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The last decade has seen increasing recognition by policymakers, capital providers, and finance practitioners of the vital role played by agricultural small- and medium-sized enterprises (agri-SMEs) in agriculture and food systems in developing countries, as well as their key challenge of limited access to finance.

In sub-Saharan Africa and Southeast Asia, there is an estimated USD 160 billion demand for financing by ~220,000 agri-SMEs. However, we estimate that only USD 54 billion (~34%) is currently being met through formal finance channels—leaving an annual financing gap of USD 106 billion.

These headline estimates are large, but reflect in numbers what most practitioners have experienced through working with agri-SMEs. Digging beyond numbers, our new State of the Sector report with CASA introduces a more specific view of where the market for agri-SME finance is (and isn’t) clearing.

To add new perspective, this report breaks down the market in a more comprehensive and holistic way to show where finance is specifically flowing, via specific types of products from specific types of funders to specific types of agri-SMEs. The report also presents four long-term change priorities that we see as crucial to systematically closing the USD 106 billion agri-SME financing gap over time.

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In 2018, ISF Advisors, in partnership with the Syngenta Foundation, published Protecting Growing Prosperity: Agricultural Insurance in the Developing World. Alongside the release of that report, more than 100 industry stakeholders convened to consider solutions for maximizing the uptake and impact of insurance for smallholder farming households. However, since that time, the climate crisis has rapidly escalated and the disruptive effects of the COVID-19 pandemic have shifted market dynamics for smallholder farmers. These trends called for a new convening and reflection process for the sector. 

To that end, this 2022 State of the Sector update was commissioned by a new partnership of donors—including the Bill and Melinda Gates Foundation, Syngenta Foundation, FSD Africa, and Swiss Re Foundation—and written by ISF Advisors with support from the Microinsurance Network. The findings of this report were shared and debated in a virtual industry convening of over 130 stakeholders in January 2022. Key ideas and reactions from these discussions have been captured in this report, which sets out to: 

  • Take stock of the current state of agri-insurance for smallholder households, distilling what has changed in the sector since 2018; 
  • Introduce new ways of thinking about the sector in the form of four deep dives; and 
  • Propose a set of priority areas to guide work over the next 5 years. 

We hope that this research will continue to support the insights, partnerships and investments needed to respond to the climate crisis, with smallholder farmers at the center of the action agenda. 

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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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