Commercial-scale indoor farming technology is the process of growing food within:

1. Retrofitted real estate assets – whether this be in existing warehouses, greenhouses, shipping containers, hospitality venues, commercial or multifamily stock – or,
2. New, purpose-built real estate assets - typically developed using modular methods of construction (MMC).

At a high level, the investment case for indoor farming is clear. The segment is underpinned by several clear macro drivers, including:

• Growing food demand amid depleting agricultural land supply. To feed 9bn people by 2050, the UN’s Food and Agriculture Organisation (FAO) estimates food production will need to increase by at least 60%. At the same time, agriculture comprises 60% of global land displaced by urban expansion since 1970, with a recent IPCC report predicting the loss of 65Mtonnes of crops by 2040.
• Food security is threatened by climate change and fragile supply chains. Greater variability in weather patterns and growing seasons will decrease the yields achieved through open field farming methods over the coming decades. Food security concerns will grow for net importers of food (i.e., Europe), with a push to de-globalise food production where possible.
• Growing farm labour shortages. An ageing agricultural workforce is making it difficult for developed economies to access agricultural labour. Labour shortages are particularly acute for outdoor activities, such as soil preparation, planting, daily crop care and harvesting.

Indoor farming provides undeniable climate mitigation and adaptation benefits, including:

• High yields. Vertical farming systems stack plants to achieve greater yields per sqft. The ability to grow larger amounts of produce on smaller amounts of land is critical amid declining agricultural land supply.
• Low produce and plant input waste. Indoor farming systems require 90% less water than traditional open-field methods, and zero pesticides. At the same time, growing food indoors practically eliminates food waste: controlled environmental growing conditions reduce the probability of crop failure, while the shelf life of indoor-grown produce is 3-4x that of open-field produce.
• Zero seasonality. Amid growing volatility and variability in weather patterns, the controlled environment of indoor farming serves as a key climate adaptation strategy, allowing crops to be grown all year round.

Limited adoption despite high capital investment

From 2017-2021 indoor farming startups raised close to $4bn in equity investment from VCs, with funding showing no signs of slowing down (invested capital grew 1.8x YoY to 2021) (A/O analysis, Pitchbook data).

To date, incumbent indoor farming models have focused on producing leafy greens at a commercial scale. This includes vertical hydroponic farms (Bowery), digitised greenhouses (Gotham Greens) and onsite container units (Infarm). Together these indoor farming incumbents have opened several growing facilities and boast partnerships with large retailers, including Wholefoods.

Yet despite this, these players continue to demonstrate low margins, limited scalability and require vast amounts of electricity to power LED lighting and HVAC across their facilities, with providers increasingly exposed to energy price volatility and greenwashing claims.

Emerging business models comprise a second wave of indoor farming investment

With a view to reduce opex, incumbents have been acquiring precision agriculture and robotics startups at pace. The integration of IoT sensor and imagery-based solutions provide insights that enable facility operators to reduce electricity consumption, while daily crop care and harvesting automation solutions help to reduce labour intensity.

Interestingly, several early-stage startups are tackling the challenge from the ground up - forming a second wave of indoor farming innovation. While some of these startups are translating existing growing models to new geographies, we are also seeing the emergence of several new business models.

New models in indoor farming

High-value crop types

Offsite, vertical farm operators are changing the unit economics of end-to-end indoor farming by growing higher value produce such as berries, peppers, tomatoes and cucumbers in optimised modular vertical farm facilities. The complexity of growing vine crops at scale currently presents a competitive advantage, given that only a handful of players – including Oishii- have successfully optimised the indoor pollination process to date. As leafy green incumbents scale up their berry operations in the medium term, differentiation will come from the creation of a category defining brand.

Distributed indoor farming network

Onsite vertical farming solutions are disrupting the traditional agricultural supply chain (growing -> distribution -> retail -> consumption) through a franchise model which enables produce to be grown and consumed locally.

The customer - typically hospitality, educational facilities, or local entrepreneurs - serves as the farm operator, while the solution provider manufactures and distributes hardware (i.e., digitised shipping containers). This is often complemented with tailored CEA software, which collects growing data and in turn provides optimised environmental profiles per crop type to the user. There are clear network effects - growing data aggregated across a distributed global network of indoor farms informs the development of optimised growing profiles for a number of different plant types. This in turn has the benefit of reducing opex and enhancing the value proposition to the customer.

Advanced players such as Freight Farms additionally provide financing options to remove the upfront hardware cost to the customer, and seed subscription services to create a seamless end-to-end customer growing experience.

Next-gen CEA software

Next-gen CEA software players – such as iUNU, Source.ag and Koidra – leverage camera and sensor data from incumbent automation controls, crop care and harvesting robotics to create real-time digital twins of existing indoor growing facilities.

These AI-driven platforms help growers upstream (by connecting data from multiple data silos), midstream (data visualisation to create growing insights) and downstream (creating actionable productivity insights and autonomously optimising the growing environment). This translates to significantly improved yields and higher profitability.

At the same time, solutions can integrate with accounting and ERP systems, improving the facility’s access to project financing. And, interestingly, the aggregated data is relevant for phenotyping and genotyping research, helping to inform the development of plant inputs tailored to an indoor growing environment.

Tailored plant inputs

Tailoring plant inputs to an indoor growing environment can help to amplify yield, appearance, nutrition and flavour, in turn boosting revenues and improving the operating margin of a facility on a sqft basis.

For example, startups such as Vindara create tailored seeds using analytics -- rather than gene editing or GMOs -- while solutions including Proterra Ag create tailored substrates to boost yields and increase the speed of growing cycles.

At A/O, we see the intersection of real estate and agriculture as a key lever for reaching net zero. We’re excited to continue following the developments in the space.

‍