How do I develop a business case for my insect project?
An entomologist assessing black soldier fly larvae in a Growth Unit. Photograph: Entocycle
Introduction
The investment hurdles to successfully realise an insect plant can be daunting, and the recent news about the financial struggles of some of the pioneering insect protein companies further complicate access to capital for projects in this exciting industry.
To convince today’s investors, it’s essential to have a solid business model that not only outlines the potential for revenue but also clearly describes cost structures and investment returns. Doing so will greatly help secure long-term success in a market that’s becoming more competitive by the day.
This short guide will help you navigate the key steps in developing a business case for your insect project. We’ll focus on the important cost factors, potential revenue sources, financial metrics, investment insights, and how to assess risks along the way.
Identifying the business opportunity
Entrepreneurs and companies enter the insect industry from different angles. Some see it as a waste management solution, utilising organic byproducts to rear insects. Others focus on integrating insect protein into their supply chain, particularly in the animal feed or pet food markets. Additionally, many businesses are drawn to the industry due to its sustainability potential, supporting a circular economy, or all of the above.
Clearly defining and articulating the business opportunity and the problem you are solving is essential for attracting investors. This includes demonstrating the market demand for insect-based products, outlining competitive advantages, and showcasing the potential for scalability and profitability. Investors need a clear understanding of why this venture presents a compelling opportunity, how it differentiates itself from existing solutions, and what tangible benefits they stand to gain.
Building the financial case
Regardless of the reasons for entering the insect industry, every entrepreneur or start-up must address hidden or unknown cost factors. The conceptual phase aims to reveal these costs and transform them into robust financial assumptions. Identifying critical cost factors will help build a solid foundation for your business case and provide realistic projections for potential investors.
A successful business case must account for several cost factors, split into the following two buckets:
Capital expenditure (CapEx) – your initial building and set-up costs.
Operational expenditure (OpEx) – the costs of running your facility.
So, let’s take a look in more detail at the most important factors of these two cost categories.
Capital Expenditure (CapEx)
Facility Construction & Setup: Costs for land acquisition, building infrastructure, and permits.
Equipment & Machinery: Includes feed preparation equipment, conveyance systems, larvae growth units and trays, climate control systems, and drying or oil extraction units. Here it is important to not only consider the main equipment costs, but also take into consideration the interfaces between the selected solutions from different suppliers as well as the installation and commissioning costs.
Automation & Technology: Expenses related to automated counting and dosing systems, sensors, data collection and monitoring and controls and automation.
Operational Expenditure (OpEx)
Feedstock Costs: This is likely to be your biggest recurring cost and includes sourcing, transportation, and pre-processing of organic waste or byproducts. Feedstock costs can vary significantly depending on the waste stream or by-products sourced, and there is the potential for your business to generate income via gate fees for processing the waste (depending on local regulations). In this instance, this cost would become revenue and could have a very positive impact on the business model.
Labour Costs: Cost to Company (CTC) for farm operators, managers, R&D and administrative staff.
Utilities Costs: Energy, water, and heating/cooling expenses for maintaining optimal climate control in rearing and subsequently for processing the larvae and frass.
There are likely to be additional costs to consider, such as packaging and distribution of final products, regulatory compliance (e.g., HACCP, product conformity), certification (e.g., GMP+), and marketing expenses. Depending on your business strategy and plans, you will need to determine whether these costs fall under CapEx or OpEx.
You will need to determine reliable costs for each activity or item and input these into your business case model. You should scrutinise each of these costs and mitigate risks by being as precise as possible.
Once costs are calculated, you can proceed to identify your projected turnover from product sales and other potential sources of revenue. You should have a clear understanding of the off-take markets available, where your product and by-products are directed, and the volumes involved, whether it be insect protein and oils for the aquaculture market, whole larvae for pet food, or insect frass for the horticulture and agriculture industries.
Turnover from product offtake will have one of the biggest impacts on the business case, and therefore it is imperative to find the right partners and pricing agreements for your end products. Aligning your offtake strategy with investor expectations will enhance the business case, demonstrating clear revenue potential and market fit.
In addition to income from sales, there may be other sources of revenue to explore and validate, such as subsidies or CO2 certificates for sustainable farming practices, depending on your region and national or local funding initiatives. However, these additional income streams should be an upside potential to your business case, which should be robust enough to sustain itself with the revenues generated through product sales.
Business case modelling
Once financial assumptions are gathered, the next step involves business case modelling to initiate the creation of financial projections for investors. Investors evaluate business cases based on financial viability and associated risks.
Investors utilise several financial metrics to assess the attractiveness of an investment. The most commonly used metrics include:
Payback Period
The payback period is the time it takes to recover the initial investment, often expressed in years or months. Understanding the payback period is crucial for investors and will likely be one of the first metrics they look for.
Weighted Average Cost of Capital (WACC)
WACC represents the average cost of financing your project through debt and equity. For an insect farm, a bank loan may cover one-third of the investment, while two-thirds come from private investors. Banks typically offer lower interest rates but require collateral, while private investors expect higher returns due to increased risk. A balanced capital structure optimises WACC, ensuring long-term financial sustainability.
Net Present Value (NPV)
NPV calculates the present value of future earnings, adjusted for the time value of money. A positive NPV indicates profitability, whereas a negative NPV suggests the project may not be viable. Investors use NPV to assess whether projected earnings justify the initial capital outlay.
Internal Rate of Return (IRR)
IRR represents the discount rate at which NPV equals zero. A higher IRR relative to WACC signals a profitable project. Investors compare IRR to their required return thresholds to decide on funding.
Return on Investment (ROI)
ROI measures the profitability of an investment over a given period. For insect farms, ROI varies over time. High initial investments may lead to negative ROI in the first few years. However, once operational costs stabilise and revenue grows, ROI becomes positive.
Risk assessment and scenario planning
Investors evaluate not only potential returns but also the risks involved. To enhance credibility, insect entrepreneurs should present multiple financial scenarios:
Base Case Scenario – Realistic expectations based on market conditions and cost estimates.
Optimistic Scenario – A best-case outcome with higher production efficiency and favourable market pricing.
Conservative Scenario – A pessimistic outcome with higher costs and lower-than-expected revenues.
You will need to demonstrate a thorough understanding of risks and preparedness for potential challenges by illustrating these three scenarios.
Investor expectations
Investor expectations differ according to industry standards. For software-based ventures, they generally seek an IRR of 20–35% with a payback period of 1–3 years, owing to the low capital expenditure. In contrast, infrastructure and manufacturing ventures, such as insect farm investments, typically require an IRR of 8–25% and a payback period of over 5 years, reflecting the higher capital expenditure.
Although software investments may appear more appealing due to reduced costs, manufacturing projects provide tangible products and long-term revenue stability, rendering them more reliable to investors.
Validate and refine projections and reduce risks
Most projects start with many unknowns that should be reduced along the way to finally present a credible project to investors.. The conceptual phase should highlight key uncertainties and their impact on IRR and other metrics. It’s important to validate cost factors and turnover to refine projections and reduce risks. Addressing these uncertainties in the proof-of-concept phase will strengthen the business case and increase investor confidence.
Finally, you will need to start bringing the business case to life by designing an investment committee process with impressive supporting documentation for investors. This will include the strategic case, the business case model, a project roadmap, and a stakeholder map. You’ll need to consider carefully which stakeholders and supporting documentation are required for each stage of the investment journey.
Conclusion
Creating a solid business case for your insect farm is all about careful financial planning, assessing potential risks, and working closely with investors. By understanding key concepts like ROI, WACC, NPV, and IRR, you can build a convincing argument to attract investment. Plus, engaging in scenario planning and strategic business modelling adds extra credibility to your project, paving the way for the long-term success of your insect farm venture! Or even multiple ventures!
If you need help developing the business case for your insect project, Entocycle and Bühler can help refine projections and optimise investment strategies to get your project investment-ready. Entocycle and Bühler are in partnership to provide solutions and expertise to serve customers in the insect industry, covering the multiple steps of the journey, from concept and basic engineering to the execution of BSF facilities worldwide.
For more information, contact us.