The way we get our food is changing.

Many are discussing how to make modern farming more sustainable, but this startup working to end it entirely.

Ikuo Hiraishi is a serial entrepreneur and the Japan head of Infarm Japan, an urban-farming startup growing food at supermarkets. In fact, as Ikuo explains, a lot more of your food is grown indoors than you probably imagine.

The future of food will look nothing like its past.

t’s a great conversation, and I think you’ll enjoy it.

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Show Notes

  • What is Urban framing, and why do it?
  • Why Japanese consumer’s first resisted urban farming
  • The true value proposition for the supermarkets.
  • The biggest costs in indoor farming are not what you think.
  • Why, after 40-years. urban farming is finally taking off in Japan
  • The two challenges to scaling indoor agriculture
  • Three reasons Japan might be the perfect market for urban farming and one reason it may not be
  • Why it’s better to grow cheep veggies with expensive tech
  • Is it better to be a founder or a VC?

Links from the Founder

Transcript

Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs.

I’m Tim Romero and thanks for joining me.

Food is complicated.

That’s why successful food related startups are so rare and so important when we do find them. Today, we sit down with an old friend after almost eight years. Ikuo Hiraishi is running Infarm Japan, an urban farming startup that is actually growing vegetables in supermarkets.

Now, indoor farming or hydroponics has been fairly common since the 1980s, but the combination of rising global cost of food and the plummeting cost of technology and some innovative machine learning has resulted in urban farming not only becoming commercially viable today, but providing a very interesting value proposition for the supermarkets. And a pretty interesting value proposition for you and me as well. 

We talk about the future of food, why you need expensive technology to grow inexpensive vegetables, and whether it’s better to be a founder or VC in today’s world. But, you know, Ikuo tells that story much better than I can. So, let’s get right to the interview.

Interview

Ikuo: Cheers. Very nice to see you.

Tim: I’m sitting here with Ikuo Hiraishi, a serial entrepreneur, angel investor, and new urban farmer.

Ikuo: Thank you.

Tim: So, thanks for sitting down with us.

Ikuo: It’s honor to be back here, to have a chat with you.

Tim: It’s been a while. It’s been around eight years.

Ikuo: Yes. I was kind of like test interviewee of Disrupting Japan. That was eight years ago.

Tim: I think you were episode number four.

Ikuo: Yes. A very early episode. 

Tim: Very early. And we’re closing in on episode 200 now. 

Ikuo: Oh, cool. Congrats.

Tim: But yeah, we’re here to talk about urban farming. So, just so I can make sure I understand it correctly. So, the types of farming we have, like rural farming, which is just vegetables out in the field, like just farming.

Ikuo: Yes. Soiled based farming.

Tim: And then we have indoor farming, which is like plants and warehouses and things that are usually in the suburbs or in the outskirts of cities. And then we have what you and Infarm are doing, which is urban farming, where the veggies are grown like in the supermarkets themselves. So, what’s the big advantage of urban farming overall, the other types of farming?

Ikuo: So, of course there are lots of advantages, but so we can minimize the food mileage meaning delivery distance. So, it all depends on countries or markets and regions. For example, Europe, Germany actually Infarm originated out of Berlin. So, Germany is very cold country in general. And farming is possible only a four, five month a year. So, that’s why they have to import lots of vegetables.

Tim: So, when we’re talking about food mileage, is the underlying concern cost? Is it CO2 emissions? Is it…?

Ikuo: Transportation around Distribution has to consume lots of gasolines, lots of CO2 generated. So, meaning very big impact to global warming. So, urban farming can reduce those kind of energy consumption. And also the CO2 emission.

Tim: And what type of vegetables is it good for? Is it good for growing just about anything? Are there certain types of vegetables that are better for this kind of farming? 

Ikuo: Technically, almost all of the other vegetables can be grown as indoor farming, LED and hydroponics. But however, some vegetables, and they’re not really good as they are the current technologies. For example, roots vegetables, like radish, carrot, potatoes, et cetera, are not really good to produce by the LED and the hydroponics. However, leafy greens, spinach and all the other herbs like basal coriander, et cetera.

Tim: Lettuce and cabbage and…

Ikuo: Right. That can be grown by LED and hydroponics.

Tim: Why is that? Why are leafy greens so easy to grow and things like beets or carrots difficult?

Ikuo: Beets, carrots, the roots have to be inside the water. So, the depth has to be certain amount.

Tim: Okay. So, like root vegetables just require more space?

Ikuo: I think so. I’m not the engineer, the LED and hydroponics, so maybe I am wrong, but as far as I have heard from the other engineers, technically we can produce potatoes and radish, et cetera, roots products now, but the quality maybe shaped, are not qualified as a commercial products. But leafy greens, they can grow very well.

Tim: Okay, That makes sense. Before we dive deep into the business model, which I really, really want to do, because it’s super interesting. I want to take a step back in how you got involved with the team and you mentioned Infarm is from Berlin. 

Ikuo: Yes. 

Tim: And you and I have both been back when I was at Teco, I was in Berlin an awful lot. It’s an interesting city. There’s a lot of innovation going on in Berlin.

Ikuo: So, you’ve been to Berlin?

Tim: Four or five times.

Ikuo: Oh, nice. Good enough. 

Tim: Yeah. It’s a lovely town. I love it.

Ikuo: So, when I was running a company called the Sunbridge Global Ventures, which we were running am event called the Innovation Weekend. We started Innovation Weekend back in May, 2011. The first three years we were only running such events in Tokyo and Osaka. However, the startup movement restarted after the financial crisis. So, we call the Lehman Shock. And then in Japan we had a Livedoor Shock. So, Tokyo Stock Exchange made that regulation very, very strict. So going public all of a sudden became very, very difficult. Meaning, exits are very difficult so that’s why the investors hesitated.

Tim: Now I remember the timing really well, but I’m curious, so after Livedoor, there was a lot of new regulations and a new…

Ikuo: Yes.

Tim: Actually, a lot more sort of guidance than regulations. But did the government change the regulations again to make it easier to IPO?

Ikuo: Yes. Not the government, Tokyo Stock Exchange, because if they had kept the windows very narrow, only a few IPOs.

Tim: So, when did they start loosening up again?

Ikuo: I think 2009 was the bottom. And then 10-11 the time we studied innovation weekend and then kind of bounced back. 

Tim: So, they started loosening up pretty much as the economy started recovering from the Lehman’s Shock.

Ikuo: And then after three years since we studied the innovation weekend, the startup market was kind of crowded. So, I thought we should reposition our innovation weekend. At the time, I always shouted we should go global. So, that’s why we changed to host overseas, like Silicon Valley, New York City, Boston, Singapore, London, Berlin, et cetera, cetera. And then November, 2015 was the first very innovation weekend in Berlin. And Infarm was one of the setup who pitched.

Tim: Right. I remember they won the Innovation weekend grand finale that year.

Ikuo: Yes. Grand finale 2015. 

Tim: So, was that the first time you’d met the team?

Ikuo: Yes. In Berlin.

Tim: You also led the Sunbridge Funds investment into them? 

Ikuo: Yes. 

Tim: That was after…

Ikuo: So, that was after they won the other Innovation weekend Grand Finale 2015. But we also helped them conduct the other feasibility study of the Japanese market before we invested in.

Tim: Atomico invested like a hundred million dollars.

Ikuo: Yes. I don’t remember the amount but Atomico, I don’t exactly remember series A or series B.

Tim: And then you brought them to Japan with partnership with Kinokuniya? 

Ikuo: Yes. Kinokuniya and JR East.

Tim: So, how has that gone? I mean, you brought them in about two years ago like right before COVID.

Ikuo: Yeah, very good question. We seriously started operation to enter the Japanese market, Old Town, 2018. We eventually decided to enter the Japanese market maybe September or October, 2019. And then we established Infarm Japan as a legal entity 2020, February 27th. 

Tim: Right, at the beginning of COVID.

Ikuo: Right, right. So, we need to wait and suspend it.

Tim: So, what happened, I mean, Japan’s been opening up. Have the projects with Kinokuniya or with Summit, are they moving forward again?

Ikuo: Kind of. The number of vegetables we can grow are more than a 75 or something. However, because Infarm studied from Europe, most of those varieties usually eaten by the Western people.

Tim: Oh, so they’re not necessarily what the Japanese consumers want to buy? 

Ikuo: No. So, now we are growing and selling Italian basil, coriander, Italian parsley, wasabi, arugula, kale, of course lettuces. But we do need some more vegetables which have been consumed in Japan in our daily lives. We are in progress. So, I think we can accelerate business from now on.

Tim: All right. Well, let’s talk about the business model, both in Japan and in the US and in Europe where there’s a lot more supermarkets using this. So, what is the main value proposition to supermarkets see in it? Because I mean, you mentioned like food miles, but is that the value the supermarkets see?

Ikuo: It’s a very good question. The social or retail culture entire different, those one in Europe and those one in Japan. In Europe, food mileage is one of the big issues and sustainability or SDGs are very big agenda, especially in Germany. So, even for foods, people tend to pay attention where those vegetables come from and if chemical pesticides have been used, et cetera. And then to grow same amount of vegetables compared to the other ordinary soil based agriculture usage of land. So, we can also reduce 95%.

Tim: But is that, I mean, I can see how it has this huge impact if you’re looking like long term and on like SDG goals. But in like selling it to the consumer, it’s organic. There’s no pesticides. There’s no chemicals. That’s clearly a really compelling message. But like land use or water use, like if you’ve got land that’s like way out in rural areas in a farm versus land that’s in a supermarket, which is like really expensive, high value. Is that really like a fair comparison? Because it’s like taking a valuable retail space.

Ikuo: Very good point. But if we kind of reduce or we don’t use 95% of the other actual land, it also means those land may be able to return to the other forest or the other nature. That would also to reduce the other global warming. And also to reduce ordinary soil based agriculture, which use the other chemical pesticides that also damage the environment. So, especially in Germany, that can be value proposition. But your question is very good because in Japan claiming such as sustainability and SDG agendas for food and vegetables not as effective in Germany. Of course, we are based on those kind philosophy, but our idea is how we can enrich their daily lives with vegetables. The people very conscious about eating healthy.

Tim: A lot of Japanese supermarkets will have displays with organic vegetables that’s not just organic vegetables. They’ll show it was grown on this farm and treated it this way. Raised this way. And people do pay a premium for that here.

Ikuo: But the percentage of the organic vegetables less than 3% in this country because it’s simple, expensive. But Infarm can offer them not a luxury, but afford of premium. So, the price range are somewhere between such a known organic vegetables and ordinary vegetables, which has size they use, but no chemical pesticide. And the price are always same 365 days.

Tim: So, when I was researching this, the Infarm vegetables are still pretty expensive. 

Ikuo: No, no. 

Tim: No? What I was thinking is about twice as expensive as regular …

Ikuo: No, no, no, no.

Tim: Oh no. So what is it like compared to a regular head of lettuce and compared to like organic lettuce and an Infarm lettuce? What’s the price difference? 

Ikuo: It depends on the other stores, but the most popular lettuce in Japan called iceberg, that price very volatile. Sometimes less than 100 yen. Sometimes 300 something if typhoon, lots of in lettuces Infarm’s the harvest are damaged, then price all of a sudden kind of spike. But our letters always 198 or 220 something.

Tim: The on average it’s about the same and the same range.

Ikuo: So, between iceberg, ordinary lettuce used with the pesticides and organic lettuce, somewhere between. 

Tim: So, what is the biggest contributor cost in urban farming? Is it electricity or water or labor?

Ikuo: Infrastructure. Not only Infarm, it’s a LED hydroponics, vertical farming, because the farming can be stacked as ceiling heights alone. So, we need to invest those farming units. It’s big because our business is based on the scalability.

Tim: So, that capital investment that is just much higher than the electricity or the water or the operational costs.

Ikuo: Right. So, we need to invest into the infrastructure and that those farming units, scaling is the essence to be profitable.

Tim: So, the key to scaling and reducing costs is reducing the costs of those farming units, the reducing the cost of that basic infrastructure? 

Ikuo: Right. 

Tim: Okay. That makes sense. What’s the biggest cost for traditional farming? Is it labor?

Ikuo: I think so. It’s not only Japan, but all the developed countries there are lots of subsidized by the government. 

Tim: Yeah. Agriculture’s heavily subsidized.

Ikuo: Right. So, that’s why they are not really efficient in terms of cost efficient.

Tim: That’s true. The true costs are much higher than what we pay at the supermarket.

Ikuo: Right, right. So, but that we are not subsidized. So, we need to invest those kind of facility by ourselves. So, that’s why we need to raise big money from the investors. So, vertical farming or LED and hydroponics is manufacturing. So, we need a factory. We need a capital expenditure first. And then the question is, how many years are required to recoup those kind investment?

Tim: That surprises me. I would’ve guessed that like the electricity cost would’ve been really high.

Ikuo: Not really. 

Tim: Really? 

Ikuo: No. And the cost of LED has been reduced constantly. Like Moore Law back in 1980s Japan studied LED hydroponics, however, because of the cost of LED, we could produce the other vegetables but the cost was very, very high.

Tim: So, the expectations that as technology continues, that capital cost will continue to drop as well.

Ikuo: Right, Right. Like I know laptop and computers, et cetera.

Tim: What about labor costs? Because Infarm staff has to like plant the seeds and deliver the plant to the supermarkets and harvest the plants. Is that something that can be automated, do you think?

Ikuo: Also good point. In Japan, so we are still small, our facility is called Infarm plant hub, but recent facility in Europe and the North America, those places are called the Infarm Growing Center, IGC. At the IGC, the farming units is automated, not 100%, but very much automated. So, automation reduced the cost. In Japan we deployed our micro farming units at the supermarkets, we put the seedlings into those install farms and depends on the vegetables, but the two weeks or three weeks, and they’re going to harvest bio stuff. Of course the burden is not really low. So, the next step is to establish Japan IGC.

Tim: So, that’s more automated.

Ikuo: Yes. And higher volume. So, the cost per plant will be reduced.

Tim: Now I got to say, Japan seems like almost a perfect market for this kind of technology?

Ikuo: Do you think so?

Tim: Well, yeah. I mean it’s an affluent country. People are willing to pay for high quality food for specialized food. And the food quality laws are really strict. Japanese consumers are very picky.

Ikuo: Yes, very picky. 

Tim: So, it seems like a great target market for it.

Ikuo: Theoretically it’s correct, but practically it’s not easy to execute.

Tim: And that’s the thing because I mean I’ve read there’s been over 400 vertical farms in Japan of like all kinds of different sizes. Some very, very tiny.

Ikuo: Right, right.

Tim: So, there’s a bunch of startups doing this. There’s like, what was it, Farm ship, Spread. I think Toshiba had their lettuce.

Ikuo: Yeah. And also big guys as well. For example, Itochu cooperated with one of the ham producing companies to produce lettuces for sandwiches, which are sold at the 711. Because the demand is fixed. So risk is very, very minimized. It’s a very clever idea. But if Infarm could deal those kind of big business, that would be wonderful. But the other point is the most good way to make a profit is producing only lettuces and build the big facility in rollout area because lettuce are the easiest variety to produce by the LED and hydroponics. And they’re always big demand.

Tim: But for example, like the Toshiba project was seven or eight years ago. And I mean, I haven’t heard anything about them recently. 

Ikuo: No, me neither.

Tim: What makes it so challenging? Why when the market theoretically looks so good for this type of technology, why isn’t it taking off?

Ikuo: So, you make always good question. So, of course there are several reasons, but the people meaning, ordinary consumers started to accept festivals produced by the LED and hydroponics. As a Japanese nature or culture, people tend to appreciate the other nature, sunshine, soil and these farmers kind of cherish to their land, blah, blah, blah. And so those kind human touch in nature are more appealing to the general people. However, lots of typhoons and the SDGs, especially generation Z those younger population getting to realize and appreciate the benefits and advantages of the LED hydroponics in vertical farming. 

Tim: So, there’s been some consumer skepticism about the technology as a whole? 

Ikuo: Right. But I’ll tell you the true story. So, when I pitched one of the major supermarkets in Tokyo at the first appointment, the buyer told me, I’m sorry to say, but don’t you think vegetables grown by the sunshine and the origin results are better than the vegetables grown by the LED and hydroponics? That’s it.

Tim: All right.

Ikuo: So, that was three years ago, but now no one tells me those kind of thing. Their mindset and the perspective has been changed.

Tim: Okay. Well, if sentiment is changing, yes, but looking at the economics, so like the leafy greens like lettuce, everyone seems to grow lettuce, which is one of the least expensive vegetables out there. What about like higher value crops? Things like wasabi which is like super expensive. 

Ikuo: Yes. 

Tim: Why are we growing the really inexpensive crops instead of the really expensive crops?

Ikuo: This is also a good question. So, if anyone evaluates which crop we should grow and target. So, because of the easiest lettuce has to be the choice. And as I mentioned, there are always big demand. Four, five years ago there are not really many LED and hydroponic based lettuces at the supermarket, but now almost all the major supermarket, the lettuces produced by the LED hydroponics, that’s the reality. However, if you put the lots of investment on research and the development to produce wasabi, the market is very, very limited.

Tim: Yeah. Okay. So, even though the individual plant is expensive, the market is too small to justify the R&D.

Ikuo: Right. Right. 

Tim: That makes perfect sense.

Ikuo: And actually there can be justified but as the management perspective, let’s say this is 2 billion USD market, this is only a 5 million market which you want to do. That’s a simple question. 

Tim: That makes sense. 

Ikuo: But if you can dominate even a 5 million in a market, so then you can be profitable, but in general, people would like to go for those big market. So, that’s the reality.

Tim: That makes perfect sense. Hey, listen, before we wrap up, I’m going to ask you a question because I’m curious, you founded a couple of companies. You’ve done investing both as an angel investor and a VC investor, right? You’ve done market entry. Which do you enjoy most?

Ikuo: Good question. Right now, I would say investing is very interesting. Taking a seed in its early stage period, the best stage and the phase, I can be most valuable and the performance is good, but as the business grows, I’m not really good at handling those big organization. So, finding interesting in the founders and startups and making and seed all the investments and starting of the business I can enjoy.

Tim: I mean I definitely get that as an investor there’s just so much more variety and so much more mental stimulation.

Ikuo: Right, right. So of course, I’m not running those businesses, but I can feel somehow I’m also kind of running A business, B business simultaneously so I can be involved within lots of different interesting businesses. 

Tim: You get the same mental stimulation with much lower stress. 

Ikuo: Yes, yes. But if I stick with one single business under the big pressure of the other investors and employees and the clients, et cetera, and grow those business, that is very stressful.

Tim: Okay. I agree actually. Hey listen, Ikuo, thank you so much for sitting down with me.

Ikuo: My pleasure. I really enjoyed. Yeah.

Outtro

And we’re back.

Food is complicated. One of the most interesting points that Ikuo brought up, is that we don’t really know how much our food costs. I mean, we know what we pay for it at the supermarket, but with so many direct and indirect subsidies and price supports, it’s clear that the real cost is much higher. But we’re not sure exactly how much higher.

And that makes planning for scale much more complex than with your typical SAS startup. And Ikuo pointed out, although Infarm is a technology company, they require the capital expenditures and the business planning of manufacturing companies.

But the overall trend is very clear. Lettuce and leafy greens are already less expensive than the subsidized price of traditionally farmed plants. And as the cost of labor continues to rise and the cost of technology continues to fall, more and more of our food will be grown indoors. And I do think that Japan is the perfect market for this.

Relatively high in increasing food prices. Picky consumers who are willing to pay extra for quality and an aging and shrinking farming population will give Ikuo and Infarm a strong tailwind as they scale in Japan.

Infarm highlights an interesting contradiction in VC funded startups. We founders love to talk about changing the world but very few of us really want to. It’s easy to raise a lot of money for a new crypto exchange or a technology that promises to increase online ad conversions by 2%. But the really important transformative projects, the green energy startups, the water usage startups, the revolutionary agriculture startups. Well, that’s much harder and with good reason. Those businesses require a lot of capital and their success rate is very low, even by startup standards.

But, you know, those startups are the ones actually changing the world, and we are going to live in a much better future because of them.

 

If you want to talk more about urban farming and the future of Food, Ikua and I would love to hear from you. So, come by disruptingjapan.com/show197 and let’s talk about it. And hey, if you enjoy the show, share a link online or just, you know, tell people about it. In this age of over the top hype and reviews as a service, you’d be amazed how much power your honest recommendation really has.

But most of all, thanks for listening and thank you for letting people interested in Japanese startups know about the show.

I’m Tim Romero and thanks for listening to Disrupting Japan.