filed for Chapter 11 bankruptcy amid concerns over its cash flow and the foreclosure of one of its greenhouses. AeroFarmsin New Jersey and Planted Detroit also shut its doors this year.
Bowery Farming in New York has laid off workers and delayed opening new facilities after top investor Fidelity Investments slashed its valuation by 85 percent to $2.32 billion.
In the third quarter of this year, indoor farming startups attracted only $97 million through 13 deals, according to Pitchbook data. By contrast, in the first quarter of 2021, investors poured $1.5 billion into these companies through 46 deals.
With venture investment running dry, startups in need of capital have turned to more exotic fund-raising techniques.
Freight Farms, a Boston-based startup that supplies technology and equipment to indoor farms, decided to go public in October through a complicated vehicle called a Special Purpose Acquisition Company (SPAC).
While some companies — including Boston-based DraftKings – have gone public through SPACs without much drama, the model has also drawn regulatory scrutiny. Some critics believe the model has been overused as a rash alternative to the due diligence investment bankers put into a traditional initial public offering.
Sellew suggested that his field may not be a great fit for venture capital because of the time and money needed to create and carefully maintain an artificial pocket of Mother Nature within four walls.
“This whole notion of supporting these money pit companies that continue to burn cash, that’s not us,” Sellew said, referring to Little Leaf.
Sellew founded Little Leaf in 2015 along with Bill Helman, a former managing partner with venture capital firm Greylock Partners. From the very start, the startup benefited a great deal from government help.
In 1996, MassDevelopment, the state’s economic development agency, acquired the property of Fort Devens, which served as the US Army’s New England headquarters for nearly 80 years. The agency wanted to turn the land into a sustainable, mixed-use community.
After Little Leaf purchased 14 acres on the property from MassDevelopment, the agency granted the startup a $4.5 million construction loan.
Unlike other indoor farming startups that relied on costly electric-powered artificial lights to grow crops, Little Leaf opted to build a greenhouse that could harvest the power of the sun.
The former method is “quite expensive, in terms of both the capital and operating costs to buy and operate the lights,” Sellew said. “And then you have to have the heating, the ventilation, and the air conditioning.”
By contrast, “the sun is free,” he said.
Sellew said he took a gradual, methodical approach to growing the greenhouse.
In 2017, the company started to generate operating profits and positive cash flow. This milestone allowed the firm to tap less risky lenders in banks and the federal farm credit system versus venture capital.
Sound finances have “always been something that’s important to us,” Sellew said. “We’re profitable so we can borrow money from the banks the way normal companies do.”
In 2021, Little Leaf raised $90 million in equity and debt financing from Bank of America, asset manager Equilibrium Capital, family investment office Pilot House Associates, and cofounder Helman.
“We didn’t get caught up in the hype,” Sellew said. “We grew the company the old-fashioned way.”
Thomas Lee can be reached at thomas.lee@globe.com.
Source: bostonglobe.com
