How do you feed a growing world population with fresh, nutritious food in the face of limited resources such as farmable land? Canadian firm Verdant Global has an innovative solution: efficiently grow produce indoors at scale in “agrifactories” close to local populations so food tastes fresher because it wasn’t harvested early for travel. In these indoor facilities, plants are stacked in layers and the environment is controlled so they can grow year-round and without pesticides. Verdant claims a yield of 20 times bigger than greenhouses. Knowledge at Wharton spoke to Verdant CEO Douglas James about how his company is at the leading edge of the future of farming.

An edited transcript of the conversation appears below.

Knowledge at Wharton: How big is the global market for indoor agriculture — or vertical agriculture as it’s sometimes called — and how fast is it growing?

Douglas James: The market itself is very large because it’s the displacement of existing growing technologies, greenhouses or food grown at a distance in countries that actually don’t get winter. The market in the United States is in the order of about $10 billion a year, and it is growing at the rate of around $300 million a year. Put in practical terms, we grow facilities to grow food indoors. If we were to satisfy all of that market, that’s somewhere on the order of about 1,000 facilities. So, it’s a very big market.

Knowledge at Wharton: What are some of the factors driving that growth?

James: The fundamental one was the ability to eventually make it economic, which occurred only in the last few years with the development of agricultural LED lighting. People have been growing food indoors for many, many years — basil in their kitchen or whatever — but it was never economic. It was a hobby. What made it economic was low-cost lighting and low-heat lighting. The combination of the two allowed for much higher densities of growing, much lower cost for electricity and air conditioning and other things you need, and that switch turned it over from being an interesting idea in development to being a commercial possibility.

Knowledge at Wharton: If you were to compare, say, the cost of a box of strawberries grown in a conventional way and a box grown in this innovative environment that you just described, what would be reflected at the retail level?

“Once we’re local, we don’t have that long time lag between growing and selling, so we can grow products that are tastier, sell them locally into the market and we’re at the same price. That’s our competitive positioning.”

James: All of our economics have been done based upon normal, wholesale market conditions against existing incumbents. The reason for that, of course, is they exist and if you can’t compete with them, you’re going to be taken out of the market. That being said, we also are essentially an organic product. We’re a premium product. We’re tastier, we’re fresher, we’re local, which gives us an upside that we can actually capitalize on. Our average selling price is higher than the wholesale market price but well within the range of normal stores.

Knowledge at Wharton: The market as you described is big and growing. What is Verdant Global’s strategy in trying to capitalize on the opportunities that this market offers?

James: Economic viability was a hurdle that we had to cross before we ever went to market, so we satisfied ourselves that would work. Then, we looked at questions such as what are the best products to grow? What gives you the best return on capital employed or lowest operating costs or easy entry into existing market channels — all the normal business metrics. Salad greens, lettuces, kales — anything that looks like a lettuce plant, basically.

We also like small greens, herbs, edible flowers for the culinary market, anything that looks like that, and, finally, strawberries and bush beans because they command a premium. These are not generally available fresh year-round. They all require different technologies to grow, so we developed three parallel technologies, integrated them and made it possible to put them in one common facility, sharing the infrastructure. By doing that, we are able to provide a suite of products to a local supplier. We are very attractive because we can offer one or all of those products to a local market. Our strategy is really pretty simple. Go to the market, find out what the local market needs and then build facilities that look like that.

Knowledge at Wharton: Who is your competition and how do you set yourself apart?

James: There are several types of competition in the marketplace. There’s just traditional farming, growing in Mexico against [low-cost] labor — that’s competition. To compete against greenhouses, which is the most obvious natural competition within the continental U.S., their cost of operations are much, much higher. They also grow products that are shipped a long distance. The evolution of the food distribution industry is products that look good, taste bad but can be shipped, and that’s what we all live with nowadays. Our primary strategy is to go local, get rid of the distribution network, reduce our transportation costs. Once we’re local, we don’t have that long time lag between growing and selling, so we can grow products that are tastier, sell them locally into the market and we’re at the same price. That’s our competitive positioning.

Knowledge at Wharton: Do you focus on organic produce only, or do you also have conventional produce?

James: We’re essentially organic by nature. Functionally speaking, nowadays organic means you don’t use pesticides. It’s a certified marketing strategy by organic farmers, so they have club entry requirements. We do not intend to ever be certified as organic per se, but we out-perform organic product all the time and it’s very simple. On average, organic product is slightly contaminated above the levels that the USDA recognizes, and it’s not (the farmers’) fault. It’s because there are other farmers close by who are not organic. We grow inside an enclosed space that’s utterly protected from the outside, and we do not use pesticides. So we can 100% assure people that we are pesticide free.

Knowledge at Wharton: Could you talk a little bit about what you did before Verdant Global, and at what stage is the company now?

James: Oh, I’m a techie. I’ve been doing technology development in a variety of sectors for all of my working life. I started out as a chemist. I went into optical electronics and high-tech instrumentation as a consequence of the work I did prior. I went back and did a business degree, and have been doing technical development ever since. I’ve worked in sustainable energy, I’ve been in fuel cells, and I’ve actually worked in the standard oil industry by looking at their technology practices and providing services to help them change how they develop technology. I have big company experience — how technologies developed there — and small company experience, literally running by the seat of your pants, making it happen.

“We get to do good and do well at the same time.”

I brought that to Verdant Global about five years ago. It was a company that already existed. I was consulting, and then a little bit later I was helping, and then a little bit later I was CEO and primary investor. I’ve just put my efforts for the last several years now into taking us from being a really good technology off the lab bench — we have more than 10 years of experience developing our technology — into the full commercialization, and that requires going through the technical diligence, the financial diligence, the marketing diligence to finally figure out what it is that our product is offering. We’re now at the stage of going full-scale commercial, offering to the marketplace full-scale facilities.

Knowledge at Wharton: Who is the customer of Verdant Global?

James: The first is existing producers or distributors who’d like to be in the business of producing food and not having to buy it. That’s by far the most likely candidate we have. There’s pure investment folks as well, but we prefer the ones that bring industry experience because that also normally brings marketing channels, so let’s just skip right past the hard steps, let’s get right to the customer.

The other one is more of our philanthropic side where we are working with not-for-profit organizations across the United States to put in public-private partnerships where the facilities will be operated by not-for-profits. The revenue from these facilities will go back into the local community, and we’ll help run them. We do make our income from running facilities, so we get to do good and do well at the same time.

Knowledge at Wharton: When you approach commercial food growers or nonprofits, what is your pitch about why should they invest their resources in working with Verdant Global?

James: It’s a very different story depending on which ones we’re talking to. In the case of the nonprofits, typically it’s food deserts in the center of cities. It’s poverty reduction, it’s nutrition, and they have a vested interest in serving that community. Because we’re local, because we’re essentially organic, because we’re fresh, we can help deal with some of those issues, and it provides jobs in the local community. Their interest is how do we improve the local community?

In the case of folks who are selling into existing distributors, existing growers, it’s much more commercial terms. The ones who are particularly interested in us are the ones who are looking to the future going, ‘This whole sector is changing. What’s my role in the sector in 10 years if it’s all local-growing? What’s my role in the sector if it’s all been offshore and the prices have all changed?’ It’s much more of a strategic investment for them at this early stage of the industry. Later on, it’ll be much more straightforward, just normal commercial terms.

Knowledge at Wharton: What are the main risks of working with Verdant Global?

James: I’ve been inside this company long enough and looked at it that I don’t feel there are any significant risks, and I tell them so. Here’s my main reasoning: The industry is sprouting up, literally, worldwide. There are firms in Japan, the United States, Canada, Israel. We’re at the front of the pack, perhaps, but we’re in a pack of things that are developing. We’re very grateful for these other companies. They are demonstrating the marketplace, so we don’t have to prove that the marketplace exists. That means that the food can be sold. If you buy into our concepts, you’re not taking a business risk.

On the technical side, we’ve done our due diligence and our development for a long time. We’ve had full-scale prototype facilities where everything’s been fully tested for years, or we have operating partnerships with folks who have been in the business. Innovation is not always about invention. It’s often about integration of ideas that pre-exist, and then you put them together in a novel package. We scanned the world for best practices long before we went commercial, and we’ve partnered with what we think are the best companies in the world, and they bring 50, 60 years of experience to us.

“Innovation is not always about invention. It’s often about integration of ideas that pre-exist, and then you put them together in a novel package.”

We’re a new company, but we bring this wealth of experience and capacity to the plate. And that is what takes care of the technical issues people might have.

Knowledge at Wharton: So there are no risks that need to be hedged?

James: In food growing, the key operating risk is health. If you get a contamination of some sort that goes through and gets in the marketplace, you have recalls and so on. The way we deal with that one is all of our facilities have full laboratory capacity and everything is tested on the way out the door. We start with the seed, and we can trace from seed to where it gets delivered to the customer. That traceability puts us at the top of the pack of health care.

Knowledge at Wharton: If you are so locally focused, how do you scale Verdant Global? Ultimately, do you think it can be scaled globally?

James: There’s a global market, certainly. In these early years, the product mix that we’re offering satisfies the North American palette and the European palette, in particular. Quite simply, we’re starting where the money is. As we learn and our technology improves and the cost curve can be pushed down, we can start going to secondary markets elsewhere.

I said earlier there’s something on the order of 1,000 facilities. Even if we doubled every year, that’s a lot of years before we’d ever get caught up to that, and that’s the marginal growth rate. That’s not the total capacity. The way I see the market evolving is that a major center like Philadelphia ultimately could have five to 15 of these growing different things in the local marketplace, so that’s really the scale.

Knowledge at Wharton: How many facilities do you have right now?

James: We have zero facilities that are fully operating. We’re in the business of moving that forward right now. We are talking to and have serious interest in five facilities, all of which are in negotiation right now. Ask me a year from now, and I’ll probably say five.

Knowledge at Wharton: Five years from now, where do you think Verdant Global will be?

James: We’ll be among the top three indoor food growing companies on the planet. We’ll be growing at the rate of approximately 100% a year for the next few years after that. We will have moved our technology from its current state to being probably 20 to 30% more efficient in terms of cost and yield, and we will be starting into what I view as the real future of this whole sector, which is being able to grow plants better than they’ve ever been grown on a farm because we have so much more control over the environment.