Serenity Prayer for Agritech Founders and Investors
Be honest. Do you really understand the difference between markets and marketplaces?
This is second of a series of posts (First is here) where I explore the idea of Pace Layers (introduced here and elaborated further here) to design alternative markets and marketplaces that could create and meet demand for sustainable food and fibre products and sustain rural livelihoods.
Once upon a time, on a faraway hill, there lived a beautiful princess. At first, it seemed like yet another ordinary day to be composted in the quicksand of memory.
When the princess went to sleep, she had a dream.
In her dream, a real hunk of a man was looking intensely at her and started coming towards her.
He came so close that she could even feel his breath. She trembled. Not in fear.
“What will you do to me?”
“Well, lady. It’s your dream!”
As an agritech consultant who works closely with agritech founders and investors quietly building the unevenly distributed food and agriculture systems of the future, I’ve seen idealist dreams that crashland sooner than you expected and pregnant dreams that are patiently held by nerves of steel.
And what about investors? Do I hear you asking?
From what I have seen, good investors have the uncanny ability to spot founders who may be less audacious in imagination, but strong in nerve (as opposed to strong in imagination, but weak in nerve).
The more ideal scenario, ofcourse, is discerning founders who are great in imagination AND strong in nerve. Which is largely an 1% outlier gameplay.
And so the million dollar question is this: How do you develop the nerves of steel that take into account, as one wise man put it, ‘boundless optimism about technological progress with bottomless cynicism about human nature’?
In practice, this boils down to clearly understanding the difference between markets and marketplaces.
If the American theologian Reinhold Niebuhr were alive today to write a Serenity Prayer for the future of Agriculture, he perhaps might have written
"Grant me the serenity to accept the agricultural markets that I cannot change, courage to design the agritech marketplaces that can change those markets, and wisdom to know the difference between markets and marketplaces."
Marketplaces learns; Markets remembers.
Marketplaces proposes; Markets disposes.
Marketplaces are discontinuous, Markets are continuous.
Markets control marketplaces by constraint and constancy.
Marketplaces get all our attention, markets have all the power
It is quite discomforting to know of many founders who have died a quiet death in dangerous valleys where the difference between markets and marketplaces can cost you..your life.
As Nassim Taleb famously put it, “in academia, there is no difference between academia & the real world. In the real world, there is.”
If you are an agritech founder working in agricultural markets of smallholding contexts, markets are mostly…matching markets where prices don’t do the job of matching supply to demand.
If I were to teach Agritech MBA 101 to founders, this would be the first lesson: Never assume that prices dictate everything.
As Nobel Laureate Alvin Roth nicely put it in a lecture
“We decided that the problems of that market; the asymmetric information, the power imbalances were too great to try to fix the market by regulating it and instead we would simply forbid it. The existence and the importance of repugnant transactions comes up against this idea that capitalism among consenting adults is a Pareto-improving thing.
One take away for students is that there’s a big variety of markets in the world and not all markets are commodity markets where the prices do all the work. Lots of markets are matching markets where you need mutual consent to arrange a transaction”
Agritech industry loves to hate middlemen precisely for this reason.
They are orchestrators of matching markets. Matching markets are those sites where rules of dating and marriage apply: You can’t just choose what you want, you have to be chosen.
If you’ve tried to land up at farm gate and trade with a farmer, you would know what I am talking about.
When I say agricultural markets, I am addressing three dimensions of markets- 1) An Institution or Agreement between buyers and sellers 2) A Market site where the commodity exchange occurs 3) A Marketing System that connects the various market sites and provides a means of communication to allow the exchange of scarce resources through price mechanisms.
I am spelling this out to make them agnostic of technology. To get more specific, I making a clear demarcation betwen agricultural markets and market sites. Market sites can be physical location, or a virtual platform like Agribazaar. Similarly, marketing system can be physical or virtual. I borrow this from Mekhala's definition of agricultural markets in her research paper. This is more of a conceptual firewall to get my point across.
In his classic tome, “What Have We Learned from Market Design?”, Nobel laureate Alvin Roth, talks about the virtue and importance of thick markets.
“To work well, marketplaces have to provide thickness, i.e. they need to attract a large enough proportion of the potential participants in the market; they have to overcome the congestion that thickness can bring, by making it possible to consider enough alternative transactions to arrive at good ones; and they need to make it safe and sufficiently simple to participate in the market, as opposed to transacting outside of the market, or having to engage in costly and risky strategic behavior.”
And here we deal with the intricate tango moves of the marketplaces.
The crucial insight is this: While marketplaces have to provide thickness, they also need to facilitate decongestion and make it safe for the participants to reveal the information they have to reveal to get efficient transactions.
The way they do this is through a signaling mechanism where you express your interest in taking it forward and thereby decongesting the market. In an agricultural market context, this largely happens currently through being part of a whatsapp group of buyers and sellers.
And if there aren’t sufficient takers, you make sure that the markets remain thick through auction portals and other scrambling mechanisms.
So much about theory.
What happens in real life across most smallholding market contexts is that the lack of infrastructure makes it insufficient for markets to remain thick.
Because traders and middlemen control the crucial infrastructure that governs the transaction, produce markets remain thin.
If you travel across the fruit markets of Hyderabad, you will find predominantly Kiran watermelons in Hyderabad, probably because few traders believe that is what the market wants. Now if you contrast this with Onion which has gained enough political mileage where farmers have decided to boycott traditional trader-controlled markets.
Takeaway Questions for Agritech Founders in the trenches: If you are an agritech founder building newer marketplaces, can you identify the crucial bottleneck infrastructure which has made it a classic case of thin markets as opposed to thick markets? Is your offering bundled with infrastructure? If you are building trading platforms, in what ways are you creating signaling mechanisms and scrambling mechanisms for your buyers?
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