While high-tech agricultural startups wilt, Little Leaf Farms flourishes

“There was a little bit too much hype, and it was not grounded in the kinds of approaches that we’re doing here,” he said.

As of the end of 2022, investors had placed more than $2 billion in such companies across 158 deals, according to data by Pitchbook. But Little Leaf executives decided to forgo venture capital, worried that the rapid expansion often expected in the startup scene may not be sustainable for their vision.

Instead, Little Leaf took a more old-fashioned approach to growth, carefully nurturing its business into a profitable enterprise before looking to expand with less risky capital such as government and commercial bank loans.

Sellew has long advocated for indoor farming, growing fruits and vegetables inside structures with carefully controlled environments. In Little Leaf’s case, the structure is a 10-acre automated greenhouse in which lettuce is planted, grown, and picked without human hands ever touching the food.

Little Leaf’s annual revenue this year will cross $100 million, Sellew said, more than five times what it generated in 2019. During that four-year period, the company has grown its workforce more than six-fold to 300 people.

Little Leaf is now the market leader for packaged salads in New England, Sellew said. Retail customers include Stop & Shop, Walmart, Shaw’s, and Whole Foods Market. And the company recently opened another production facility in Pennsylvania.

Until recently, indoor farms had captured the imagination of investors because they use less fertilizer and can operate without pesticides or other chemicals. That’s a big plus at a time when more consumers care about climate change and sustainability. Indoor farms are also more efficient because they can grow food all year round.

Perhaps more importantly, companies can build these farms closer to where people buy and consume the foods. That matters for a couple of reasons.

California produces about 70 percent of lettuce in the United States. That means lettuce, a highly perishable food that’s made up mostly of water, has to travel thousands of miles and several days before it reaches supermarkets in New England.

“Why not be able to grow these products right here in New England, cut and deliver the product within 24 hours?” Sellew said, noting lettuce only has a shelf life of 15 days.

A long, complex supply chain ultimately also costs companies money. Deloitte, an accounting and consulting giant, estimates that agriculture companies lose an average of 35 percent of the initial crop before it reaches consumers because of breakdowns and inefficiencies in the transportation system.

Moreover, consumers like locally sourced food because of its perceived quality and freshness, said Jeff Bornino, a former top supply chain executive at Kroger and Giant Eagle.

“The volume of such food at supermarkets is still so small,” said Bornino, now president of North America at TMX Transform consulting firm. “But as local as you can get it is a good thing. It will resonate with consumers. There is a place for it.”

A report by Coresight Research says supermarkets and other groceries could even establish their own indoor farms adjacent to stores and distribution centers.

“Customers could witness the growing process firsthand and purchase freshly harvested items,” the firm said.

But despite all of this promise, venture-backed indoor farming startups have been struggling of late. Many investors have found these startups need more cash and time to grow than they were willing to give.

In July, AppHarvest in Kentucky, a tomato producer backed by Martha Stewart, 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.”