Building the world’s best early stage water fund
The world’s most valuable, finite, and irreplaceable resource is being overdrawn, polluted, and wasted - at a time when climate change is upsetting the balance of resources across the globe. Cities, towns and villages are seeing more frequent and intense droughts and floods. Agriculture needs predictable access to water to feed our 7.6 billion people.
Whether we meet our water challenges will depend in great measure on our capacity to innovate. The world needs new ways of stewarding the fundamental molecule. Water management will be a $900 billion-plus market by 2023 growing at more than 5 percent a year. Today’s investment levels don’t yet reflect the size of the opportunity. Despite this massive market, venture investment in water has held steady at around $150-$200 million per year for the last three years. That is out of total global venture capital flows for the first half of 2020 of $129 billion.
No one has yet firmly established themselves as the go-to early-stage firm in water. There have been excellent individual investors who have been active for a long time, but you can count them on one hand. In terms of the best funds the refrain remains: “We’re really looking to write $3 million-plus checks, but thanks Tom” - a trend that seems to be getting reinforced.
It’s time to build the firm early stage entrepreneurs need. That is why I’ve started Burnt Island Ventures.
I believe this is an asymmetric bet.
Water has always been slow, but things are changing in three key areas: the demand for innovation, the supply of innovation, and the market for exits. These factors add up to an increasingly healthy operating environment for entrepreneurs and investors.
The world is facing an unprecedented and accelerating need for water innovation. America’s water infrastructure bill is coming due. Federal investment collapsed at the end of the 1970s and has never recovered. The symptoms of this, from leakage rates to contamination, are increasingly evident. Internationally, companies are starting to feel the pain of the mismanagement of water. Vast industries that rely on water are increasingly making public commitments around its management. Major investors are seeing environmental risk management as non-negotiable. Major economies are embarking on remediating decades of neglect of their water resources. There is stormwater to manage; there are droughts to survive. All of these imply a sustained and permanent increase in the demand for innovation to help the world do more with less water.
This demand is being met by the first true generation of water entrepreneurs. They’re a heroic bunch. The secret to a great business in water is not the technology. The technology has to be there, but it’s the business that is built around the technology that counts. Great businesses require great entrepreneurs, creating better solutions, better companies and better outcomes. I have seen firsthand the acceleration in the quality of the individuals and teams who are founding water companies, and it bodes well for the future of water.
They’re also going to be able to make real money. No one has built a unicorn in water (yet) but names like Valor Water Analytics, Oxymem, Aquatic Informatics, EMAGIN, Flo Technologies, WaterSmart, Optimatics, Nebia have all been purchased in the last 24 months. Incumbents are figuring out that the best way to evolve their offerings is to buy, not build. With increased competition from relatively new entrants like Siemens, Schneider Electric, and Danaher, prices for good companies are likely to increase substantially within a fund’s exit window in seven to nine years’ time. This is before you factor in that private equity is already sniffing around seven- and eight-figure recurring revenue businesses, and that founders are going to see greater diversity in their capital-raising options. Great companies are going to be in demand, and great founders will have more negotiating leverage over when and how they sell their businesses.
So that’s why water, why a fund, and why now. Why me?
I have been lucky enough to have a front-row seat for these changes while running the world’s leading accelerator for founders in water. I’ve worked with some of the best entrepreneurs, utility leaders and company executives in the industry over the last five years. I’m in a unique position to help today’s founders build their companies to their full potential.
In March 2015, I stood in a ballroom at the Palace Hotel in San Francisco and applauded as twelve water entrepreneurs took the stage. Within five years, two of those members of the 2015 Imagine H2O Accelerator sold their companies for tidy exits, and four more created seven-figure-revenue leaders in their markets.
That evening was the start of my journey at Imagine H2O. I was hired to build the organization’s programming capabilities, with a focus on building the Accelerator. It was my job to ensure that the program became and stayed THE program for founders in the water sector, alongside a brilliant and deeply fun team. Five years, two country offices, three programs, 140-plus companies, 2,000 applicants and $400 million in funding later, it’s time for what’s next.
Investing in water is tricky. As Steve Kloos of True North Venture Partners put it in 2018, “If you don’t know what you’re doing, water can be a pretty productive place to lose money.” Investors who dip their toe into single investments can get in to trouble without understanding the peculiarities of water. Successful water investing requires focus, and, no, being a cleantech investor is not focused enough.
If you know what to look for (and avoid), a resilient, high-upside portfolio of great founders building robust, scalable solutions to water problems in very large markets is increasingly achievable, while identifying and mitigating inevitable risk. I am founding Burnt Island Ventures to provide a platform for the best early-stage water entrepreneurs in the world, where the companies we invest in get an unfair advantage from our support, our network, and our expertise. We know what to look for, we know what works, and we will help these founders create the solutions the world needs.
Do get in touch for more information if you’re interested in hearing more. Let’s build the future of water together. It’ll be fun.
My thanks to Rukmini Giridharadas, Nimesh Modak, Nidhi Menon and Nick Ferguson for their input and support on early drafts - and everything else.
