Ag-Tech Incubator Lures Sponsors, Startups With Unusual Model

A West Michigan incubator that helps farmers and entrepreneurs turn their ag-tech ideas into businesses is trying to get the word out about the program’s first year in hopes of attracting more sponsors. In the past year, the Great Lakes Ag-Tech Business Incubator launched a handful of startups and hammered out an unusual financing model that eschews equity in favor of a percentage of its clients’ sales.

Established in December 2014, the incubator provides assistance with product validation, patent filings, market and consumer acquisition, regulatory permits, business plan development, connecting entrepreneurs to suppliers, and assembling management teams. Assistant director Paul Sachs says that during its inaugural year, the incubator picked up two additional municipal sponsors, Barry County and Allegan County; raised an additional $75,000 in public and private contributions; and officially took on four startup clients, with a fifth expected to come on board before the year is over.

“The interest we’ve had from both farmers and the private sector has been great,” Sachs says. “Our partners love the model and want to support it.”

During the first year, the incubator procured sponsorship from service providers like Consumers Energy, BizStream, and the Watson Intellectual Property Group, who offer their expertise to incubator clients for free or at a deeply discounted rate.

When entrepreneurs come in to the incubator with a viable idea, Sachs explains, they undergo an intense product review process that lasts three or four months. The incubator brings in other farmers to test use cases, and it performs a market analysis. It also analyzes intellectual property and forecasts the idea’s potential financial success.

“Basically, we ask, ‘Is this a product that has the potential to succeed?’ If the answer is yes, we continue with the client to develop a prototype, test it, and get it to market,” Sachs says. “This has really worked well. We developed the programming during the first six months, and now that we’ve gotten through all that, we’re more intensely focused on bringing in additional clients. We’re right where we expected to be a year later.”

Once a company spun out of the incubator begins to generate revenues, Sachs says the incubator takes a 2 percent cut of the gross sales; it doesn’t require the participating startups to pay any money up front, and it doesn’t take a piece of the startup’s equity, which makes it different from the majority of startup accelerators. (Over the years, some tech investors have experimented with revenue-based or royalty-based financing, with mixed results.)

“Other economic development folks said we’d never get our clients to pay us a percentage of their sales,” Sachs says. “But we’ve found that this model has actually been a really good draw. Our clients say, if you helped us start our business, why wouldn’t we pay?”

Sachs says he’s not aware of any other ag-tech incubators using a similar model.

The incubator client that is furthest along is a Marne, MI-based startup called Grassroots Energy, which has developed patented ethanol extraction equipment that employs low temperatures while consuming less energy than required by conventional, high-temperature distillation methods. Sachs says Grassroots Energy is currently demonstrating a pilot version of its machine on the incubator’s premises and expects to start selling a commercial product within the next few months.

Other companies at the incubator—Sachs declined to name them—are working on agricultural applications for drone technology, a biofuel-powered engine, greenhouse management software, and new equipment for use in the production of hops.

During the incubator’s second year, Sachs says, the goal is to bring in five more entrepreneursand have 30 percent of them generating revenues by 2017. Barry and Allegan counties underwrite farmers from their communities to participate in the incubator, and Sachs would like to add two more counties to the program next year.

Sarah Schmid Stevenson is the editor of Xconomy Detroit/Ann Arbor. You can reach her at 313-570-9823 or sschmid@xconomy.com. Follow @XconomyDET_AA

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