very few large companies. So if you go to Europe or the US, if you want an investment strategy, there is a vast amount of let's say medium-sized businesses, family businesses, uh, whatever. So there's a vast group to invest in, and you can and they're further advanced. We never wanted to start a fund because we saw so many investment opportunities, so we thought actually it's not needed, and we saw a lot of funds active on the component continent. However, very few can invest in those early stage companies. But if nobody invests in those early stage companies, nothing moves through the funnel.
SPEAKER_05:So you have to be that first institutional ticket in that structures the deal, and in your case, you're super hands-on that structures part of the company. There's so much low-hanging fruit, but that first ticket can unlock, or the first investor can unlock so many things.
SPEAKER_03:So we say roughly from one million revenue to one million EBDA. So that's what nobody does. That's and because it's hard, it's just to be a bit suicide.
SPEAKER_05:It has to be a bit suicidal to a certain extent.
SPEAKER_03:It's also the property where the bigger is. But you can also create a lot of value. A lot of value. So that's one thing. You can create a lot of value, you can get a good deal eventually. So also for your investors and for the local otherwise, because your in your equity ticket lever unlocks a lot of additional capital in terms of prepayments from buyers, debt from lenders, impact loans, etc. etc. etc. Exactly. That's a part that is slightly different. Then the other part is if you want to do this in a normal way, not extreme leverage or just growth capital. I think these industry in general, what you see also in private equity in the middle markets in Europe, it's about a 15% net IRR to investors in this. And it's great in Europe, you'll see, for example, that there's that that's basically what they do, and that's the risk profile, it's not venture capital, it's completely different. And I don't think that you can, if you do it like that in Africa with a well-diverse portfolio, you will get about 15% IRR, maybe a bit more, maybe a bit less. But these are existing companies, they're profitable within a couple of years, and they have a market, they have supply. But if you want to invest in Africa, people say 25%. So that's just it. So you'll see that there's a big bit of a hinge, or people are lured into get into the VC model to get you 25%. So you'll see a lot of funds that I think there's a lot of opportunities on the continent, but that means that this sector is still underinvested.
SPEAKER_05:So that is a those are two big the mindset of you need 25% to compensate for the risk you take because you're super not you, but because in Africa, and most of them will fail, and they're very high, high risk, etc. etc. And you're saying, no, actually, it's much more private equity. What we're anyway do in Europe with some changes or in in the rest of the world, with some change, of course, you go in relatively early, but there's huge value. There's a processing company that has real value, there's a relationship with farmers, you don't start from scratch, it's not a SaaS business, and you can get to profitability really quickly, and then it's a very interesting ride after that. Of course, not going to explode overnight, etc.
SPEAKER_03:Yeah, I think there's in general less competition, so it's easier.
SPEAKER_05:Uh there's a many interest from private equity investors that know how that works in Europe or the US that sort of recognize what they see. Like actually, we've done that, we've seen that.
SPEAKER_00:Yeah.
SPEAKER_05:And this is the next frontier in that sense.
SPEAKER_00:Yeah, so we actually have a lot of European private equity investors investing in our fund. It makes a lot of sense. Because they think like the geography. I understand the model, and we're not maybe to for your listeners, it's not that we they might have a different picture of private equity investors very.
SPEAKER_04:Uh your shop.
SPEAKER_00:So I think we do actually. But it is it it's more of a private equity model than it is a venture capital model. But it's maybe impact private equity.
SPEAKER_05:Do you start with that slide when you talk to investors as well? Forget what you think about VCE.
SPEAKER_00:Like this is more impact private equity. I don't know if we have that somewhere maybe in our deck. But um, I think it's also difficult to yeah, but you also don't want to have the evil private equity frame. Yeah, yeah, yeah. So it's always a bit difficult, I think, with these words.
SPEAKER_05:Sorry, but go back to impact private equity.
SPEAKER_00:Yeah, so yeah, and what so maybe just to clarify what we do, because I don't think we've explained, but we invest always with equity, we try to take a significant minority with our initial investment. So ideally 20, 30, 35 percent, something like that is what we often end up with. And then we get a director's seat, we negotiate, and we get some minority protections in the shareholder agreement. And that means we can also work together with the founders on this transition towards regenerative agriculture and quality. So we are really actually becoming a partner, I would say, to the founder often a strong sparring partner. So it's not that we come in and we say, okay, now tomorrow we're gonna do everything different and whatever. So it's actually just more also maybe less grounded in reality. Okay, we know this is your these are your busy seasons, this is your flow, this is your reality on cash flow, this is what we can maybe do this year, and then next year we'll tackle this issue, whatever. So it's a very collaborative, but yeah, but we do have then an investment manager who is the key contact point, of course, for the founder. But we've got this whole team of people who have expertise from the businesses that we set up ourselves.
SPEAKER_05:On you've done the RD, let's say, and you've paid the mistakes, exactly.
SPEAKER_00:So on region egg, of course, but also on just financial management. How do you do good inventory management? How do you do budgeting? How do you do organic certification?
SPEAKER_05:How do you get a container to Europe or to the US?
SPEAKER_00:Yeah, usually they know that, but if there is indeed on certifications, that's often something that we've now experienced multiple times and we've done ourselves for some of our own companies. So we've got a lot of expertise in-house that we can then plug in basically where relevant.
SPEAKER_05:Again, it's private equity. Yes.
SPEAKER_00:Done well. Yeah, exactly.
SPEAKER_03:Yeah, so that all of that leads to our current fund model and how it's been set up. So all of these factor together have been very important in setting up our fund and how we structured it. That what is what we went to the market with. So we said, okay, it's it's originally an evergreen fund. So we thought, okay, there's long horizons, it's difficult to time your market because, on the exit side of Africa, it's also a challenge. But these companies can, after a couple of years, pay dividends, especially if they're really still for profitability, it's a big driver for us. It's also a health indicator, I think, for the business for the company. So we originally had this idea of an evergreen fund where we say, okay, it's got a small equity ticket initially as a de-risk, get the basics right, and then the majority of the funds. So we talk is to is for follow-up investments, double down or triple down on those companies that do well. So that is part that we said, okay, let's do an investment into a company and then 150k additional investment in support. That's for this, they still paid out of the fund. So we think a lot of spending, a lot of time, and support to these companies is actually an investment. So if we calculate our return on investment or we do an estimate or forecast, we say, okay, if it's a 300 or 400k equity ticket in our minds, so we calculate it as being a 550 or 600k investment from the fund. And would that stake and all the time, would that provide on the financial side be enough financial return? And then on the impact side, the farmers. So is that how our how we review these opportunities, or is the option for a follow-up investment? Is this providing enough potential for us to have the option? Because often we negotiate an option, or we yes to pre-empt you often first in line to to follow up investments. So that's how we review this. So that's but then obviously when you go out to the market, then it's you adjust your fund again based on what the markets know, and then you end up somewhere in the middle, probably.
SPEAKER_00:Yeah, we've yeah, we tried to raise this evergreen structure, but it was super difficult. So we've spoken to I don't know how many people, and then the issue was, I think, also a little bit structural. So there is you need to get to a certain viable fund size to be attractive for people to invest in the fund. So many people have in their mind that this is about 20 million fund size, but then ideally you're larger, so you're about 50 million, which was actually also our ambition, or even bigger than that. But then the problem is that a lot of the larger institutional investors do not invest in evergreen funds, especially not when they invest in equity. So there's just a no-go. But then the investors below those large institutional investors know that the larger ones don't do it, so they say, yeah, but then the larger ones don't come in, and then it's a risk for your fund size, so then I also am not gonna invest in evergreen equity structures.
SPEAKER_03:And so everybody's believed in the model, we believe in this model, but we do not believe that some of the others will believe in it. This was a very common response.
SPEAKER_00:And so we were still business dilemma, basically. Yeah, but when you've heard that too many times, and at some point we felt like, yeah, this is gonna because then we're gonna be raising forever, and we'll have like maybe one and a half or two million that we raise every year, and it's just then Gijs and I are basically only fundraising, which is a lot of fun, which is not really what we wanted to be doing for the rest of our lives. So then we thought, okay, let's change our strategy. So we were with the team in Nairobi and we really hashed out like what can we do if we actually are gonna compromise on this idea of evergreen and we do change to a close end fund, then what does it have to look like so that we can still do what we want to be doing, basically, so that we don't compromise on our mission and our vision and our impact goals, etc. So now we came up with. The 13 year fund timeline. So it's longer than the average or the normal 10 plus one year.
SPEAKER_05:So one, three people, not 30.
SPEAKER_00:Yeah, no one, three. And we think that's actually also realistic. Also, for us to go towards exits, there are we still have the ambition to raise an Evergreen if this fund is successful. So then we can actually roll over some of the investments into our own Evergreen, maybe. But there are also other exit opportunities because we're so focused and strategic. There are actually quite a lot of other opportunities for us. So you can do consolidation of a number of these companies, they can then be sold to other investors because then they become actually super interesting. We sometimes get interest from strategic buyers, especially if they're really looking to secure regen sourcing, like Gijs mentioned. That is actually something that is already sometimes when we do the deal, there are already buyers that are interested. Yeah.
SPEAKER_05:And then how do you this is asking the obvious question, which for sure you've answered 600,000 times by now. Yeah. How do you secure the impact after the accident?
SPEAKER_00:Yeah, so that one, I think it's interesting.
SPEAKER_05:We I just have to be with everybody's thinking about it.
SPEAKER_00:Yeah, we've had this discussion a lot with our team, but what we see is that the business case for what we do is so strong. So for the region egg, because like we just explained, it leads to actually it's a better business case for the farmer. It's also a better business case for the process.
SPEAKER_05:The farmers, better prices, lower costs eventually in some models, or at least equal. Exactly. Which means just more money.
SPEAKER_00:Yeah. So that's our goal is to make it just so good that it would be very stupid for anyone who buys us out to change this. Because then you would basically go back to a low margin business, which I don't know, that would be the ideal. If you just lock it into the business case itself, then I think it's most and I think that's not unrealistic.
SPEAKER_03:So there's a business model where you say, okay, we compromise on profit to make impact, and then it's challenging. But if your impact is generating a better r return, then that's part of the business. So those are the things the different streams. And you take that part of your blog is a bit about the transition finance, but it also links to this part. Maybe you need that's slightly a different story. But this is also links to that. Is if it's embedded in the economic models and it works and it generates it delivers a better quality, and that's the business model, then it can still happen, but it's very unlikely somebody would buy it because first of all, they probably would buy it partly for that.
SPEAKER_05:Why would you where regen ag is part of the success, the quality, the pricing, the margins, etc., and the security and resilience, it does it, it would be a very stupid business decision to start lowering that.
SPEAKER_00:And I also think you see this already. There's just from the supply chain, so from the buyers, also these large B2B buyers are all looking at regen ag also just to do climate change adaptation, so to just uh decrease risks in their supply chain. That's a big issue in all these value chains where we operate. The prices you can see, you can just look it up for cashews, coffee, cocoa, whatever. It just goes berserk. And that's not nice for the buyers, of course. So it's pretty risky. There's also just increasingly, yeah, perhaps gonna be an interest actually from the larger buyers to invest in this in their supplies, and you already see that happening. So I don't I also think that there will the demand will grow. So then it would also be very stupid to divert away from this. I don't yeah.
SPEAKER_05:It can still have so it could be slightly different, but it's interesting how intimately regen practices in their context, etc., are connected to the long-term health of the business and the farmer and thus the system.
SPEAKER_00:Yes.
SPEAKER_05:And that's if you remember one thing of this conversation, probably that's the one. And shifting gears to Zambia, you've been on the ground for uh quite a few years, experimented a lot, paid, let's say, the research, the RD costs significantly, but are still there. What's the current status now in in November 25?
SPEAKER_03:Well, good trial to keep it short, but we have time. Zambia is one of the ventures. So in our early years when we started buying from other smallholders, and one of the things we saw in Zambia in particular was that there's so many talented farmers, and one of the ideas was what if we do an uncompromised investment into the top farmers? And with uncompromised, we mean making sure that they have everything they need. So, our full knowledge database on region egg, they implement advanced compost, biostimulants, there's irrigation, there's storage space, there's a bit of post-harvest handling space. So we brought them all to we brought a group of talented farmers to one location to see what it what does it look like if you do an extreme transition rather than a gradual step-to-step. That was super hard, in short. So the first years we spent years, and the idea was okay, this is also different. So it's primary egg for a large part, and it's the original idea was to the local market. So it sells vegetables to the local market because it's super high value. For smallholders, we always look at models where they can compete and earn a very proper wage. So we found it very hard with maize on their limited area and their limited time to make that very profitable model for the farmers, also because yeah, you compete with international streams of grains, etc., and they are often cheaper than a smallholder can produce. But vegetables. The vegetables are also for the local regional market, but we spent years actually to get some yields off. A, the soil building takes time, but also very hard to find the right cultivars. So nobody is obviously selling cultivars for a region system in the middle of Zambia in that climate zone, that semi-aride arid climate zone, with a cold season, a very hot season, a dry season, and a rain season. So that's super complicated.
SPEAKER_00:So I think in the I don't think we would maybe choose the same location to set this up as a pilot.
SPEAKER_03:No, again, maybe a bit of background. And then one of the other challenges is that yeah, the local markets, what do they eat? Cabbages, which we struggle with, tomatoes, onions, mace. That's roughly it. So it's it's basically semi-agroforestry, so it's forestry strips together with vegetable rows. And but once we've selected, so after hundreds and hundreds of different tomato cultivars, different onion cultivars, now the team is actually, and you see your standard procedures adapting to the season. So that took a bit of time, but now the team actually performs really well. So those farmers they grow, I think, tomatoes about 60-70% of the commercial yield of what we call. So we take it back from what a crop what this seed can potentially do, and we do about 70% of that for the tomatoes, I think with about 20% or 30% 20% input cost, which I think other farmers generally think have for tomatoes much higher input cost, let's say 50-60%, I think, direct input cost. Obviously, that's partly offset by the labor and the farm. So it's our farmers spend a lot of time on those crops, but in general, labor plus input costs is still a better ratio than what others do. For onions, it's interesting because we have now two years in a row of 110% of what we thought was possible. So onions is completely insane. So probably the seed companies underreported of what's potentially possible for the or we accidentally put too many seeds in the ground, and we don't exactly know, but it's that's super it's a big success. So you see now small areas of land. So the farmers have about half a hectare, two blocks. I think on generally a farmer is doing about$30,$50 a year a month. Now, let's say$50 a month, I think, and we go to about two, three hundred dollars a month for the farmers on that block. That's after our cost inputs are subtracted, they share water reservoir, they share tractors, etc. But the challenge is that this came to be out of one of the cooperations with other parts, so the it's in the middle of nowhere, and obviously, vegetables transport the roads are better. So roads are opening up. We're looking now to find money for a truck so that we can go a bit further. But the trade is coming all over the place to source at a farm.
SPEAKER_00:Because it has irrigation and it has produce that lasts longer than the normal. So the tomatoes are longer, are stay good for longer. So I think those two combined exactly. And so, for instance, there was a very bad drought like last year and then two years before that. So then this was one of the farms that was still operating and even had vegetables in the first place. Yeah, so there is a lot of demand for these vegetables in that region.
SPEAKER_03:Yeah. Yeah, so that's the the farmers on a block by block are profitable, so now it's the race, but there's very little finance available for these types of businesses because it's actually a large investment into a few farmers rather than what the many of the funds are available, they are small investment funds into a large number of farmers because often the number of farmers is the impact target, so that's challenging. What is what it came to be, what are the other things we started to grow a bit of chili, so we have now three or four off takers for chili, also international. So that helps to bring in a uh the dollars and more cash, and it also brings in the skill because it's almost like we've done a light version of our farm, and to be to reach much more farmers, and also to reach the capital that is there that has the target of number of farmers. So we ended up so we still have the farm and the vegetables, and that's doing well, and now we're scaling after two years of trials, we're scaling the chili and paprika production, meaning you're starting to work with other farmers around the farmers around, and but then the challenge obviously is that we not need to only raise working capital to buy from the farmers, but for many of the farmers, we also need to raise to get them on irrigation. It's an area well known for chili and paprika production, also historically. I think it was one of the best regions, so it's also climatically very well suited, long dry season, so you have low dry costs, so it grows really well, and the farmers perform well. But now the challenge is obviously to raise because we need to raise for the business, but you also need to raise for the farmers, and that's that's I think in Zambia one of the hurdles. It's not to say the business case anymore of the farm or of the but it's for the infrastructure for these farmers to scale. So that's that's another challenge. So this is also part of this is an independence, so not part of the whole fund, which is agri-processing, so it's also a different risk return profile still. But we use a lot of the biostimulants are first tested in Zambia, part of the crops of the compost, everything is tested there. The nurseries do a lot of trials on so biostimulants we use in the nurseries, we test them before we, for example, use them in our nurseries around the other companies.
SPEAKER_00:Yeah, and that's very powerful. Also with the outgrower model, so those are the farms, farmers around that farm that we support. You go to them with, of course, already tested practices. Not that we go to an outgrower and go, oh, maybe try this on their own. Exactly, yeah. So then, of course, you need to be much surer that it's gonna work, so that we use that in Zambia, but also indeed more widely when it's applicable. Of course, it's also always still adapted to the local context and the crops, etc. But there's a lot of RD we can do there.
SPEAKER_03:Yeah, and we've actually set up several RD plots. The company's setting RD plots now, the other two portfolio companies in the fund, they are doing that, and the companies we're looking into are doing it as well, are planning to do it as well, because we see how much value it brings to be able to do the trial and error and feel for yourself rather than because it's obviously there are one of our most important clients, are the farmers. So if we've pre-tested it and we've done it, and they can come and check. And so it basically goes from model farmer to what we call lead farmers or those poor front runners, and from there it's it's implemented wider. So there's this whole pyramid and like of implementation.
SPEAKER_05:It's an impossible question to answer, but how do you feel in terms of are we scratching the surface of what's possible in the crops and the geographies that you are? Do we know already quite a bit, like how much is still possible with better cultivars, better practices, better biofertilizer, etc. Like, where do you feel you're on the on the scale of okay, we're we're starting to push the limit, or we're starting to reach, or are we actually really at the beginning, and there's still so much to figure out in terms of practices and how they work together and how they impact quality and quantity, etc.
SPEAKER_00:Ooh. I don't know what to do. My guess would be we're at 10% or something like that.
SPEAKER_03:10% max.
SPEAKER_00:Yeah. Which is exciting or scary? Yeah, it's exciting, it's nice because it's still it's covered yielding. Yeah, no, of course, there's a ceiling there.
SPEAKER_03:But the challenge is I think that's uh we're also raising some grant funding for the RD work. So that's obviously for these businesses super hard. We've shared it with the local. We so we share that RD with other horticulture associations in Tanzania, for example. So we share what we know because they have they reach also the farmers we don't source from, and then if those farmers start already, it's easier for us to onboard them later. So it's but that RD is highly underfunded, and that is part of the that's I think in the whole region X space why it's so difficult. Is that previously you can make money out of RD by selling something to the farmer, and I think for seeds it might still be for partly true, but especially for the queer inputs, biostimulants. We make our own biostimulants, own biochar, own compost, own. There's a lot you can do with local sourcing where it comes to agri-inputs. The uptake of your nutrients into the ground is I don't know how many X times more efficient. So you'll see that but it's not a business model, yeah. So delivering to farmers, so that's I think where we started. The first thing in Zambia, where we started, it was the business model to very effectively sell something to the farmers so they can produce. And in the end, it's that's a difficult position. If it's very efficient, then it's less to sell. So from a farmer, actually, you want to buy more from farmers, so that's when we changed position. I think very early on, and we had two models at the same time, so it was not the one first and the other second. But in the end, if you're in a position of buying, then it's much easier because then your clients is your supplier rather than your client is your off taker.
SPEAKER_00:And that's yeah, but this is, I think, in general, in the region act transition, just a very difficult point, indeed. Just to maybe reiterate like the so a lot of the RD in the agricultural sector comes from the large input providers, the best scientists, the best massive industry. It's I don't know how many hundreds of billions of dollars worth, and they spend about 10% on RD. So there's a lot of RD coming from that part of the agricultural system. The question is, of course, if actually one of the key parts of the business model that we are also excited about is that farmers can cut these input costs massively by just producing a lot of that, a lot of that themselves or in communities. But then who is gonna do the RD? Who is gonna fund that? Because there's actually no scalable business model, or at least it's much more difficult to find. So then for a long time, I think you will still see this that RD by the conventional industry will just vastly outcompete the region egg industry. So this is where we need, if there are grant funders listening, this is where I think you need to put your money. Is this the biggest lever is just pioneering farms, anything that is just piloting these kinds of models, because maybe also good to explain, once you've got that, so in Zambia, once we figure this out on this central farm, then we can go to another farmer next door and tell them this is how you can do it. You can see on our farm. Is it our protocol? And then at least that's much easier because then that farmer takes much less risk. It's actually highly likely that it will work, and they can implement it in stages, so they don't need to do everything at once. So then this transition can be gradual and profitable for that farmer. But who is gonna do the RD, I think, is the biggest.
SPEAKER_05:And we've seen it until now. I think it takes maybe that's the sort of narrative mistake we've made. We look at the pioneers, the vocal pioneers, let's say, that we follow online, etc. etc. And they maybe, I don't know, it took seven years to to figure things out. But that wasn't a transition, that was an RD project. Yes. They took three, four years to figure out what doesn't work in the last two years. They figured usually it takes about seven, eight years. I think in your case as well, you see it in, of course it can be faster, but then you figure out what's the recipe here in this context, what works with onions, what works with which tomato seeds, et cetera. What we've done is called that the transition phase, which is not fair, because if they would do a new field now or a new place, they would go way faster. It might take a year or two. And we put it on the farmers in somehow way we like scraping by, et cetera, to figure out that. Because they were the crazy pioneers, the people that absolutely wanted to figure that out. They maybe raised some grant funding, they put a foundation next to themselves, etc. But we can't expect them for other people to do that necessarily. So the message here is support the absolute pioneers by also data keeping and that, because from them it will spread around very quickly, because once it starts to make sense after a couple of years, whatever the protocol might be, of course the neighbors are gonna knock on the door, and of course this is gonna spread like quote unquote wildfire. But until now, we expected the farmers to do that by themselves. Okay, of course, you're doing some trials, yeah. But to do this structurally properly when your margins are close to zero, it's just not fair.
SPEAKER_03:No, so it wasn't. And I think for us in Zambia, the dream is one day this should be next to Dara, this is uh 70 hectare farm. We need uh in the end, you want to do a couple thousand hectares close to Doc, which is the biggest city in the world that when we pass away. That might be that's just that was also an interesting thought. But it's maybe also on the input models one back. It's also, for example, why those companies like we follow with interest, like in seedlings. So it's not something we look at, there's not a lot in Africa happening, but I think those are the other pioneers and companies. So I think trying to do that from an input perspective. How do we change that? How do we do the RD differently so that it's geared towards a region egg? How do we diversify seeds and make it more a majority of the tomato seeds obviously for greenhouses and not like it's yeah, and not that greenhouse that's a bad thing, but in in our climate zone, we might need tunnels but not greenhouses. We can do year-round production and especially vegetables that use so little land compared to what you get off. So those are all things that I think are and you get your quality out of pure soil and your compost and your rows, and so the only one loses are the input companies. That's yeah, and that's where we get the most pushback now.
SPEAKER_00:Yeah, exactly. Because you just need yeah, I think that will be the end result.
SPEAKER_03:Yeah, and I think for seed companies is something to be won, but it's difficult because you mean you get a more niche batches or different type of seed production. For different regions, different so I think that's there is a there are models there, but I think still under construction, or you'll see that the bigger seed companies are struggling. Also, because to be fair, there's thousands of cultivars out there, and it's not that any of the Zambian farmers has maxed out on the potential of any seed variety in cultivar in Zambia. They are 10% of the current cultivars. So for them to grow something for the African market is also a challenge because yeah, they can choose whether if you get 10% out of them, doesn't make or if you doesn't really make if you get 10 kgs out of the one variety that can do 100 kgs, or you get 10 kgs out of a cultivar that could do 20 kgs, doesn't really matter which one you buy. You go for the cheapest one because you get the same result. That's basically a bit of the situation where we entered, and now more and more we see we maxing out on the cultivars, or when it comes to disease pressure, or resilience, heat tolerance, etc. And now we'll see that this so that's what in Zombies that we see in our system. Then the cultivars become eventually become a limiting factor.
SPEAKER_05:But we are still far off, and I think what you've also seen, I mean not a seed expert, but you've seen seed companies struggle, so selling to a few large ones, which also are input companies. It seems to be more money on the input side than the seed side. Of course, you're doing less research, less niche research, it won't come out because the market is just not interesting enough because you want to grow seeds where you can sell a lot of inputs, and the seed is not necessarily the most profitable input. And so those incentives are like as far as you can imagine from any regen approaches that you can probably structure, and that is not going to stop anytime soon. There's the the they've chosen a road or they forced into a road that's not and they might be buying some biologicals, they might be buying some some other companies left and right and claiming they're part of the regen movement, but it's it's just so incompatible with where the sector or where farmers want to go.
SPEAKER_00:Yeah, it's but it's interesting. I think like on the inputs front, there is also some nice innovation. There is a company in Kenya. I'll look up the name for you after this, but uh they have a kind of distributed model for producing organic fertilizers. So they have that like small-scale production sites run by farmers, they're actually doing really well. I think they raised another round now, which is very interesting. So just localized production of inputs, but not on farm, but by a number of farms together. I think that is where it's probably heading because that makes a lot of sense. Yeah, but so they just set up from scratch and they are becoming an input company, but uh in a very different sense, of course, than a large I saw it for very advanced biochar.
SPEAKER_03:So people have both. Yeah, I've seen that coming by, so that's interesting actually for us, I think, to look into. We use biochar, but it's obviously I think you can do it very well at the great also there. Yeah, it's not. I think our farm in many places do it relatively okay, but probably you can do it very sophisticated. So if you have mobile units that come back, yeah, also there.
SPEAKER_05:We're not saying every farmer will make their own and we'll all become independent of everything and everything. Of course, there are specializations. Some things make sense to make on farm and not to drag around too much, but maybe biochar powder makes a lot of sense to do it more professional and higher quality biofertilizer to a certain extent. The teas may be interesting or not, the seeds probably partly. There will be a mix, but it will be way more localized and from local input, and the money will stay local and doesn't go to some shareholder in Germany. Probably. True. Yeah. But it's another processing part because I think what holds back biochar for a long time was we always said, ah, everybody can do this, and you just look at a video, etc. But to do it properly, you need some kind of knowledge, you need some kind of skill, you need some kind of just as grading, etc. But these businesses are might be unsexy or not so sexy, but these alternative input businesses, not alternative, are super interesting and super needed because there's where you get a lot of RD, like okay, the best composty. True.
SPEAKER_00:Yeah.
SPEAKER_05:There are certain rules you need to follow, otherwise you're gonna probably kill your crop, or at least do not get the effect you want.
SPEAKER_00:Yeah.
SPEAKER_05:Yeah.
SPEAKER_03:But I think if you all add it up, it feels like you know, a lot. But then what do you mean? Because it feels like what I'm looking at. We talk about finance gaps, we talk about market access grading, all of these things together. But I think if you for just zoom in on Zombie, I think if you see all the investment there, I think it's about 1.5 million. That's a half of it is written off. If you see, take that as an RD budget and would have put it next to a university, and you will see the results. I think it's there's no RD budgets and you uh nationwide RD budgets for this, I think, on the continent. But if you see the results of that investment, I think compared to many others, and the percent how much of the potential of these crops comes out, I think it's it's super exciting. So that it also shows how little you need compared to the hundreds and billions of RD money. A couple amateurs that start up, not let's call our aggronomer, but me as an amateur, and then just enthusiasts and auto-deducts. What's the English word? Is that an English word? But self-taught at Gronomer, if you see what they achieve with so little means in such a bootstrap environment. I think if you do this, we did it actually, a business model was a farm, not per se an RD facility. But if you do this from an RD perspective and do it very well, I think with 10 or 20 million, if you have a proper couple of RD of these RD fields, I think there's so much to be won. And there's not so much, and how you fund it, I don't know. That's for a different time.
SPEAKER_05:Yeah, but we that money is a very in a sense, like if we see what we've put we, I mean, using the larger we into smaller farming wherever a big chunk in Africa and other continents, and what the result of that let's bring the green revolution everywhere, etc., it's been billions down the drain, and very little to show for. And with that money or a tenth of that money, let's do a tenth of that into real demonstration farms, which I think has been an answer on this podcast 6,000 times. We're now doing an AI project to see if hopefully in a few weeks we can actually ask that question. But proper context-specific demonstration, real farms, where you experiment and see what works, it would have done what would it have cost across the continent? 50 million, 100 megs. The impact would be in the billions. Just in save fertilizer and save input costs would be insane, let alone the health side of things. So it shows it's not, first of all, it works. Second of all, it's not impossible. And especially this is not an like, okay, we need to invent fusion. This is an amount of money that's very reachable. Yes. Not maybe any of us has it in the pockets, but this is very reachable and very and by what you're doing and showing what is possible, a lot of that probably will unlock. There will be a lot of unlearning needed. Of course, we don't have to bring NPKs to every single farmer, blah, blah, blah, blah, blah. And hybrid seeds or very competitive seeds might not be the solution. There's some unlearning to be done there, but for a very little amount, you can do a lot. And a couple of years down the line, it leads to very interesting, profitable business models. Yeah. And so that's, I think, that story of, and we talk about that a lot, like it's negative, it's always difficult, and it takes 10 years of transition and it's less profitable, blah, blah, blah, blah, blah. It's just not true in many cases.
SPEAKER_00:No, indeed. I think that also creates an interesting, that's maybe also more evolving insight in this whole regenerative agriculture community, right? Because you see more and more people reporting, oh, it's actually profitable, more profitable.
SPEAKER_05:But it's a good idea.
SPEAKER_00:But then you see more. You see this on large commercial grain farms in the US, in Eastern Europe, you see it, even that Ayara report that came out, a lot of different farming systems. I think the higher profitability yield, I think 2% lower, or something like that, if I remember correctly.
SPEAKER_05:78% less input in the case.
SPEAKER_00:So just we also see this yield often in our case, even go up a lot because the starting position is so low.
SPEAKER_05:Are you then scared to say that? Like these kind of things, like it's more profitable as well. Like in investor meetings as well, because the narrative has been very different. Are you like almost to sound naive or over optimistic in a sense?
SPEAKER_00:Yeah, then we explain. So we often explain that we invest in so the starting position of the farming systems we work with is very important to understand. So those are really low input, low output systems. So often, for instance, in coffee in Uganda, the farmers use nothing on their coffee, nothing. And income annually there is really low. So it's some families earn$150 off their farm on an annual basis, and this is their main source of income. So they're not going to spend that money on fertilizer. So that's, I think, important to understand. So then, if you start making, for instance, bioliquid applications, you can make them yourself, you can put them on the coffee, then the yield goes up often, almost immediately, because there's now something, and you combine it with the mulching or cover crops, maybe some composting. So that we always explain it like that. Okay, it's important to understand that also the yield almost cannot go lower, basically, because they do nothing. So then you will not get a yield dip. Yeah, of course, if the weather is bad, you know. Yeah, but that's important to understand. But for the whole movement, this is, I think, something which has been interesting to me. It's also why I sometimes write about this. Is I think the narrative has actually maybe been too pessimistic. So there's this narrative on this yield dip that takes very long. There is a narrative, I think, still, that it's less profitable, that it needs premium pricing to work. There is all these kinds of which also need a lot of debate and work in the sector. So there are many people thinking about how do we change the whole system, or maybe the whole financial system needs to be different for region act to work. And I think we are maybe a bit more pragmatic and thinking, okay, but we're living in a world where there is a capitalistic system, it's maybe not ideal, but what are the chances that we are gonna overthrow this system? Pretty low. I see some activists, and there is also these big commodity traders, but how do you work with the powers that are there and with the dynamics of the existing system to make this work? And if we can make it work in this system, is that then bad or is it then not good enough? I actually think then it's still actually quite okay.
SPEAKER_05:Of course, it doesn't mean that if you're working on if you're like in the systems change, horizon three, you're in the what it should be, please do that. But we also need a lot of horizon two, what it can be already now, and it's way better than the status quo, and you use the existing financial commodity systems as a sort of UDO actor to use that to just bring a lot of money tomorrow to farmers on the ground that are making real changes and can send their children to school.
SPEAKER_03:And you can try to stop and break down a system, or you can try to defeat it on its own grounds in this way, in its own field, in its own playing field. So you that's a game, and if you're better at it within the system, and I Africa is because there's also this on-farm reality, and obviously the off-farm reality, and the off-farm reality in Europe is just big infrastructure investments into mainstream, whether it's input markets or or big farms or big silos. In if you go through if you drive to Illinois or what is it, there's grain silos everywhere. So it's cheap to store your grains, it's cheap to the machines, are there, everything is there. So you're there's a lot of historic investments into the current system, making that a very efficient system. So, therefore, because it's so well developed, it's also harder to get, it takes a bit of more time to get there. It's not, and that's obviously different in Africa, where there's no infrastructure. So, when people said the green revolution for Africa, fertilizer prices in Europe are a third of what they are in the middle of Africa. Whether it's storage or whether it's machinery, what type of machinery it all depends on. And so I think the Green Revolution in Africa and what other countries did well in the Green Revolution was not just on farm increasing yields, but it was a whole nationwide investment philosophy. What streams, what do we do? And I think it's you can, and that's I think what's why partly failed in Africa was because they just only focused on farm yields and not on all the other things. You need roads, you need ports, or you need storage, etc.
SPEAKER_00:And financing.
SPEAKER_03:A lot of financing. Yeah. I think if you go from if you start from scratch, then in the end, bacteria and fungi are much more efficient taking nutrients out of and putting it in a plant. That's a 10 times more efficient process than to try to chemically put it directly into a root. So, in the end, if that's your starting point, then the other system is a way easier way to go if you have to start from scratch. And that's more of the my amateur understanding. But that's how I got convinced is just by people showing me the data of how efficiently plants take up. In the end, it's how you transform those nutrients and weight streams into crops again. And what's the best way to do that? And if you then see how, and I'm not an expert, but if our agronomy shows the difference, and if we do trials on how much inputs are needed or how much we've done fertilizer trials for an organic potassium form. And I think the uptake was just three, four times more in Zambia. We've done that, it was just extremely efficient uptake. Very we use, I think, only 10 or we ended up only 10 or 15% of the recommended uh application. And it was a natural rock shaving, how do you say that? I think so. Just because a healthy soil is much more efficient in taking it on.
SPEAKER_05:So by dancing within the current system, maybe as a final could be a set of questions. Where do you compromise? So where do you feel uncomfortable or where do you feel tension within the large commodities, within the large trading, within and so where does sometimes you think, oh, I would love to just re-redesign from scratch in that sense? So where do you feel slightly uncomfortable or a bit uncomfortable in in within to change within the current system?
SPEAKER_00:Yeah, so of course, these companies have to run and make revenue every year. There's a reality that if the so the processing companies if they do not work financially, then they cannot source from the farmers and the whole impact philosophy falls flat. But that also means that sometimes we've had actually uh last year there was they had a lot of farmers organic certified doing a lot of black pepper, but the black pepper market was not strong, the cardamom market was strong. We had to source cardamom to make the company just work and earn money, but not all the cardamom we could source from the farmers in our traceable supply network doing regions, and some of it is sourced through middlemen that we actually don't even know where it comes from. Sometimes there, and that's of course not ideal because then we yeah, so there are examples like that where we indeed operate in this system, the company needs to survive. The market dictates something, and you have to get it from somewhere now. Of course, what you can do then is uh expand the organic certification so that over time we've got a large supply base with all the different crops that this company is sourcing, and you can then be much more likely to actually source everything from the pharmacy. But because you invest in an existing system, it's not perfect at the time we invest. So, actually, when we invested first in this company, they had nothing traceable. So we invested in a company that we thought was gonna do regen act, but they didn't even know where their produce came from, right? The first year we just implemented a traceability scheme for 750 of the 2,000 farmers they were sourcing from. But yeah. So I think then you have to with what we do, you have to accept that sometimes it's not perfect.
SPEAKER_05:Even if we know what perfect is, yeah, or perfect.
SPEAKER_00:Still, of course, you can argue it's not bad because this company they bought the cardamom from farmers and this money flowed to those farmers, so probably there's not a lot of like negative impact. It's not that this uh yeah, but that's maybe one example of where sometimes it's compromised.
SPEAKER_03:That's a bit the sad thing is that the farmers remain the price takers. So we try to work with floor prices, minimum prices, etc., based on yield, and see if they can make a good income year on year. I think stability is super important, stability, predictability for farmers. But as the company, if the market prices are very low, you can maybe pay a bit more than your competitors and increase the price a bit. But operating at a negative gross margin or even at an unhealthy, that can break a company. And you'll see that these companies in relative margins can be relatively stable. But if prices go down a lot, that's partly set up against our suppliers. And they also benefit in good years, so that's good. Coffee price, I think. The Uganda coffee prices have been what have we paid three, about 35-40 percent over our floor, and it was they've been they have a super year this year, partly due to import terrors in the US and people searching elsewhere, so there's a lot of local dynamics. So some years it's amazing that they get a great price and everybody happy, but in the other years, where you want to support your farmers, it's super hard, it's super hard to continue sourcing from them if the markets are sometimes not competitive or hard or just prices are low. And I think that's yeah, in the end, you even as a business, in order to survive, you have to, you can't say, Yeah, we're gonna pay you this amount because we think it's a fair price if nobody buys it from us. Yeah, and we don't have the money, the working capital is so expensive. So you can't say, Oh, we buy now for this floor price, and we're gonna wait three years and then see if we can sell it on. So that you take uh almost like a gamble or something, but that's tricky.
SPEAKER_00:Yeah, and that's another reality that these companies work with, is maybe interesting to understand these processing companies. So they are that we invest in our first buyer for the farmers, so they're the first contact point, but after that, of course, it goes to somebody else or whatever. But the processor has to pay the farmers on spot, of course. But it gets paid often 120 days working capital cycle, so it first has to then process, then ship, then if the Suez canal is closed, it has to go around the cape and it takes for forever, and then and then the buyer says, Okay, I have 90 days payment terms after delivery, for example, if you have that maybe 180 days. So the processes are financing actually these large multinational buyers to a large extent, and they're financing the farmers or financing, but they're just they have to pay on spot, otherwise, the farmers will sell to somebody else. So this is just a big challenge, and the buyers will say typically they'll pay 10% up front if you're lucky, maybe 20. If they're in a real squeeze because they can't get the ingredient from anywhere else, then they might actually pre-finance substantially, but otherwise not. So you just need a lot of financing. And interest rates are if you can get a good deal, it's maybe 12% or something like that on working capital. So it might give you a picture. If you do a revenue of five million, then you need a lot of capital, and you need a large we saw payment terms from a famous
SPEAKER_03:Multinational, formerly Dutch, British, now I think British, if I'm not mistaken. I was gonna say, we're not gonna name them, but apparently we do. No, maybe about I think it was 270 days. Wow. And I think for impactful business earning 180 or something, so a massive, massive uh step forward. Elizabeth, if you're in Africa and you have to lend money against 20% and you have to wait that long on your process because obviously we have amazing lenders that do normally high single digits, low double digits, that's where a lot of the impact lenders come in. But then still, if you have to finance it, you buy it from the farmers, you have to store it a couple of days before you can process it, then store it again, then bring it to port, then wait for the ship to arrive, then to ship. So that if you if it takes about, I don't know, 300 days for your money to stand still and you pay 12%, or if you pay normally 17 or 18%, and you have a 20% margin, there's very little money left after you have to wait that long. If you can turn it around, if you get paid even if you get paid FOB and DAR, or if you get even paid from when the truck leaves the factory or something, that's 60 days. Can we so that's massive, and the cost of that financing is super complex. You're intervening there as well, right?
SPEAKER_00:You're trying to yeah, so that's what we're now trying with grounded ingredients. So we first had this, I think, much more idealistic idea. Oh, we're gonna sell regeneratively farmed indigenous ingredients from the African continent into these smaller brands, or just to link basically the regenerative suppliers with the ethical brands, etc. And then we saw okay, this is really difficult to make it work economically because then you have these small volumes and you need to match them. So we got it working a little bit, but then thought, yeah, this is just really hard. And then decided to this year try something completely different. So instead of doing these niche ingredients, just actually focusing on the bulk ingredients that we deal with in the portfolio that we have, and then see if we can do much more attractive pre-financing. So if we're a buyer that actually pre-finances 60 or 70 percent, that because what we just explained that makes a huge difference. If grounded ingredients can borrow at more attractive rates than the processing companies can, so they basically provide working capital to the companies and buy and then import and then can process further and sell, or just sell straight to buyers. So that's what we're now trying to do, and that's I think has a big there is big potential in this working capital finance innovation in these agricultural values. People are listening. I think if you're looking for another idea, also in Europe, I think there must be, or in the US or wherever, there must be opportunities here to link it somehow to regenerative indicators and to I don't know. There's something in this short term which is very big in agriculture, that you can, I think, innovate on.
SPEAKER_05:Where farmers and or processors are currently being squeezed, so there is there should be space.
SPEAKER_00:So there is room for influence, but it's difficult because it's risky. So I don't have the solution. But I think there's something to think about. It's large amounts of money, there is something there.
SPEAKER_05:Join Fresh Ventures for something similar in building for anybody with a finance brain.
SPEAKER_00:I'm actually gonna talk about some people at Fresh Ventures.
SPEAKER_03:Good. At least I think that's maybe the end. It's also a lot of fun. Yesterday I spent between 10 and 11 in the evening prepping 200-300 gram samples for cardamom. We had to ship out and send a lot of so it's not a diverse job, and it's a lot of fun. But no, that's a joke. I think it well. The amazing thing about our journey is first and foremost, is I think so much talent. So amazing people in these businesses that run these companies that go out and go out to these farmers every day. I think the extension services in these businesses, the feedback that they get, the interactions with the farmers, but also the talent that stands up in all of these businesses, for us in particular in the continent. I think it's always something worthwhile to mention. The enthusiasm, the energy, it's hard work and the season, it's seven days a week, it doesn't stop. It's just fascinating to see what happens if you operate in regions with little economic opportunities and then come with a lot of economic opportunities. It's just that that is one of the most fun things, I think, in the world. And then obviously, all those crazy people that have supported us before it was visible. So I think that's also most importantly, our team.
SPEAKER_00:So that is really nice. We've our team, a lot of people who are with us today have been working with us since 2014, 2015, 2016. So we've not, it's not been just Gijs and Tekla, actually. There's a team of people who have been walking this hole in the journey with us, and so we build up a lot of learnings and culture.
SPEAKER_02:I think that's the academic term, yeah, is that I think.
SPEAKER_00:But also going through some of these failures and like flows together, and then at some point, I think people get used to the sort of turbulence, and then it almost becomes you're maybe floating on it, and it's like turbulent most of the time. But okay, this is actually getting somewhere. I think there was a point when it was only turbulent, and we were maybe like in a rocky cave area. We didn't actually know whether this was gonna whether we were gonna sink. Now I think the perspective is a little bit better, but still, it's of course now we are zooming out, but on a daily basis, this is a lot of just solving issues, basically.
SPEAKER_05:Yeah, but I've seen we've known each other for quite a while. Seen the of course from the outside, and sometimes with a microphone, and sometimes without the different phases and the different also energy phases of both of you, like when stuff was really difficult and when stuff was getting easier, when you thought you found a recipe that works, and then actually it might not have worked yet. There's some enthusiasm in the previous conversations, which is hilarious, listening to after this lambda was going to work absolutely, and of course it didn't. And there's some, but it we need that. None of this is easy, none of this is a SaaS platform, not saying that's easy, but we're in ag and we're trying to do something that has been done very little, is trying to grow without destroying the underlying asset and all the social capital and health, etc. And that's and it's possible, and we see that, but it takes years, it takes failures, etc. And luckily you had a lot of supporters that got you through that, and but that's needed. But it's also nice to see now, like the tone has changed. I see the not necessarily enthusiasm on the podcast that was always there, but also another that you're starting to show results, it's visible now, people are starting to join the fund, the other people are starting to buy things, things are flowing, of course, with trouble, but in the right direction.
SPEAKER_04:And it's investable, huh? No, so that helps. And it's a thing, and that's a thing. So we're finally delivering up to the title of the podcast after all those years.
SPEAKER_01:After about eight years.
SPEAKER_05:It took a bit, yeah. We're 10 years into the podcast almost. So it's uh but it's I think it's a general shift. We're laughing about it, but it's a general shift in the scene. I see. I don't know, maybe I just see more examples now. The last few years, there's uh ambition is still there, maybe a slightly higher even. There's optimism, there's niches, not niches, it sounds very small. There are pieces where it really works. Yeah, and I think we can't afford to not double down on it. Yes, we have to change the system, we have to change the financial system, all of that, health system, but there are also many pieces already where hundreds of millions, probably more, can be put to work. Not tomorrow, but in the next 12 months, if we really wanted to.
SPEAKER_00:Yes.
SPEAKER_05:And we can't afford not to do that. And so let's double down on those, and then we'll see how far we get within changing the system from within and from without and from outside, and all of those will move at the same time. But I think it's uh this is such an example of showing what actually works. Quality, you get that with regional practices, and you get paid for it, which means more money for the farmer and everyone on the ground, and potentially also, of course, for investors. So I want to thank you so much for this unique one because it's the fourth we do, and definitely the first one we did in person, which is hilarious if you think about it. Um, and for yeah, coming back and sharing about it. And of course, for not giving up all the work you do in the space and all the education sessions you've done with investors and trying to share the blogs you write, which are extremely powerful, and the narrative shift that we need. This works and this makes sense. On and not easy, none of this is easy, but it works and makes sense, which I think is financially impact-wise, human-wise, socially wise, etc., and environmentally. So thank you, and thank you for uh joining us again.
SPEAKER_00:And thank you also for all the work you do, because I think that's just important and cannot be said enough. Because this podcast, I think, has been a sort of I thought about it almost like a mycelium, like connecting people in this community and sharing knowledge, and yeah, because I don't I it's that it's the most powerful sort of medium I know in the community that spreads ideas, insights. So thank you for that.
SPEAKER_02:It's also shaped our idea and thinking. Yeah, I think many of the interviews shaped how we perceive the industry and how we explain the industry.
SPEAKER_00:Yeah. So thanks.
SPEAKER_02:Thank you.
SPEAKER_05:And with those feathers in my ass, we wrap up. Thank you for listening. So, what did you think? First of all, thank you obviously for listening all the way till the end. What do you think of a conversation with Tekla and Gijs and of the notion? And I think we we might need to make a list or something. When I need to make a list, we might need to make a list of what are niches, what are not maybe not even niches, but what are places and context? And yes, it's context-specific, and yes, I don't want to uh dismiss anything where it's very difficult, but where are places where in the current economic system that is flawed, as we all know, but we have to deal with, and probably it's gonna change, but it might not change in five, maybe not even in ten, and maybe not even more years. Like, where are places where currently, in the current system, region already makes a lot of sense? Financial, environmental, social, the whole shebang. And we should probably double down on those. Like, how do we communicate those opportunities to investors that are rightfully so skeptical when you say, look, we don't need any extra support, we don't need government policy to change, we don't need transition finance, let's just do this. It might sound sort of delusional or super naive, um, but we also see in these examples that there are these examples. So, how do we deal with that? How do we deal with that tension of on one hand be optimistic and ambitious and also be seen realistic when you're raising significant money? I mean, 20 million, 50 million, 100 million is a lot and nothing at the same time, but it's definitely more than many other people have raised. And so, how do we do that? How do we uh convey these opportunities where we see them? And of course, without neglecting the system change work. There's work that on the system that needs to change or the systems that need to change, without neglecting that and without not doing that, obviously. So I would love to hear your thoughts. Get in touch, as always, through the website, through social media, LinkedIn, etc. And of course, um yeah, thank you so much for listening and see you at the next one. Thank you for listening all the way to the end. For show notes and links discussed, check out our website, investinginregenerativeagriculture.com/slash posts. If you like this episode, why not share it with a friend? And get in touch with us on social media, our website, or via the Spotify app, and tell us what you like the most. And give us a rating on Apple Podcast or Spotify or your podcast player. That really, really helps us. Thanks again, and see you next time.
