Transcript: How Silicon Valley Farming Startup Addresses Extreme Poverty, Global Food Shortage — John Denniston, Chairman of Shared X

We recently ran a fascinating podcast with John Denniston, Chairman of Shared X – which he describes as a for-profit agriculture impact company with two key goals: Generating financial returns and generating social returns.

The problem is confounding, challenging, and enduring, and to listen to Denniston, it also just may present the perfect opportunity to do both good and do well. It’s called the yield gap, the difference in agricultural yield from farms in developed countries, which are more efficient and deliver more food per acre, versus emerging countries, which are, of course, the very places where food is most needed. That gap is part of the reason why Denniston, whose career has included investing in green tech and more as a partner at Kleiner Perkins Caufield and Byers, as well as heading tech investment banking in the western US at Solomon Smith Barney.

To help WCR readers learn more, here is the transcript from that conversation:

Chris Riback: Let’s start with the broad picture, and explain to folks, what is Shared-X? What’s the problem that you seek to solve?

John Denniston: Shared-X is an agriculture impact company. We grow high-value specialty crops in emerging countries, and are targeting two objectives. The first is financial return for our investors, and the second is social return in the form of lifting smallholder farmers out of poverty.
Chris Riback: We hear that a lot around various sustainability investing efforts. You know, “A chance to do good and do well.” Tell me, kind of is this more “do good”? Is this more “do well”? Do you feel like it’s evenly balanced? Which came first for you? I’m certain that you don’t want to do one without the other, but kind of balance those out for me, if you would, on this particular effort, and then we’ll go deeper into kind of literally how it works.
John Denniston: Yeah. You bet. Our strategy is to avoid the either-or of financial and social return. “What’s the trade-off between the two?” And instead pursuing a business plan where one builds the other. They’re mutually reinforcing in the following way. With financial success, a company like Shared-X can reinvest some of its profit into the expansion of its business model, which by definition brings more smallholder farmers into our system and helps alleviate poverty.
With larger hub and spoke systems, that’s how we operate, we also have volume purchasing advantages and other financial advantages that build our financial return and so forth. Financial success begets improved social success, begets higher financial excess, thus avoiding the myth of the trade-off between one and the other.
Chris Riback: Take me through the logistics, and maybe that will include a little bit of how you came across the idea of agriculture investing, particularly in countries, emerging countries, where the creation of agriculture opportunities is hard, and yet on the other side of that, there are these massive nutrition and food problems, and getting access to enough food. Tell me about the problem that you saw, and then how did you get into this? How did you see this as a real viable financial opportunity, in addition, obviously, to the social impact? Then maybe we can get into, and I can follow up on, literally how the logistics work.
John Denniston: Let me start with the investment thesis. What is the opportunity that we’re attacking? The opportunity that we’re attacking is an agriculture phenomenon which is known in the industry as the “yield gap.” The yield gap is the astonishing difference in bushels per acre when comparing a developed and an emerging country farmer. That difference can be factor five, factor seven, factor 10, sometimes greater. In the business world, that’s known as an arbitrage opportunity. It’s hard to find, in the world today, arbitrage opportunity with that kind of gap, five to 10 X, possibly greater. That’s the opportunity, and we’re choosing to address the opportunity, as I said earlier, for both financial return for our investors, and social return by including the smallholder farmers in our communities, and our advanced, sustainable farming methods.
I’ll now briefly answer your question of, “How in the world did I come across this?” And it’s a long story. The short version is, exactly 10 years ago, my wife and I decided it would be good for our then teenage daughters to spend a week or two that summer outside of Silicon Valley where we live, because we began to worry about how our daughters, Lauren and Katie, could possibly have a healthy perspective on the world growing up amongst the wealth in Silicon Valley. By serendipity, through a friend, we ended up in the northern desert of Peru. We wanted to take them outside of the United States to do volunteer community service.

At the bottom of the pyramid, we’re in the desert of Northern Peru, and the very first thing we did was to help a community of smallholder farmers harvest their cotton crop, and it was the bottom of the pyramid. We went looking for it, and two hours after our plane landed in Northern Peru, we found it. We wanted to do something to help, but something more than a charitable contribution, which would serve as a good band-aid, but only a band-aid, not a sustainable solution to the problem, and I was looking for somebody, an agriculture expert in Peru, who could diagnose the problem and help tell us what to do, and that person is Tony Salas, today our CEO at Shared-X. That’s the long backstory to how I got to where I am today with Shared-X, and how Shared-X came to be.

Chris Riback: How did your daughters react when you took them there, and it’s not a beach vacation, and they’re not off in the mountains climbing or hiding or anything, but they’re working a farm in the Peru desert, or near the Peru desert? How did they react? How did you sell that one? There may be a whole parenting book here that we may get you away from this investing thing, and get you into parenting guidance.

John Denniston: I don’t pretend to be qualified to write that book, Chris, but I’ll tell you, I think we spent 10 days down there on that trip, and we did a number of things. Yes, we helped the farmers, helped harvest their crop, but we also worked in an orphanage, and a hospice, and we delivered food to those without, and we built the homes in the customary fashion, and we adopted a family in need, and so forth. My litmus test, and there was nothing really comfortable about the setting down there and what we were doing. It’s very outside our comfort zone of what we had previously done in our lives, including mine.

My litmus test was, I didn’t ask my daughters while we were down there, “How’s it going? Are you okay?” For fear of the answer I would get. I waited until we had boarded the airplane in Lima back to the United States, and I just asked them … Here’s my litmus test question. “Do you want to come back here next year for a week?” My older daughter, Lauren, shakes her head “no.” And said, “No, I don’t want to come back for a week. I want to come back for two weeks.”

Chris Riback: Wow.

John Denniston: My younger one, Katie, said, “I don’t want to come back for two weeks, but I’ll come back for a week.” I said, “Okay, well, there’s a midpoint between seven and 14 days, and we’ll just find that.” This trip to Peru has become a family addiction. We’ve come back to the exact same remote place virtually every single year, with one exception, because of our kids’ desire to do it. Now, our younger son has been many, many years. He started coming when he was nine years old, so this has become a family addiction for us.

Chris Riback: That’s terrific. Fine, I’ll take you at your word, you may not be qualified to be the parenting expert, although we can debate that another time, but you did hit on one of the key lessons, I would think, which is, “Don’t ask your kids a question that you don’t want to know the answer to.”

John Denniston: That’s exactly right, and honestly, Chris, just to be in the setting is … We’ve taken some friends on this annual trek of ours too, and a particular friend of mine had this reaction, which is it’s the only vacation he’s ever taken where he’s forgotten about the office, and it’s because we’re immersed in that community. It’s different being at the beach, and you got your cell phone, and boredom sets in, but we’re constantly in motion, constantly in action. It’s edgy, it’s a little bit uncomfortable, and after a while, we kind of sort of have become members of the community, just because of our repeated trips back there.

Chris Riback: That’s really excellent. You mentioned “hub and spoke,” and I think that that’s really part of your model and how it works, so take me through, what does that mean, and the logistics? How do you find the farmer? How does the farmer make money? How does Shared-X make money? How does it all work?

John Denniston: The hub and spoke is our model in any particular farming community where we come in and we buy a farm, a mid-sized farm, and we call that our hub farm. We never buy farmland from poor, smallholder farmers. They don’t own mid-sized farms. They own one or two hectors, something like that. We set up our operations. We have an outstanding agronomic team, and naturally our yields will be high relative to the community. We then engage with the community, the smallholder farmers who are our neighbors, and otherwise in the community, and here’s one of the benefits of the hub and spoke model, is that we are their neighbors. It’s one thing to come into a farming community and say, “We know the best farming methods for you, and let us teach those to you.” It’s quite a different thing to say, “Come and see what we’re doing on our farm.”

The smallholder farmers, many of whom are illiterate, can with their own eyes see that something special is taking place on our farm, and therefore there is a greater willingness to come aboard, at least try what we’re doing, and we’ve seen that that has been a formula for success.

Chris Riback: You’re closing the yield gap, if you will. Tell me if I’m understanding this right. You’re closing the yield gap on your own farm, on the hub farm that you own, and the other local farmers, you can invite them by or whatever. They come by and they say, “Whoa.” You know, “How is Denniston, a guy from Silicon Valley, how’s that guy …” Although you’ve got some help from Tony Salas, of course, and others. I’m kidding a bit, but, “How is Denniston creating so much productivity on his property?” And maybe you can talk about that, how you’re doing that. They say, “Okay, yes. I would be interested in learning this.” You help them do that, but as part of helping them do that, it’s a business venture. You, I guess, in some way, become a business partner of theirs, or they become a related spoke to your hub. Maybe that’s in terms of distribution, or maybe you figure out different types of production on different farms. Is that it? You’re showing them what you’re doing, and by that they say, “Okay, I want in on this venture”?

John Denniston: That’s exactly right, Chris. I think you captured it very well. Yes, we close the yield gap on our own farm, the hub farm, so in one sentence, our business plan at Shared-X is to collapse the yield gap by deploying advanced and sustainable farming techniques, and we deliver our impact by sharing those advanced sustainable farming techniques with our neighbors, the smallholder farmers, thus lifting their incomes, and many of them out of poverty.

Chris Riback: I probably know the answer to this already, and I’m coming at this from two different directions. Question is, what about the governments? The federal governments, let’s say? But then also the local governments? On one side, on the farmer help side, if these techniques, unless they are somehow proprietary and you’re not telling anybody exactly how they work, and I don’t think that’s the case, but you’ll tell me I’m wrong if I am. On the one hand, why are governments or NGOs not delivering that type of knowledge to the farmers, and then maybe on the other side of it, what kind of obstacles do you get from officials, whether that’s on the federal side or on the local side? I know obviously you mentioned already you’re in Peru. Maybe you can talk about some of your locations, or some of your planned locations as well.

John Denniston: I’ll break that into two pieces. The first is, why hasn’t the world figured out how to do this yet? The fact of the matter is that 70% of the world’s poor live in rural areas where farming is fundamentally the only … One of the very few work opportunities. The yield gap is widening. It’s not narrowing. The smallholder farmers remain mired in poverty, and why is that? I think it’s two reasons. The first is, the world-class agronomic talent, people that actually know and have practiced for years or decades the advanced, the best advanced sustainable farming techniques are incredibly scarce in these communities, incredibly scarce. There’s also a delivery method of the knowledge. As I said before, it’s one thing to go in and say, “I’m your coach. This is what you ought to do.” It’s a second to actually do it as their neighbor, and they can see with their own eyes kind of the Missouri state motto, the “Show Me State.”

The other, it’s a really interesting, at least for me, observation somebody made to me, is to address the persistent problem of smallholder farmer poverty worldwide, mostly what’s been done is to try to pay the farmers a price premium. There are various different efforts to do that, and here’s the observation that was made to me, that I keep coming back to, which is, well, you can lift yields, so the volume produced from a given acre of farmland, factor five or factor 10, that is the yield gap, if you have the advanced sustainable farming techniques. But you can’t lift prices factor five, factor 10. Maybe 10% or 20% or 30%. That’s it, and some of that gets absorbed by the distribution chain, by middlemen along the way.

If you’re going to attack poverty, the global poverty, a really good place to start would be the Agriculture industry, just given the fraction of poor in the world who are in that system, and probably a good way to address it would be to collapse the yield gap. You can add a price premium on top of that, but do both.

Chris Riback: I’m listening to you. You’re rewriting the old saying, “Give a person a farm, he eats for a day. Teach a person to farm, and they eat for life.” The fish are out, and the farm is in.

John Denniston: That’s exactly right. You can give a person abetter to teach a person how to fish, because that is a sustainable solution to the problem.

Chris Riback: Where are you now? Where are your endeavors now? Where are you looking to go? What about Africa? Asia? When we talk about, sadly, you’ve pointed out some of the numbers, we don’t lack for emerging countries where the problem that you’re describing exists. Tell me your footprint, and where do you head to next?

John Denniston: Our footprint today is, we began our business two years ago, and we have several farms in Peru, and now we’ve expanded into the Dominican Republic, and we have ambition to expand beyond those two countries going forward. One of the advantages that we have as a company is our CEO, Tony Salas, has a long history in agriculture in emerging countries. He and his prior firm participated in over 400 agriculture projects in over 30 countries, over nearly a quarter of a century. What that means is that we have in-country networks in multiple countries where we don’t have to do a lot of research, which crop to grow, where, and with whom, and how, and so forth, because our team has done that before. That has allowed us to move swiftly, and we hope that it will going forward as well.

Chris Riback: How does this work for GSV? They’re involved in so many different things. Why does Shared-X make sense for GSV?

John Denniston: GSV, led by Mike Moe, it stands for Global Silicon Valley, and it’s really, part of the mission for GSV is to bring the spirit and the methods of entrepreneurial innovation to the world, and GSV has a number of initiatives, one of which is sustainability/impact, and when Mike Moe and team heard about what we were up to at Shared-X, they were very enthusiastic and wanted to play a role to help us, and we’ve been really delighted with GSV. The whole team has been terrific and a huge help to Shared-X.

Chris Riback: At Shared-X, are you taking on additional investors at this point? Does someone need to get involved through GSV, or is there really not an opportunity? How do people kind of think about getting involved in your growth or anything around your financial situation?

John Denniston: I think if people are interested, I think they can reach out to GSV on GSV’s website, and that’ll get channeled to the right people at Shared-X. I’ll just say this. We’ve been embraced, warmly embraced by the investment community, and it’s been a huge help as well, and we’re looking to accelerate and go faster.

Chris Riback: Green tech. Do you consider this green tech? Is it food tech? Is it Ag Tech? What language do you use when you describe it?

John Denniston: That’s a great question, Chris, because there’s aterms. We call ourselves an agricultural impact company, because that brings precision to what we do. Actually, to be more precise, we are a for-profit agriculture impact company, so we’re here to make money for our investors, we are farmers, it’s agriculture, and we’re looking to lift people out of poverty. That’s the impact. That’s who we are at Shared-X.

Chris Riback: Obviously you have a long and successful history in green tech, which I guess is maybe a related family member to a for-profit agriculture impact company. Did you see this type of opportunity coming? Was there something in your history around green tech where you kind of … Then obviously, your personal experience is what brought this really to light, but did the green tech background really play a role? Maybe did that open your eyes [inaudible 00:22:36] when you were there? You saw not only something really useful for your family and for your spirit, but you also said, “Wait a minute. I’ve seen this investment opportunity in different spaces before.”

John Denniston: Great question. The answer is yes. My career helped open my eyes to the investment opportunities in agriculture and water, and in fact I’ve said that of any industries in the world, the two for which the gap is widest between market need and available solutions, the top two on my list would be agriculture and water, maybe water and agriculture, but with population, the middle class growing, we’re going to need more food. It’s not obvious where that’s going to come from, especially with the growth of cities taking farmland, and likewise water. There’s water scarcity worldwide, and that’s predicted to intensify. From a business perspective, before I made my first trip 10 years ago to Peru, my eyes had been opened to the investment, to the for-profit opportunities in those two sectors, and then the trip to Peru with my daughters opened my eyes a different way to, “Yeah, you can invest in agriculture and do good,” and that was basically how I came to Shared-X.

Chris Riback: John, obviously as you’re talking about agriculture, and yield gap, and maximizing what one can from the property and from the farms, climate change. It has to be a factor. How does Shared-X think about climate change in terms of what you’re doing?

John Denniston: That’s an excellent question, Chris. At Shared-X, we see climate change as a risk, and we’re doing a number of things to mitigate the risk, one of which is to diversify geographically, and diversify by crop, and that is in fact how we’ve begun our company.

Chris Riback: John, just to close out, what is next? As you look through maybe the rest of this year and into the next 12 to 18, 24 months, what’s next for Shared-X?

John Denniston: A number of things. At the top of the list are continued expansion of our hub and spoke model, so that financial success continues to beget social success, which feeds financial success. Also, we want to increasingly tell our story directly to the consumer. That’s what we want to do. I think in a world where the demand for purpose-driven food and beverage is increasing, we have a unique story to tell, and we aim to tell it.

Chris Riback: When you say “the consumer,” is that in developed countries? Do you see the food … Does the food get distributed back to places like the US as well, or when you say “consumer” you mean in the countries where the farming’s occurring?

John Denniston: At the moment, most of our harvest is coming todeveloped markets. We are also distributing some in the local Peruvian market. We’ll do both over time, but our primary impact is the injection of prosperity into these farming communities.

Chris Riback: And obviously when you factor price in on theobviously very important. That’s got to happen a little bit more, I would think, in the developed countries.

John, thank you. What a fascinating story, and the intersection of personal and the things that you experienced with your family, and being able to apply that in the ways that you are, it’s really, really interesting and inspiring stuff, so thank you. Thank you for your time.

John Denniston: Thanks, Chris. It’s been a lot of fun.