A check-in conversation with Brandon Welch and Phil Taylor, founders of Mad Capital and Mad Agriculture, to talk about Perennial Fund 1 and 2, the lessons learned and building the vehicles to finance transition and funnel billions into the space.
LISTEN TO THE CONVERSATION ON:
In the conversation Brandon and Phil explain how they are planning to push hundreds of millions into regenerative organic farming through Mad Capital and help speed up the markets for these crops through Mad Markets.
THE KEY LESSONS LEARNED FROM PERENNIAL FUND 1
Perennial Fund 1 made sense on paper, in the field and when talking with farmers. Brandon and Phil were receiving good feedback, but when it came down to collecting farmers balance sheets and income statements and building the financial model with them, they started getting a lot of hesitancy and unexpected friction.
“Farmers were unsure as to whether this was the right decision. I think what we ended up learning from that was that because it was so new and unconventional in many ways, enact finance, farmers felt like we were trying to dupe them or pulling over on them. And we weren’t by any means. I mean, we were showing all of our cards. It was just so different than what you find from the conventional debt system that it was just shaking things up a little too much.” – Brandon Welch
“So we ended up alternating the model and moving over to a standard interest rate where we ended up essentially getting at the same type of payment schedule that a farmer would have had with a revenue share. But instead of calling it a revenue share, we call it a bridge loan. And we vary the principal payments during organic transition. So we just lowered the amount of principal that they’re paying to try to match the cash flow of the farm.” – Brandon Welch
“I would also say what we learned in the Perennial Fund is that, the entire Perennial Fund thesis was built around the idea that transition finance was a huge gap, traditional bankers would laugh farmers out of their office. Because, they would say, ‘Hey, I’m gonna lose money for a few years. But if you can stay with me, it’s gonna be good.’ Bankers don’t get that, they don’t underwrite on future cash flows. And so, we learned though, that transition finance, while an awesome kind of entry point in the market, is definitely not enough.” – Phil Taylor
HOW PF2 LOOKS LIKE AND DIFFERS FROM PF1
It is not transition finance alone what works, but it’s transition finance in partnership with traditional finance. There’s an artful balance that Brandon and Phil are now starting to walk within by managing PF1 and starting PF2, where they are starting to work with banking and non bank partners who want to flow financing into this space, they want to finance regenerative and organic agriculture, but they don’t know how.
“A lot of what has informed our thinking over the last year to now launching Mad Capital and starting to build a two part capital stack of blending both traditional financing and transition financing. Because they can work together in their different parts of kind of the risk curve in terms of different structure, different appetite for collateral, for debt service, how much of it is historical looking and looking at a five year balance sheet trend versus forward looking in terms of what we think we can project on cash flow in the future.” – Brandon Welch
“But what we’ve been learning is that farmers who are transitioning to organic or transitioning to regenerative organic, they may not always have a very large pool of equity kind of sitting on the side, whether that’s a large land base that they own, that they’re ready to leverage up, they might not have the precedent for producing positive cash flows for the past decade, they might only have three or four years of experience.” – Brandon Welch
WHY THEY STARTED MAD CAPITAL
Mad Capital is a kind of hourglass between a two-sided marketplace, and that hourglass has two central flows: it’s the relationships with their credit facilities and their strategic funds. Their business model is like most financial institutions, they collect an origination fee and create a place for the capital actors to have a spot to place low-risk capital into regenerative organic farmers to meet their ESG mandates.
“We’re connecting the dots and there’s an enormous amount of energy, you know, at a high level, we see it as a kind of a two-sided marketplace where you have farmers that need this kind of capital to make the transition throughout the regenerative organic ag. And then you have financiers that would love to fund it. And oftentimes that they don’t know how to interact, find each other speak the right language, you know, whether it’s the understanding probability of default and underwriting or, you know, credit analysis, or whether it’s simply just finding them and knowing them.” Phil Taylor
HOW TO GET ACCESS TO MORE BILLIONS AND MUCH CHEAPER CAPITAL TO FINANCE THE REGENERATIVE TRANSITION
According to Brandon, now that they have had more exposure and they are learning more about what capital markets want to see, they’re thinking about moving a little further out on the risk curve. They would be moving from senior debt to junior debt. They are trying to create capital that’s between senior debt and funds and different financiers. A lot of learnings from other industries have to be brought into regenerative agriculture to help facilitate the transition.
“We can take a little more risk with the farmer in order to push the loan to value ratio higher than what you would find at a traditional financing institution […] So, junior debt can fit within that spectrum where you’ve got cash, which is just pure equity, it’s liquid, it’s ready to move, you’ve got senior debt, which needs to take firstly lean and take priority over that cash, junior debt can be a sliver that can fit between those two […] You could have a $600,000 senior debt loan, you could have a $200,000 junior debt facility come in and then that farmer only needs to come up with $200,000 in cash, because they’ve now utilized more creative financial structuring to enable them to purchase that property to start building equity, to start transitioning the farm to a form that’s more resilient, and has higher ROI on the other side.” – Brandon Welch
OTHER POINTS DISCUSSED:
Koen, Brandon and Phil also talked about
- The importance of putting an MVP (minimum viable product) out in the world
- The business model of Mad Capital
- The current state of the market for farmers
- Phil Taylor and Brandon Welch, the first investments of Mad Ag’s $10 million fund
- How to finance a radical transition while having skin in the game
- Brandon Welch, Perennial fund, investing and profit sharing to get farmers to organic and beyond
- Dan Barber
- Transition Finance for Farmers with Benedikt
- Emma Chow and Eliot Beeby on how circular design for food is crucial for regenerating landscapes, and how large food companies can lead it
- Elizabeth Whitlow on how to change the ag world with the gold standard of regen certification
- Pete Oberle on how to invest in lab grown regenerative meat
- Tripp Wall on why provenance is key and time kills food
- Mark Lewis, hunting for unicorns in regenerative agriculture and food
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The above references an opinion and is for information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.