What will it really take for vertical farms to succeed?

But they are fabulously productive. That’s partly because they operate year-round, explains Marc Oshima, chief marketing officer of AeroFarms, and partly because they stack growing plants ten or 20 deep. But it’s also that today’s high-tech vertical facilities can fine-tune variables such as airflow, humidity, and the intensity, wavelengths, and duration of light, as well as piping nutrient-enriched water directly to the roots. That allows each plant to “get what it needs, when it needs it. That lets us grow our greens in 12 to 16 days. It takes 30 to 45 days in a field,” Oshima says. “Annualized, we’re 390 times more productive than a field farm.”

Impressive, but not enough to trigger a collapse of conventional agriculture. To date, vertical farms have grown only a limited array of crops. They seem to be nowhere near to growing the corn and soybeans that make up more than half of American ag. And as for the idea of replacing the output of America’s roughly 400 million acres of cropland with indoor facilities, it’s not particularly credible. Let’s say we could reduce the necessary acreage by a factor of 400 because of the increased productivity of vertical farms. (We probably couldn’t, once we started moving into grains and beans and other vegetables.) We’d still need a million indoor acres, or roughly as much space as a thousand World Trade Centers.

So the death of outdoor agriculture isn’t going to happen. But there’s a lot of smart money behind vertical farming, and a lot of tech-trained guys, whose best skill is shifting gears as they learn the ins and outs of a market.

Something is going on here. The question is, what?

 Low light, high density, short turnover

For Chris Higgins, the founder of indoor-farming industry publication Urban Ag News, the current formula for vertical farming success includes “a low-light-intensity, high-plant-density, short-turnover crop.” That is, a crop that doesn’t use much electricity and produces a lot of pounds of product per unit of space and time. What that means is that, for the foreseeable future, the salad market, with its clamshell boxes of dollar-an-ounce greens harvested as young as possible, is the place to watch for vertical farm growth.

Baby greens, says Marc Oshima, “is an $8 billion market – and it’s considered one of the most dangerous to be in.” Leaf vegetables grown in fields, he points out, are highly dependent on vicissitudes of water availability and vulnerable to microbial contamination. Growing them in a controlled indoor environment has the potential to change that equation.

That makes differentiating one’s lettuce in the market more of a challenge, but, according to Robert Colangelo, CEO of Green Sense Farms, the way to succeed in a difficult market is to keep the quality of the end product in the foreground. And the vertical farms, with their tight environmental controls and local delivery, may well have an advantage there.

But is there life beyond greens? There are a handful of crops that may soon be added to the greens-and-herbs rotation, notably strawberries. But, as Higgins points out, the game could change as growers develop strains of plants adapted to indoor farming. “Right now,” he says, “we’re just using field varieties. We won’t see a ton of growth in our industry until we breed lower-light-requiring crops. And that’s very feasible, but people won’t start really developing them until the industry hits a certain critical mass, and it’s hard to say when that will happen. We’re going to see a lot of failures before things take off.”

And Colangelo foresees development beyond the conventional food market in the near future: “The next areas are plant proteins and botanicals for biopharmaceuticals. And crops grown for home delivery, to completely go around brick-and-mortar stores. That will be a huge change over the next five years.”

In search of a business model

Part of that change will be in crops grown. But equally important will be the changes that come as vertical farmers discover business models that work.

At the moment, that is a crying need. Think of AeroFarms, the world’s largest vertical farm at 70,000 square feet. A year ago, the world’s largest vertical farm was even larger: a company called FarmedHere, which grew greens in a 90,000-square-foot warehouse space on the outskirts of Chicago. That farm shuttered in January. The Chicago Tribune wrote that, given the costs of energy and labor, the company’s bottom line “looked significantly better by giving up the farm.” Last year, Atlanta’s PodPonics, which both sold turnkey farm “pods” and grew its own produce, went bankrupt, unable to scale up fast enough to stay afloat.

“The large-scale, that’s where most of the investment is going,” says Henry Gordon-Smith, co-founder of the Association for Vertical Farming. “But in a lot of cases, they’re too new to make profit. You can have all the size and efficiency in the world, but you still have to sell millions of units of produce.”

And once you’ve landed a big investment, you’ve lost some freedom. Robert Colangelo’s Green Sense is about to build its fourth farm, in Las Vegas, at a cost under $5 million. “With big investments, you get big investors watching everything you do,” says Colangelo. “Just because you have money doesn’t mean you can expedite your way through the learning curve; you still have to go through the same trial and error, and that takes patience.”

Higgins concurs. “With a bigger farm, logistics becomes more important: distribution, trucks, inputs. If you streamline with automation, and put in the crop that works with your automation, now you need to get access to shelf-space at key grocery stores and focus on sales to turn around on the shelf very quickly.”

By Gordon-Smith’s estimate, there are about 25 vertical farming companies in the United States with 5,000 or more square feet of growing space, and only about half a dozen, like AeroFarms, operating with 20,000 or more.

Of those 25 medium-scale farms, some are “very healthy,” says Higgins. “It helps that they can live on lower profit margins.”

In a more mature industry, says Colangelo, the larger farms will have some undeniable advantages, but today, with the technology evolving as rapidly as it is, “if you build smaller farms, you’re not as committed. If you bought two million dollars’ worth of lights two years ago, in a short time your big farm will be obsolete.”

A smaller operation is nimbler as well. Green Sense’s business model is to build each of its farms to supply a particular customer, growing the specific crops they want, in the required amount, in the right location. A customer might be a supermarket chain, a college campus, or a military base. “We find out the exact count and cultivar of greens that they use each day, and then we back-build the farm.”

Gordon-Smith cites FarmOne, based in downtown New York City, as another operation that succeeds by focusing heavily on demand. FarmOne targets a specific, finicky niche: high-end restaurants. The farm’s web store lists such grow-to-order specialty crops as micro anise hyssop and over 20 varieties of basil.

FreshBox, near Boston, is proudly among the only commercial farms that are “gross margin positive” according to its CEO, Sonia Lo. Her farms are modular, built in 320-square-foot shipping containers, each with its own temperature, humidity, and airflow customized to the needs of a crop. Numerous containers can be networked together in a single warehouse, to benefit from the economies of scale of a larger installation, while maintaining the flexibility of smaller ones. “There’s a 20-degree difference between what romaine grows at and what basil grows at, so in a single space, you’re not optimized for any one plant. Containerization is our solution for that,” Says Lo. This approach allows crop yields per square foot as much as 2,000 times that of field farms, she says.

And, she adds: “We’re also fortunate to have very patient investors.”

Beyond greens

Vertical farms are still in their infancy. The presence of high-tech investors and the tech-oriented approach many of them have taken virtually guarantees that many will take the tech industry’s approach to finding their feet—shifting target markets, techniques, and business models fluidly as opportunities present themselves. Some, surely, will end up taking what they’ve learned about small-scale operations and use it to build high-output farm “machines” for restaurants and grocery stores. Some will gravitate to restaurants or growing specialty products. Others will wander further afield.

In the short run, though, to remain sustainable, they need to be good at their current business—growing greens. And that’s not easy.

Colangelo says, “People come in from a tech background and they understand it academically but not from a production standpoint; or they come from the business world, and they don’t understand science and growing.”

“These farms aren’t run by robots, despite what you may believe,” says Gordon-Smith. “Some people think they’re going into the farm business and they create a tech company. You need a grower with a personal touch, and you need that person to be treated with respect, and to stick around.”

Chris Higgins predicts that the industry will continue to grow with cautious investment, but that the next major shift might happen when major fresh produce brands start to move into vertical farming. “They’re paying very close attention. If a big traditional farming company gets in, that will really start to bring it mainstream.”

“Extremely smart people run all of these companies, and they know how to access financing, even based on the small amount of sales they have,” says Gordon-Smith. “Five years from now, if they’re not profitable, they can keep getting that money. Maybe not for 20 years, but for five years.”