When workers arrived at Fifth Season, an indoor farm in the former steel town of Braddock, Pennsylvania, on a cloudy Friday morning last October, they expected it would be a normal day.

The farm, which had opened two years earlier, seemed to be running smoothly, growing tens of thousands of pounds of lettuce per year inside a robot-filled 60,000-square-foot warehouse. The brand was selling salad kits—like a taco-themed version with the company’s baby romaine, plus guacamole, tortilla strips, and cheese—in more than 1,200 stores, including Whole Foods and Kroger. Earlier in the year, the company had said that it projected a 600% growth in sales in 2022. The branding was updated in October, and new packages were rolling out in stores. Solar panels and a new microgrid had recently been installed at the building. A larger farm was being planned for Columbus, Ohio.

But the workday never started. “The CEO came in and said, ‘Justin, we gotta talk,’” says Justin Stricker, who had worked as a maintenance technician at the startup since it launched. “He said, ‘Don’t let anyone set up. We’re going to have a big meeting.’ I thought I was getting fired. The whole entire place was just done.” The managers announced that the company was closing immediately. After shutting down the electrical equipment and draining water lines, the plants were left to die. Stricker and dozens of others were left scrambling to find new jobs.

Fifth Season’s failure is only the most dramatic signal of a reckoning taking place in what’s known as the vertical farming sector. AppHarvest, which runs high-tech greenhouses in Appalachia growing tomatoes and greens, said in a recent quarterly report that it had “substantial doubt about our ability to continue as a going concern” unless it could raise more money; the company is currently being sued by investors who argue that it misled them about its viability. AeroFarms, an early pioneer in the space, pulled out of a proposed SPAC deal last year. In the company’s May 2021 investor presentation, AeroFarms, which was founded in 2004, estimated just $4 million in 2021 EBITDA-adjusted revenue—and $39 million in losses.

The litany continues: Agricool, a French company growing greens in recycled shipping containers, went into receivership in January. Infarm, a vertical farming company based in Berlin, recently announced that it was laying off more than half of its workforce—500 workers. IronOx, which built a complex robotic system to run its indoor farms, laid off nearly half of its staff.

If these tremors in the vertical farming industry seem unsettling, what’s to come could well be worse. As of the beginning of December 2022, $1.7 billion had been invested in indoor growers, more than any other part of ag tech. Investors have been drawn to the idea of “disrupting” a 10,000-year-old industry; when the Vision Fund first invested in Plenty, SoftBank CEO Masayoshi Son said that the company would “remake the current food system.” Controlled indoor agriculture is also seen as a way to respond to climate change. And, of course, investors expect to make money.

Nearly 20 years after the first vertical farm opened, with capital drying up like heads of romaine under an unrelenting California heat wave, one now has to wonder two things: Is it even possible to compete with the economics of outdoor farming? And how did investors think that they could find Silicon Valley-style returns in . . . lettuce?

HOW EXPENSIVE IS IT TO GROW GREENS? LET US COUNT THE WAYS

In theory, there are enormous benefits to indoor farms. They often use 90% less water than traditional farms; right now, most lettuce in the country is grown in drought-stricken California and Arizona. Growing inside can avoid outbreaks of E. coli and diseases like a plant virus that recently devastated lettuce grown in California’s Salinas Valley, pushing up prices. Indoor farming also eliminates pesticides and reduces fertilizer and keeps it out of rivers. Lettuce grown near Boston or New York City can avoid traveling thousands of miles from Western fields, saving gas and staying fresh longer. It’s possible to grow delicate, flavorful foods that otherwise wouldn’t survive a long trip through the supply chain. And as climate change makes extreme heat, drought, and flooding more likely, growing inside could become a necessity for some crops.

But in practice, you end up with a head of lettuce that must bear many costs. Farms in warehouses—which typically have multiple layers of plants stacked toward the ceiling in each row, which is why they’re often called vertical farms—are expensive to build and run. Fifth Season, for example, reportedly spent $27 million on its Braddock farm, which could produce around 4 million salads a year. AeroFarms told investors that its Model 5 farm design would cost $52 million but the cost would drop to $43 million for its planned Model 7, which it projected for September 2023. Plenty—a Bay Area-based vertical farming startup founded in 2014 and which raised $941 million to date from investors, including SoftBank Vision Fund 1—has said it plans to spend $300 million on a new facility outside Richmond, Virginia. “You have depreciation before you’ve started running the operation and trying to make that compete with outdoor-grown product,” says Peter Tasgal, an agricultural consultant who works with vertical farms.

Lights alone are expensive. “Plants require about five to 10 times more light than we do as human beings,” says Eric Stein, a business professor at Penn State University and head of the nonprofit Center of Excellence for Indoor Agriculture, who studies the economic model of indoor farms. Vertical farms often start growing leafy greens first because they require less light than some other crops, but buying the lights, and paying the electric bill, is still a significant expense. Even a small, 10,000-square-foot farm might have a lighting bill over $100,000 or even $200,000 a year, he says. Running air conditioners and other equipment adds to the energy used.

Adding renewable energy outside can help—and reduce the carbon footprint that goes along with that energy use—but putting a few solar panels on the roof can’t cover the total amount of electricity needed. “In a typical cold climate, you would need about five acres of solar panels to grow one acre of lettuce,” says Kale Harbick, a USDA researcher who studies controlled-environment agriculture. A hypothetical skyscraper filled with lettuce would require solar panels covering an area the size of Manhattan.

Fully indoor warehouse farms—where plants live under the purple glow of LED lights, with no natural light— are relatively new, spurred both by growing concern about the environment and market changes like the falling cost of LED lights (brought on, partially, by the growing marijuana industry). But the broad concept is not as radical as some investors may have wished: More traditional greenhouses already grow a large percentage of the tomatoes eaten in the United States, for example (most come from Mexico and Canada). In the Netherlands, greenhouses grow nearly a million tons of tomatoes a year, along with other crops, making the country a major food exporter despite its tiny size.

Many startups in the space tout the fact that they’ve built their own complex technology to operate the farms, including software that uses computer vision and artificial intelligence to monitor the plants and tweak lights, temperature, humidity, and other factors to optimize growth. (Almost every company makes the argument that it’s found a unique tech solution to lower cost.) Custom robotic systems can plant seeds, move trays of plants, and harvest crops. But when companies each build their own technology, expenses balloon.

“There are many reasons why they’re doing it, but one of the reasons is because they know that Silicon Valley investors won’t invest in a farm, but they’ll invest in a tech company,” says Henry Gordon-Smith, founder of Agritecture, a firm that consults on urban farming projects. “In reality, these companies overspend on R&D by crazy amounts, and then say, ‘Oh, shit, that didn’t work.’” Startups often later incorporate more outside tech, he says, but keep the narrative that they’ve designed a full system from scratch.

“A LOT OF THESE COMPANIES ARE STILL FLOATING ON VENTURE CAPITAL”

Fifth Season, among others, invested in automation to help cut the cost of labor, another major expense for indoor farms. “The company was really born out of the idea that thoughtful applications of technology within indoor farming could crack the code on labor, and do it in a way where you didn’t have to break the bank on super-fancy robotics,” says Grant Vandenbussche, previously the chief category officer at Fifth Season. Its farm proved that automation could run its operations. But it also had to pay the high salaries of a team of robotics and software engineers. “When you have a commodity-type market such as leafy greens, it’s really hard to find enough margin to be able to have your unit sales cover the cost of the broader enterprise,” he says.

Bigger farms could help, he says, so companies could sell more product. Some farms in the U.S. might also move toward a model often used in Dutch greenhouses, with a much smaller staff. “The overhead to run the farm is a lot lower because there’s no corporate offices,” he says. “There’s an outsourced technical support staff team and outsourced IT team. The manager of the entire facility is also the head grower, who is also the person who pays payroll.”

Some American startups also have a suite of well-paid executives even before they’re making a profit. “A lot of these companies are still floating on venture capital,” says Stein. “What’s the first thing that they do? They hire all their friends. And they blow out the administrative salaries on the operating side.” The high-tech greenhouse company AppHarvest, which has raised more than $640 million, reported net losses of $83 million through the first nine months of 2022, including a summer quarter that yielded a paltry $524,000 in net sales when AppHarvest had to compete with outdoor farmers’ growing season. The company’s total revenue for the first three quarters of last year was $10 million, but most of that was used on up to $7 million in severance payments when it fired two executives.

The high costs of building and running the facilities mean that it’s also difficult for local indoor farms to compete with the cost of lettuce grown in California, despite the expense of trucking field-grown lettuce across the country. The production costs outside are lower because of cheaper land, far less energy use, and lower total labor costs. A 2020 study from Cornell University estimated that lettuce from indoor farms in Chicago or New York was more than twice as expensive to produce as lettuce grown and delivered from the West Coast.

Even if a tech-heavy farm can eventually find profitability, it can often take several years to achieve that, says Alex Frederick, an analyst for PitchBook. “What these companies are running into is that if they’re not going to really achieve breakeven for five or 10 years, they need to be able to keep raising capital to fund operations,” he says. “And right now, we’re seeing companies really challenged to continue raising.”

As the market has faltered, investors have pulled back on new funding, and the recent rise in energy prices has been a breaking point for some companies. “I thought investors understood that this was a long game,” says Chris Cerveny, a horticulturist who was head of grow science at Fifth Season. “Now all of a sudden they want a return on their investment.”

FARM ECONOMICS VS. TECH ECONOMICS

One founder told me that many investors don’t really understand this space, and that they’re often drawn to the sexiest, most revolutionary technology, rather than more incremental improvements and business models that are already proven, like lower-tech greenhouses.

It’s also hard to make money selling baby greens rather than a high price-point item like cannabis—or even just more expensive produce, like berries. “Is it worth spending $20 million on a cutting-edge system when you’re producing objects that might get $1 or $2 in the marketplace? That’s the problem,” says Stein, the Penn State business professor. (As a growing number of indoor farms have started selling branded greens, the competition is also making it harder to get placement in grocery stores.) If companies look to make more money by charging a large premium for a box of greens, there’s a relatively limited group of consumers willing to pay more for salad.

Fully indoor farms, which can be carefully controlled, could also be used to grow plants for pharmaceuticals, fragrances, or cosmetics, says Josh Lessing, who founded a robotic harvesting startup, Root AI, and was previously also the chief technology officer at the greenhouse startup AppHarvest. (Despite its revenue issues, AppHarvest spent a reported $60 million in April 2021 to acquire Root AI.) Scaling up those farms could help bring down technology costs to make growing lower-value food more viable.

Stein is currently collecting data from farms on their operational cost per pound of lettuce—something that many companies are reluctant to share—with the aim of identifying which farms are most efficient and gleaning lessons for the indoor farming industry as a whole. He still believes that this type of farming can be a viable business, though perhaps not in the way that some investors expect or some startups may have promised.

“For the life of me, I do not understand [why investors are investing], because the economics are not the same as Silicon Valley high tech,” says Stein. “No matter how you want to spin it, it’s not the same. If you can build a farm that has a nice, healthy 20% to 25% margin, that’s a good bet. But it’s not going to be 150%.”

Startups have also wildly overestimated how quickly they can grow. AeroFarms, for example, said in 2015 that it hoped to build 25 farms in five years. Instead, it currently has two large commercial farms in the U.S. and an R&D facility in Abu Dhabi. And they’ve overestimated how quickly they can make money. In its investor presentation, AeroFarms projected growing from $4 million in 2021 to $553 million in 2026. “They dramatically overhyped their valuation and their pathway to profitability,” says Gordon-Smith.

Management is another challenge, as startups with little experience try to figure out how to efficiently grow food with new processes. A lawsuit filed by AppHarvest investors argued that the startup had failed to disclose problems and misrepresented its ability to succeed; the company said that its challenges were reasonable for “a young company with an inexperienced management team undertaking a massive farming endeavor for the first time.”

One farm was delayed by pandemic supply chain issues, so the company wasn’t able to grow and sell as much as expected. The company’s communications director says that it has invested heavily in training, and the team plans to focus on improving existing farms before expanding. It also sold its first farm to its distributor, and leased it back, to raise funds to keep running. But it’s not clear yet whether the company will survive.

WHAT COMES NEXT?

Even as companies like Fifth Season have struggled, new rounds of funding continue to flow to startups in the space, though some investors have stepped back. Gordon-Smith believes that the industry has reached the “trough of disillusionment” in the Gartner hype cycle, the stage at which some startups making a new technology begin to fail and interest wanes. The industry may consolidate, with investors making fewer bets on some of the larger players.

“I think that there’s a part of what’s happening right now that actually is just the natural evolution and maturation of growing in a new industry,” says Irving Fain, founder and CEO of Bowery, a New York-based vertical farming company that launched in 2015 and now has seven farms, with more set to open next year. (He points to examples like the early auto industry, which had more than 250 different brands in the early 1900s, but quickly winnowed down to a smaller number.) Bowery, he claims, had its biggest quarter to date in the last quarter of 2022; 2022 was also its biggest year so far, despite the challenges of the current economy. Still, the company declined to share when it might become profitable.

Gordon-Smith says that most vertical farms in the U.S. are a long way from profitability. “Based on an analysis we did for a large private-equity firm, we don’t actually see a scenario where in the next 10 years vertical farming will compete with field-grown at scale in North America,” he says. Right now, he says, the economics make the most sense in the Middle East, where extreme heat makes outdoor growing impractical and consumers currently pay high prices for imported greens.

Some lesser-known companies continue to say they have finally found the magic formula: Soli Organic, an organic herb grower that grows both on traditional and indoor farms and sells its products in stores like Walmart and Wegmans, says that growing in soil, unlike most indoor farms, using a patented process allows them to find profitability. Little Leaf, which also claims to be profitable, says it’s done it by growing in automated greenhouses. A Taiwanese company called YesHealth Group, which has been developing vertical farms for more than a decade, along with its own equipment like custom LED lights, says that it is profitable at a farm in Taiwan, and expects to be profitable across the company as a whole—including R&D expenses—this year. But these companies’ ability to buck industry trends for the long term remains to be seen.

Companies are also shifting to other types of produce that could potentially make more: Oishii, one startup, markets absurdly expensive strawberries—$20 for a tray of 11—with a unique flavor. One of the farms Plenty is opening after closing its South San Francisco facility is in Virginia, where it’s partnering with berry giant Driscoll to, it claims, grow 20 million pounds of strawberries a year, with the first crop expected next winter.

It’s not clear how each of these companies will fare in the long term—and how much money that has been invested in the space may ultimately be wasted, with little to show for it. But climate impacts on agriculture are already a reality; if floods and droughts and heat waves on farms mean that an increasing number of crops fail, success growing food indoors—and more than just lettuce or berries—may be a necessity. At that point, will the billions invested in these failing startups feel like money well spent in the quest for a solution, or will venture capital’s pursuit of high returns turn out to have been a setback on the road to food resiliency?