Deal To Watch: Hitch Pushes Farming Automation

Key Stats:

Summary

The Hitch team has been selected as a “Deal to Watch” by KingsCrowd. This distinction is reserved for deals selected into the top 10%-20% of our due diligence funnel. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com. 

Over the past century, the agricultural industry has undergone unprecedented change. Technological innovations have reduced the need for labor. Shifting attitudes toward work have also made the profession less-desirable for Americans to pursue, and competition with foreign countries have made competing on price difficult. Despite the ongoing march toward mechanization, there are companies out there that believe the industry is under-served. Hitch, a startup focused on building a self-driving wheelbarrow, hopes to further disrupt the industry. If successful, this firm could reduce farmers’ costs, while creating value for itself and its shareholders.

Problem

As a share of the economy, farming has undergone tremendous shrinkage over time. In 1950, there were 9.9 million farm workers across the US. Today, that number has shrunk to 2.6 million, accounting for only 1.3% of the nation’s employment. Once a major contributor to the economy, farming accounts for around 1% of the nation’s GDP today.  A mix of rising labor costs, shifting worker attitudes, and foreign competition has placed a vice on the companies operating here.

Solution

The management team at Hitch is adamant that its technology can help alleviate the farming industry’s woes. The company is building its own off-road, self-driving robot that’s capable of transporting fruit and other payloads.  The aim is to get the goods transported from where they are to where they need to be on any given farm. These units, pictured below, utilize computer vision, machine learning, AI, object recognition software, and a high-precision GPS system. Management asserts the units are electric (primarily solar-powered) and quiet as well.  

Though there may be an initial fear that this technology may push laborers out of the workforce, management stated that that’s not the goal… yet. Using a robot to move agricultural goods around the farm can help to increase productivity by more than 40%.  This improvement comes as its service frees up employees to handle the more skilled aspects of the profession. This includes activities like identifying ready-to-pick fruits and vegetables.  

Eventually, the goal does seem to remove most of the labor component on the farm though. In the image below, you can see three different phases planned by management. Phase 1 includes building and deploying a transport hitch that can effectively navigate farms. Management intends to monetize these units by charging farms $1,000 per month for each unit in operation. Phase 2 will be to program the machines to identify and robotically pick ripe produce.  The machine will then transport it in bins to a centralized packing location where it will be offloaded. This service will cost $2,000 per month for each unit in operation. Phase 3 is to deploy a unit that enables fleet connectivity for enhanced monitoring, logistics planning, and more. Under Phase 3, the robots will be able to perform automated battery swaps. Management’s goal is to charge $3,000 per month for this service.  

HMC Farms, a large commercial grower with operations in California, Mexico, and Chile, owns 5% of the Hitch stock.  To further support the startup, HMC has signed an LOI (letter of intent) for 100 robots worth, in aggregate, $2.1 million. At present, and for the remainder of this year, Hitch is working on perfecting its transport hitch and field testing its technology. The goal is to deliver the units sometime in the third quarter of 2020. Those particular units will be dedicated to HMC’s grape harvest next year.  

Although revenue in 2018 was $0, the firm’s net loss was only $11,908. However, the business does have some issues with its financial statements that warrant disclosure. These center around their partner, Wavemaker Partners. Between 2018 and 2019, the company has loaned $220,000 to related parties.  Wavemaker Partners has been designated as the recipient of at least $125,000 of this, but likely accounted for all of it. In exchange for this cash, Hitch has collected interest at rates between 3% and 6%. These amounts have since been repaid. When asked about these transactions management responds that their goal was to collect interest on their cash at a time when they didn’t need it.

This maneuver is identical to what Wavemaker Partners arranged with autonomous lawnmower manufacturer Graze. For private companies, these transactions are not illegal (they would be illegal if they were publicly-traded businesses). They do, though, create some concern over management’s willingness to play with the books. The one benefit, at least, in this case, was that it did generate some interest income for the company that otherwise would not have been.  

The Market

In many ways, the agricultural industry, particularly farming, is a perfect place for a company like Hitch to operate in.  It’s an industry that is facing significant pricing pressure that’s caused by a labor shortage in the US and competing wages overseas. In addition, the space is brimming with unskilled labor, which means the work can be easily mechanized.  The fact that the industry is also indispensable makes it all the sweeter. All of these factors have combined to create the perfect scenario for disruptive technologies to come into play. Widespread adoption is all but guaranteed once it becomes apparent that particular solutions solve the industry’s woes.

Digging further, let’s discuss the labor issues facing the space. In one California study, more than 40% of farmers said that over the past five years they were unable to secure enough workers to tend to their fields. 70% of that 40% figure said that they expected 2019 to be more difficult when it comes to meeting labor objectives compared to 2017 and 2018. A full 56% of farmers said that to deal with the labor shortage, they have resorted to at least some mechanization of their farms. And half of those attributed the decision chiefly to labor shortages. Though California may not seem like the ideal state to examine these issues, it actually is. Last year, the state generated $45 billion of the $132.8 billion that comprised the total farming industry in the US. The Golden State is responsible for the production of nearly half the fruits and vegetables, as well as more than 90% of the tree nuts, grown in the US.

In response to the labor shortage in the farming industry, 86% of farmers said that they were raising wages to entice workers. This isn’t just a one-time move though. As the image above illustrates, inflation-adjusted wages have been rising for years.  They have grown from around $9.80 per hour in 1989 to more than $13 per hour today. Considering that labor accounts for the largest share of a farmer’s expenses, this move higher over time has been painful.  

Data suggests that this space is perfect for disruption. There’s only one problem: there already is a lot of disruption in the farming space. Several companies over the years have either already created mechanized replacements for labor or have attempted to do so. AGCO Corp, for instance, has been working on its Project Xaver.  Its purpose is to deploy units that release a swarm of small robots that can engage in targeted seeding activities. Harvest Croo Robotics, a much smaller firm, has created a sophisticated strawberry harvester robot. Over the span of three days, it can clear a 25-acre field, effectively replacing 30 individual workers in the process. Grape harvesting is also a popular target for automation, with some machines capable of going through between 15 and 20 tons of them per hour. The California Association of Wine Grape Growers estimates that 80% of wine grapes in the state are harvested by mechanical means.  

What this points to is an industry already filled with competitors. Fortunately for Hitch and its shareholders, the industry is still in its early stages of moving completely away from manual labor. Between 2019 and 2025, one source estimates that the agricultural mechanization market will expand at a rate of 6% annually. This implies reasonable growth prospects for it so long as Hitch can prove its products’ viability.  

The Deal

The capital raise Hitch is working to close is fairly straightforward. The company is attempting to raise between $500,000 and $2 million. Investors will receive Crowd Notes bearing an annual interest rate of 4%. Their term is set at 24 months, but they may also convert into equity upon a subsequent raise. Investors will see their money convert subject to a $10 million valuation cap, but with a 20% discount applied to the value of the company upon that raise. As of the time of this writing, the firm has received commitments of $137,000, and the minimum investment per participant is $1,000.  

Management

Though Hitch has at least one advisor and is connected with Wavemaker Partners, a $300 million investment firm, it has two core members on its team. These individuals are Nick Giancola, the company’s CEO, and Ethan Joffe, its CTO. Nick was involved in founding three companies over the years.  He has also spent the last 15 years building and launching products for other technology firms. He’s consulted on over one hundred projects with companies ranging from startups to Fortune 500 enterprises. Companies he has worked with include, among others, WeWork, Amazon, American Express, BCG, and E*Trade. His experience includes both design and software development for companies such as StackCommerce, MeUndies, Flight Club, Pongalo, and Fullscreen. Before founding Hitch with partner Joffe, Nick served as Managing Partner at Philosophie, a design innovation, and R&D firm.  

Ethan is an award-winning technologist who has led teams focused on AR/VR, Machine Learning and automation. After graduating from MIT with a BS in Computer Science, he began his career by building a multimedia software company. He later transitioned to an engineering role at VPL Research, the first commercial AR/VR company. From there he moved to Xaos Tools where he developed award-winning 2D & 3D consumer graphics products. His first exit came as the CTO and Co-Founder of WorldSite Networks, an entertainment industry hosting company. He also has experience at Super11, a free internet company with operations in Brazil and South America.  Until it was acquired, he served as the firm’s Director of Product Development. He later co-founded Nami Media where he served as its Chief Scientist, and his exit from there came when Nami was acquired by Lin Media.

The Rating: Deal To Watch

Hitch has been rated a “Deal To Watch”. The company’s product is sensible and it’s easy to imagine that it can save farmers a great deal in terms of labor costs. Management is incredibly experienced in the technology space, which is a huge plus.  The industry is also begging for disruptive players to come into the mix. From the 1930s through today, the farming space has shrunk from 8% of the nation’s GDP to less than 1%.  Despite this, its $132.8 billion market size is still material.  

This doesn’t mean that Hitch is without its risks. In such an attractive space, the industry is filling up with competition. The last thing Hitch’s investors want is to compete with a firm or firms with much larger resources and superior technology.  If the LOI does come to fruition, it will prove a boon for their business. Not only will it bring the company much-needed revenue, but it will also establish the firm’s initial reputation.   If all goes well, this will make winning over other new clients that much easier. Of course, whether the LOI is binding or what exactly its terms call for are other questions entirely. Building and deploying a fleet of 100 robots for a paying customer is excellent.  However, if it will cause a hemorrhage of cash and ultimately lose money, the pain may not be worth it. At the end of the day, these concerns are real, but they do not offset the upside prospects we believe Hitch to have if it can achieve its goals moving forward.