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In our 2021 Agricultural Platforms in a Digital Era report, ISF presented a definition of “platforms” defined by two distinguishing factors: 1) they are built upon network effects, enabling multiple users on both sides of an exchange to interact, and 2) unlike traditional “pipeline businesses” they do not produce goods or services, but rather link users together to access goods and services. Since the publication of that report, there has been broad endorsement of our definition of “platforms” and of the need to coalesce around more specific descriptions of AgTech models. 

In this update, we look at marketplace platform models, which connect users with products or integrated products and services. This growing subset of Digital Platforms are well positioned to help smallholder farmers and agricultural small- and medium-sized enterprises (agri-SMEs) overcome many of the market barriers inherent in the sector.

Types of marketplace models

Our 2021 report revealed a wide range of marketplace platform models operating in the agricultural sector. Broadly, we can divide them into three models:

  1. Product marketplace: connects smallholder farmers to physical markets both to and from the farm, including farm inputs suppliers and various kinds of off-takers (processors, trader, retailers, consumers)
  2. Integrated product and services marketplace: facilitates access to a holistic, bundled offer to farmers. Similar to a product marketplace, but offering broader range of services to farmers
  3. Services marketplace: shared economy platform that links farmers to equipment and/or other service providers.

We outlined eight sub-categories under these models, which continue to be the prevailing types in the market as shown in this graphic:

However, recent landscaping of the sub-Saharan Africa market revealed some updates to how these sub-categories of platform models are emerging.  

  • Many/most digital platforms are not truly open marketplaces with a large range of product and service providers engaged. Rather, many involve small numbers of curated partners with single offerings in each category (e.g. Digifarm)  
  • Many digital platforms are having to invest heavily in enabling infrastructure (e.g. transport, logistics, warehousing, field forces) to make they models work for smallholder-anchored markets (e.g. AFEX’s sourcing network, Twiga’s upstream investment in primary production) 
  • Many digital platforms are also running more traditional pipeline business offerings alongside their digital platforms (e.g. Coamana; AFEX)  
  • Many digital platforms are starting as agriculturally-focused and then moving to multi-product category marketplaces to include a range of consumer goods (e.g. DeHatt; Pinduoduo)

Platform design & scaling

Compared to pipeline business models, the unique characteristics of platforms should make achieving scale easier, at least after the initial start-up costs. But platforms will still struggle to reach profitability given the difficulty of generating additional value for users—and the highly localized nature of the agriculture sector makes scaling profitability even more complex. In our 2021 report, we outlined five key design decisions that platform providers must consider:

  1. Who: target customer and problem solved
  2. Where: value chain and geographies
  3. What: service offering
  4. How to Engage: customer engagement model
  5. How to Monetize: revenue model

Recent analysis shows that most platforms are still struggling to make their economics work. This is leading many to run more direct B2B pipeline business offerings alongside their platform, while some are also still reliant on donor funding. Many platforms recognize that integrated credit is key (giving rise to the term AgFinTech), but they are struggling to raise and structure the right capital to support these offerings. In the sub-Saharan Africa market, successful platforms remain heavily reliant on agent networks to scale, even after achieving a product-market fit.

Finance offerings within platforms

Most marketplaces integrate payments as a form of financial services, and some—as mentioned above—are expanding their model to include provision of financial services. In our recent landscaping, we identified four specific forms of financing being offered within marketplace models:

  • Vendor financing provides financing for products and services sold on the platform
  • Input financing provides credit to smallholder farmers in the form of in-kind inputs (or cash for labor) at the beginning of the season, generally to be repaid at harvest
  • Asset financing focuses on productive assets often financed through innovative business models such as PAYGO
  • Insurance offers bundled insurance for products or services offered on the platform

The graphic below illustrates examples of in-platform financing within the sub-Saharan Africa agricultural market.

Geographic differences

The maturity of platform models varies greatly by region. The majority of large ag-focused platforms are headquartered in India and China and are operated by tech companies. Many of these models have already reached significant scale, including DeHatt, Gramophone, Pinduoduo, Tanihub, and Rural Taobao. These models have grown rapidly on the back of densely populated markets, with strong enabling market infrastructure and consumers who are used to e-commerce in other sectors. Of particular note is Pinduoduo, which launched in 2017 as an ag-focused marketplace and now has over 880 million active users.  

At this time, most marketplaces in Africa remain small in size. Kenya is a hub for marketplaces, including Digifarm and Copia who both have over 1M users, fueled by the prevalence of mobile money and the relatively flexible nature of regulators. Other players, such as Hello Tractor and WeFarm (social connectivity platform), are currently capitalizing on their achievements as true platform models to now offer diversified offerings. Altogether, Kenya and Nigeria are the top markets in the region, receiving 96% of AgTech venture funding.

In Latin America, AgTechs are primarily concentrated in Brazil (51%) and Argentina (23%), as shown in this IBD mapping from 2019. Marketplace growth in the region has largely been fueled by mature farming systems, relatively tight value chains, urban wealth, and relatively better logistics. A select few product marketplaces, such as Smattcom and Frubana, have expanded into multiple markets.

Overall, these regional differences reveal some interesting dynamics. In particular, the relative scale of platform models in China and India are due to three key enablers that hold lessons for other markets looking to scale: 1) density and formalization; 2) maturity of enabling systems; and 3) progressive regulatory environment.

Persistent challenges

Despite their growth, platforms still face large barriers in the agricultural market. The localized nature of the sector limits network effects and increases customer acquisition costs. To successfully scale, platforms need the correct monetization strategy. 

One of the most prevalent challenges of marketplaces is the physical capital associated with the exchange of value between users. Successful e-commerce platforms, such as Amazon, have employed backwards integration to bring their shipping and packaging logistics in-house. In the agricultural sector, this challenge is amplified by the weak infrastructure in rural communities and developing economies writ large. Platforms may have no choice but to build the infrastructure themselves—as was the case with AFEX in Nigeria, which built a network of physical storage and logistics throughout the country, including 113 warehouses.

The path forward

One way we can continue to improve outcomes for ag-focused digital platforms in emerging markets is to leverage lessons from more mature sectors and markets. For example, in the US, venture capital is largely flowing into companies that have a downstream link to consumers (e.g., GrubHub, DoorDash). The same holds true for the agricultural sector, in which some of the most successful models are product marketplaces with a direct consumer link, whether it be an end consumer or a restaurant/aggregator. Plant AG, for instance, is developing a “farm to plate” platform and plans to grow their own food to sell to consumers. They raised $800M in their early stage VC round in 2021.

In Europe, similarly, the biggest deals of 2021 centered around direct-to-consumer platform models, such as Gorilla ($1B), Fink Food ($750M), and Wolt ($530M). Investments in the overall food tech space tripled to $10B in 2021, while AgTech investments grew only slightly to $900M. Investments in Europe tend to be on a smaller scale than in the US, but with significant opportunity for growth.

These adjacent markets reveal some cross-cutting learnings for platforms in smallholder agricultural markets, including:

  1. The emergence of integrated credit is a widespread platform trend. Companies in the United States (FBN) and other sectors (SafeBoda) have introduced financing opportunities for both customers and workers, similar to what we observed in the shift to “AgFinTechs.”
  2. There is a strong focus on the end consumer. This can be seen in the successful capital raises of start-ups with direct consumer links. Furthermore, the introduction of financial services specifically for platform workers demonstrates that platform providers are treating their own workers as customers as well.

Overall, platforms continue to offer a major pathway to overcoming the scaling challenge in smallholder agricultural markets. More research and further clarification of definitions and models will help digital platforms unleash their full potential.

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There has been a recent and noticeable shift in the dialogue around climate change. COP26 sparked an increasing awareness about the severity of climate impacts on rural populations in the global south, and new commitments to helping these populations adapt. 

However, as the climate adaptation challenge for smallholder farmers and agri-SMEs comes into greater focus and funding is mobilized, there has been a concurrent realization that the infrastructure to effectively channel this finance where it needs to go does not exist. In our latest State of the Sector report, we dove into how climate change is impacting agri-SMEs and how capital and financial service providers can fill the significant unmet need for climate finance.

Climate impacts on agri-SMEs

While food systems are responsible for about 30% of global greenhouse gas emissions, agri-SMEs in developing countries contribute very little to this total. The bulk of emissions are generated by large-scale, intensive commercial agriculture in Europe, the Americas, and China. Sub-Saharan Africa and Southeast Asia contribute 10% and 12.5% of global food systems emissions, respectively. 

But climate risks and shocks disproportionately impact agri-SMEs in these same regions. These include extreme weather events like storms, floods, and droughts; emergence of new pests and diseases as a result of increased temperatures; declining productivity; and volatile supply and prices due to all of the above factors.

An emerging imperative in the market

There is little doubt that the climate crisis will significantly impact agri-SMEs in the coming years—in fact, the impacts are already felt by many. To face these risks, agri-SMEs need support in adapting their business models and operations, and adopting nature-based solutions.

Analysis of the latest data from the Climate Policy Initiative reveals that only 1.5% of global climate finance (about USD 10 billion) is channeled to small-scale agriculture. Of that, only 7% (about USD 700 million) goes to value chain actors. The vast majority of this funding (>95%) come from public capital providers. Additionally, review of the ISF Fund Database reveals that impact-oriented funds with a clear mandate to focus on both climate finance and agri-SMEs have an estimated USD 300 million in assets under management. Essentially, in comparison to the total articulated demand, current climate financing for agri-SMEs represents a drop in the ocean.

Many funders are scrambling to fill this gap, but without much analysis of what investments might have different effects on mitigation, adaptation, and nature-positive solutions. We believe that a foundational infrastructure must be quickly established within the next 3-5 years to greatly increase the financing available to agri-SMEs for climate-related investments.

Building the infrastructure around climate finance

Despite increasing attention, climate finance for agri-SMEs has yet to emerge as a strong channel of funding with appropriate products and services, particularly those focused on adaptation. The public sector funding that does exist primarily focuses on big-ticket initiatives and is mostly disbursed as grants and concessional debt. 

Over the next five years, in order to build a stronger infrastructure around climate finance for agri-SMEs, we recommend that:

  1. New models and taxonomies are quickly developed and used for investment strategies and reporting. International models and standards should be research-led, and used as a foundation for the agri-SME finance community to establish common approaches to achieving climate mitigation, adaptation, and nature-based solution goals. International donors and DFIs, along with governments, must help develop these standards and sponsor the complex technical work of applying them to specific agendas, like agri-SME climate finance.
  2. Large donor investments create a viable pipeline at scale. Our research clearly reveals a need for more agri-SME product/service solutions within viable business models. Many of these solutions will be completely new technologies. While some agri-SMEs may be at the forefront of innovation, many others will be slow to adopt solutions. Donors can invest in both the early-stage development and commercialization of climate solutions, as well as the expensive new intermediation that will be needed to channel these agri-SMEs into the portfolios of funders.
  3. Climate finance is integrated into all channels of agri-SME finance. Different finance channels serve different segments of agri-SMEs with different products—but all have an important role to play in supporting climate mitigation, adaptation, and nature-positive responses. Yet few have the expertise to understand specific climate needs, design appropriate products, and channel the large volume of climate capital into viable financial offerings. Bridges must quickly be built between traditionally siloed communities of investment practitioners in order to introduce this critical climate lens.

What’s next?

In order to respond to the scale and urgency of the climate challenge, the larger ecosystem of intermediation, support, and monitoring and evaluation needs to be strengthened. This will help build more awareness and generate demand from agri-SMEs for climate financing products and services, effectively channel these funds, and measure their ultimate impact on climate mitigation and adaptation.

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Donors deploy subsidies to catalyze private sector investment in many nascent and imperfect markets, including agri-SME finance. This type of blended finance can mitigate the rural and perceived risk of agri-SME lending, reduce the high costs of serving rural areas, and address other bottlenecks to clearing market transactions.

However, fully unpacking the different approaches to subsidy in agri-SME finance is difficult, as is understanding and linking it to the impact case. In order for the sector to more efficiently and effectively deploy subsidies, we need a more sophisticated way of comparing the subsidy-to-impact tradeoffs of different models. In our latest State of the Sector report (and summarized in this blog post), we present some examples that can currently be observed in the market as a first step in more fully interrogating blended finance approaches.

The current landscape of blended finance

In recent years, the landscape of blended finance approaches in the agri-SME sector has become more sophisticated. Capital providers have become better at matching the diverse investment profiles of agri-SMEs, in terms of growth ambition, profitability, value chain, risk exposure, and investment readiness. 

In the figure below, we lay out seven key ways in which blended finance is structured in the agri-SME market, and the particular pain points addressed by each approach.

Addressing finance market pain points through blended finance

Local commercial banks, for example, often make use of risk share, incentive payments, and technical assistance; social lenders, on the other hand, leverage a broader set of approaches. In general, capital providers tend to use more than one of the blended finance channels to achieve their objectives.

The bottom line: More approaches are being tried today than ever before, and combinations of different approaches are starting to address constraints in more sophisticated ways. But comparison between approaches is still very difficult—more research and learning is required.

Specialized funds as a blended finance channel

Since 2017, when ISF developed a typology of specialized funds, a number of new examples have emerged, often focused on impact themes such as climate resilience or gender inclusion. 

In particular, recent years have seen the emergence of more high-risk “impact venture” funds and other accelerators dedicated to supporting niche and high-growth ventures. These more commercially oriented funds are heavily investing in agtech in a small subset of countries, including Kenya, Nigeria, South Africa, India, and Singapore. Earlier grant-based investment by donors such as Mastercard Foundation, Gates Foundation, and USAID laid the groundwork; however, early-stage venture funds represent an opportunity to transition agtech and digital agriculture start-ups from grant funding to a more commercial model.

It’s also worth noting that, in the current landscape, very few funds are set up and managed by local or regional teams. Local fund managers can provide deep local insight, operate with lower cost structures, and offer stronger links for local investor participation. Yet they often lack the track record and network required to access international funding. Growing local fund management capacity will be an important step in refining this specialized fund channel.

Landscape of specialized funds

Interestingly, despite the strong push for climate finance, very few funds focus specifically on agri-SME climate resilience. Those that do often retrofit their existing investments into a climate-focused category; but this doesn’t mean that the financing is truly helping farmers adapt to climate change.

The role of public capital providers

Blended finance structures have traditionally been seeded by public or private donor capital providers. According to Convergence, in 2019 international and development finance institutions deployed USD 1.9 billion in concessional capital and mobilized another USD 5.1 billion of their own financing at commercial terms, across sectors. But this financing has failed to catalyze significant private capital—with ratios of USD 1.1 in private capital mobilized for every dollar of concessional capital.

Our analysis confirms that DFIs are the primary source of blended capital, but they operate within stringent mandates. DFI ticket sizes are usually in excess of USD 10 million and the targeted rate of return is often at commercial levels. Thus, the expectation that DFIs might bend their risk-taking rules in order to mobilize more private capital is misplaced. On the other hand, overseas development assistance and philanthropic investors, are often first to fund innovative blended finance structures. Their development and impact agendas often give larger latitude for innovation and concessionality.

Interviews with various capital providers revealed a few clear dynamics that influence the use of subsidy in agri-SME finance, namely:

  • A lack of transparency. There is no common language or taxonomy of the different blended finance structures and approaches in the market. Capital providers don’t disclose their financial terms. And the evidence base for the efficiency of blended finance structures is limited. This overall lack of transparency makes collaboration and evaluation of impact difficult.
  • Limited coordination of investments. Even among DFIs and ODA donors, there is limited coordination of investment strategies at a national level. In addition, each DFI is recognized for its different sector specialization, products, risk appetite, or level of concessionality. Collaboration and—where possible—co-investment would be beneficial to the sector, but this requires more intentional strategy and intergovernmental dialogue. 
  • Large, repeated, and unchallenged allocation of grants to technical assistance programs with limited tracking of efficiency. The impact and sustainability of technical assistance efforts are difficult to measure. Some interviewees are advocating for a reallocation of funds with the aim of accelerating the mobilization of private capital for climate resilience and food systems transformation.

What's next?

We’ve painted a picture of the blended finance landscape where, while innovation has increased over the last decade, traditional approaches seem stuck in a repeat cycle. A lack of transparency, coordination, comparative learning, and genuine private sector participation leave significant room for improvement. In order to realize the promise of blended capital approaches to agri-SME finance, the sector must develop more sophisticated ways of comparing the subsidy-to-impact tradeoffs inherent in these models.

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