Why now?

According to Indoor Farm Economics, there were 15 commercial-scale Indoor Ag farms in the US in 2016. In Spring 2017, there were 56, and the number continues to grow at a healthy rate. While Indoor Agriculture is not new and has been most recently used to grow cannabis, farmers are beginning to explore these methods because of the quality and cost benefits it offers consumers, as well as consumers growing concern over food safety. In addition, technological innovations have improved profitability and are beginning to create a more sustainable method over traditional processes as the world population continues to grow. For these reasons, we see indoor ag as an attractive investment opportunity and believe frontier tech will play a prominent role in its rise.

Industry overview

Indoor agriculture is the process of growing produce using hydroponics, aquaponics, and aeroponic techniques in standardized form factors such as warehouses, greenhouses, and containers. Today, indoor agriculture farms primarily produce leafy greens, microgreens, herbs, and tomatoes. In addition, strawberries, nutraceutical plants, and pharmaceutical plants are under intense R&D and are now starting to come to market. The biggest advantages of moving to an Indoor Ag model, include:

1. Year-round availability of any and all produce items at competitive wholesale pricing.
2. Time to market is measured in hours versus days contributing to a better, more nutritious product that tastes better and minimizes transportation costs and carbon emissions.
3. Superior “science” of growing can be applied using advanced LED lighting, controls, and mechanisms to guarantee a perfect crop every time regardless of outside weather or location.
4. Grown without chemicals and drastically more efficient use of water plus ability to recapture/recycle.

These CEA advantages improve food safety and sustainability. However, the industry still has a long way to go until Indoor Ag becomes mainstream. The biggest challenges holding this up include:

1. The lack of capital from banks and VCs that will invest in this theme.
2. Gaining sufficient scale to service accounts like a Wal-Mart.
3. Concerns around profitability due to the limited size of the growing building.

Key frontier tech

The emergence of Indoor Ag startups creating innovative tech has been a material catalyst to adoption and improving profitability. Specifically, technological advancements around LEDs, robotics, and genomics have helped meaningfully.

• Excessive heat can be incredibly damaging to plants. GrowFilm, a Minnesota startup (growfilm.ag), has developed light emitters that operate around 93º F, allowing them to be placed closer to plants. This also eliminates the need for multiple lamps and lighting systems, which can increase yields by 40%. Additionally, a better understanding of how photosynthesis is impacted by different light spectrums is allowing Indoor Ag locations to work with cost-effective LEDs to further “tune” their grow recipe.
• Given indoor robotics is considered a “lab” environment by the US Labor Department, personnel requirements are more stringent than the migrant workers used to pick 70%+ of the nation’s produce. In addition, rising farm wages and labor shortage have been headwinds. Advancements in robotics and artificial intelligence have lowered the cost of labor and increased productivity. This includes cameras and sensors to enhance grow cycles and provide real-time feedback. Tortuga AgTech is a startup developing robotic systems for harvesting fresh produce in controlled environments.
• Advanced indoor farmers are turning their attention to how they can create seeds that are better designed for indoor systems, producing higher yields. Some are turning to heirloom seeds because they cost less and produce more nutritious foods than hybrid seeds, which are the primary seeds used in traditional agriculture.

Indoor Ag economics

One of the arguments against indoor farms historically has been the limited size of the growing form factor, and many struggled to reach profitability. While this was a challenge, the technological improvements discussed above, new CEA farms capable of producing over one million leafy green products per month, recycling resources, and lowering transportation costs are making indoor ag economics very favorable. Another advantage of indoor ag is it is less exposed to the cyclical nature of traditional agriculture due to the ability to steadily produce the same amount all year long. Plus, given labor shortages to harvest field grows, the dynamics of CEA farming become compelling.

Venture committed to this theme growing

While receiving capital has been another challenge for indoor farmers, VC dollars increased 3-fold in 2017 to $300M year/year. This was primarily driven by Softbank’s $200M investment into Plenty, which also included an investment from Jeff Bezos. We think the opportunity in indoor agriculture is large and believe it is an attractive theme for frontier technology over the next decade.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple Pay is still too small to move the overall Services business (only 1-2% of Services revenue, growing at 40%). Today, Apple often markets the iPhone around the camera and its filters (portrait, studio, stage), notably with the “Shot on iPhone” campaign. In the future, we expect the digital wallet to be a marketable iPhone feature. Adoption of Apple Pay is growing, and we believe 31% of iPhone users have used Apple Pay in the past year, compared to 25% a year ago.

On Apple’s latest earnings call they shared data points that allow us to back into updated user metrics.

• Over 1 billion cumulative transactions in Jun-18, a 3x increase in transactions y/y (source: Apple).
• Apple Pay now has over 4,900 bank partners (source: Apple).
• We estimate that Apple Pay now has over 252 million users, which equates to 31% of the active iPhone base (source: Loup Ventures).
• Adoption of Apple Pay continues to accelerate exponentially overseas compared to the U.S., with 85% of users being international vs. 15% in the US (source: Loup Ventures).

Quarterly transactions are increasing exponentially 

Over the last three June quarters, Apple has reported y/y growth of 500%, 400%, and 300%, respectively, bringing the total transaction number “well over 1 billion” (Source: Apple). With the continued expansion into new markets and new partnerships with banks, we expect transaction growth of 200% over the next 12 months.

Banks adoption of Apple Pay steps up

Apple announced on their most recent earnings call that they now have over 4,900 banks partnered with Apple Pay. This is the first time that Apple has given a specific number of banks that support Apple Pay. We historically have counted the number of supporting banks listed on Apple’s Apple Pay page, which while the absolute number we found (3,149) does not match the 4900 reported number, it better illustrates the bank adoption trend. For comparative reasons, we are sticking with our previous method of counting banks. We found that since the Dec-16 quarter the total number of banks which have adopted Apple Pay has increased by 1,701. To put that into context, over that same period growth in U.S. & Canada banks increased by 926 (55%), bank adoption in Asia grew by 337 (141%), and adoption in Europe grew by 185 banks (370%).

Apple Pay user base up ~24% q/q

In the last year 9 countries have been added to Apple Pay’s addressable market, which has extended its possible reach by about 400 million people, and now totals 2.7 billion. As a point of reference, the jump that occurred between the Dec-15 and Mar-16 quarters is when China (1.38 billion people) was added.

International market continues Apple Pay dominance

With the addition of new countries, it makes sense that international has been the key driver to the Apple Pay story. There are currently 24 countries where Apple Pay is accepted, soon be 25 with the addition of Germany later this year. We now estimate total Apple Pay user base at about 253 million (International at 215m, US at 38m). This means the percentage of Apple Pay users in the U.S. has decreased to 15% and international has increased to 85%.

What would a deal look like?

While we now believe there is a greater than 50% chance Tesla becomes a private company, we recognize the mechanics of such a deal would be complex. Increasing this complexity is Elon’s interest in creating a special purpose vehicle for existing shareholders. Musk cited SpaceX and Fidelity’s current arrangement as a potential model, and there are similar investment vehicles for private companies like Uber. We will assume a “private Tesla” would include an SPV allowing current investors to convert their shares if they choose not to sell at $420. The price of an outright buyout may exceed $80B, but that is not likely, as it is reasonable to assume many current investors will continue to back the company instead of selling at what amounts to a 13.5% premium to the latest closing price. Insiders, including Musk, own just over 25% of Tesla shares. Individual investors account for 12% of shares, and large institutional investors like Fidelity and T. Rowe Price make up the remaining 63%. We believe nearly all investors would be supportive of going private, but not all institutional funds would be able to participate in private investments. For that reason, we assume half of Tesla’s institutional ownership (~30% of the company) needs to be bought out. Individual investors, who see greater upside than 13.5%, would likely prefer to maintain ownership if they are able to, depending on fund structure and accredited investor requirements. In short, the more shareholders that decide to roll their shares into the private entity, the less funding Tesla will need for a buyout. By our math, Tesla will need between $25 and $30B.

Where will the money come from?

This question is the most difficult hurdle. The money could potentially come from existing investors doubling down. Seeing a greater potential for Tesla to carry out its mission as a private company and several times upside to the current valuation, existing investors could increase their allocation. Other fundraising possibilities include strategic investors like cash-rich tech companies looking to make a play in EV and autonomy, foreign partners like the Saudi Sovereign Wealth Fund or the SoftBank Vision Fund (assuming CIFUS approval), or raising the debt themselves – less likely given Tesla is not a great candidate for more leverage.

Did Musk do anything wrong?

The short answer is we don’t think so. That said, this topic could weigh on shares in the near-term. In 2012, the SEC ruled that social media can be used to disclose material information as long as investors are aware and access is not limited in what’s known as the Reed Hasting’s Rule. Tesla disclosed that social media may be an outlet for disseminating company information in a 2013 8K. This, of course, assumes the tweets were truthful, but the language, “funding secured” is a vague statement that, although it implied funding is fully lined up, leaves a lot of room for legal interpretation. If Musk’s claims (which were responsible for an 11% jump in share price) were false, he could face repercussions, but based on further statements from Tesla and its board, that is unlikely.