Focusing on the Things That Don’t Change
Begone, 2022
We won’t retread the challenges of the year in full, but the Islanders had a lot to deal with. The most pernicious boogeymen (Inflation and Supply Chains) are hopefully retreating, but with issues still to shake out - ask Apple. In general, the companies acquitted themselves admirably, conserving cash, driving towards technical and commercial milestones, and keeping a close eye on the horizon. We retain a 100% survival rate, which is a testament to the caliber of the founders who mercifully chose to accept our investment.
And it’s not just survival. As you see below, there is much progress to celebrate. Water is too often discarded as a messy market where it’s too difficult to build companies to VC timelines. It is difficult but doable. The key is the founder, or founding team. In the past there has been no margin of safety on the number of exceptional people building companies in water. There have always been some of these exceptional people (mercifully a number of them now affiliated with BIV), but not enough. That has now changed, and it’s tremendously encouraging.
There has been much hand-wringing in the VC world about the retreat of valuations, but here our strategy has stood us in good stead. Find high-potential companies with exceptional founders addressing deep pain points, understand what you’re funding, and don’t overpay. Over the past few years we have turned down many good deals while we wait for great deals on multiple occasions. Our price discipline (as well as discipline around outcome expectations) means that we’re not at all worried about this “new” valuation environment. Water was always insulated from the slightly bananas goings-on given that so few understand it well enough, so the silly deals were easy to avoid, and the great ones were priced appropriately.
Water really is excellently positioned. There is $100bn in federal funding moving into the sector in the US alone, which will unlock multiples of that in private funding. The problems are now so obvious as to be unmissable. The talent influx is real, and global. It’s only the beginning, and who knows, maybe 2023 will be the year where the world finally understands that successful adaptation to whatever changes we have already baked into our climate reality is predicated on our friend the Fundamental Molecule. We ain’t making any more of it.
“Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window” Peter Drucker
Prediction is silly. 2022, and every single year prior, is testament to that. With that in mind, the question really becomes what will allow companies to survive and thrive no matter what comes. So in 2023 we’re thinking about the following:
Cash. It’s the only economic umbrella that counts. With it, no-one can tell you what to do. Without it, you can be forced to face some painful realities. Founders need to conserve what they have, access more before they need it (investment, grants, alternative financing), and build unit economics that make sense. Cash flow break-even is the Elysium where your future is assured (at least if you stay ahead of the competition).
Company Support. With 18 companies in the portfolio, 2023 is the year for our platform to shine. We have some exciting things in the works, but the main thing is taking this part of the process seriously. The investment process is usually 2 months. The post-investment work is 10 years (or more). We will be bringing everything we have to bear to help the Islanders.
Building Excellent Teams. Startups are in essence a sequence of decisions followed by actions, and the better the people who are making those decisions and taking those actions, the better the outcomes are likely to be. Simple, really (lolz).
Staying Close to the Customer. Founders have to stay close to the customer as they grow. Maintaining discipline in the pipeline, understanding customer’s evolving needs, understanding what needs to be delivered to actually solve the customer’s problem, how to sell and how to sell better - all of this flows from really staying close to the people that pay you.
Becoming Indispensable. Related to 4), especially for software businesses but equally for hardware, it’s important to become almost impossible to live without as fast as you can. The better you are at solving a problem (especially a thorny one - see below), the harder you are to live without. The harder you are to live without, the more valuable each customer becomes because they’re likely to spend a long time paying for a service, and are going to be ok with paying more for it over time.
Naturally much of our time will be focused on our existing investments, but it is possible we may add one or two more companies if the right opportunities present themselves. In addition to looking for founders who do the above well, we’re still focused on:
Real pain points. If you’re selling a solution to something people really care about now, there is no reason why you can’t sell big and quickly. If you’re selling something that is even close to a “nice to have”, things get tricky fast in tough environments.
A no-brainer market opportunity. VCs love big markets for fairly obvious reasons, and there are huge market opportunities out there, from the Silver Tsunami to PFAS to Water Efficiency & Reuse, to the stupidity of Tailings Dams. But big has to overlap with pain, and the easy bit is finding the big. Pain is needed for pace, and spotting it requires understanding market context. This is why founder/market fit is so important.
We have upcoming posts which will dive deeper into each of these. We think the Burnt Islanders all represent interesting examples of (to a greater or lesser extent) betting on things that don’t change, not only in their choice of market and solution, but in the fundamentals of the businesses themselves - the importance of customer value, unit economics, whole solutions, customer service, communications. We hope 2023 will continue to prove us (and more importantly the Burnt Islanders) right.
