A Summer in Water VC - Observations on Resilient Foundations
For the past few months, I’ve had the privilege of working alongside the talented team at Burnt Island Ventures as a summer associate. As the summer winds down and I head back to school for my master’s, I find myself reflecting on my experience in water VC. What makes launching a water startup different from say, a software company? What traits do successful water startups share? And what is my best advice for those interested in launching a company in the water technology space? Here are a few thoughts:
Play the long game. If there’s anywhere the once-celebrated “move fast and break things” mantra doesn’t apply, it’s in water startups. A delicate, fragmented ecosystem with risk-averse customers, the water sector has historically been driven by steady, incremental technology adoption rather than rapid disruption. Long sales cycles and cash-strapped utilities are the norm, not the exception. Water startups must cater to the unique processes, incentive structures, and timelines of the utilities they serve. Companies capable of navigating municipal procurement processes and restrictive purchasing regulations will be the most likely to amass a loyal customer base providing steady, sticky revenue streams.
Exude customer empathy. Water utilities are operating under some of the toughest business and regulatory conditions present in any industry. They are chronically underfunded and dealing with increasing pressure caused by climate change and aging infrastructure, while providing essential services to the public. Success requires a deep understanding of a utility’s pain points and offering services or products that are not just a “nice to have” but that are critical additions to the tech stack. The water industry relies heavily on word-of-mouth technology referrals and empathy pays dividends.
Bullet-proof your unit economics. Water is underpriced and often taken for granted—an unfortunate reality of our society today. Business plans need to have a margin of safety in timing, pricing, margins, and velocity. Pricing for the long-term health of the company sets the right expectations with customers early, and allows you to accurately understand if a long-term sustainable market is there. Good unit economics in a market that needs your product means you are more likely to avoid the “valley of death” where water and cleantech startups historically have suffered.
Sell one, sell many. Strong demonstration history is a hallmark of water startups that achieve broader utility technology adoption. Almost all initial deployments need to be home runs. Technology should be perceived to be de-risked as early as possible. Yes, utility hesitancy—often expressed by the dreaded question “where has it been done before?”—is a tough hurdle to scale. Startups should leverage demonstration support programs such as LIFT from Water Environment Federation/Water Research Foundation, UWC from Imagine H2O, and SBIR/STTR of federal agencies to rapidly bolster their product’s technology readiness level. They furthermore can mitigate risk aversion on the part of utilities by proactively developing pilot documentation and case studies that highlight the customer’s voice.
Ride the climate wave. In this day and age, water startups are climate startups. Companies should use this to their advantage and upsell their products by highlighting their long-term potential to combat the climate crisis. Founders need to tell their stories against the backdrop of climate change to ensure access to diverse sources of capital. While water still may be undervalued, climate tech has received an outpouring of support this year that can be capitalized on by water, energy, and carbon startups alike.
The future for water startups is bright. Public recognition of water challenges is quickly picking up steam. Legacy infrastructure is in dire need of replacement and governments are moving to upgrade their systems amidst growing climate awareness. The quantity and caliber of entrepreneurs entering the water arena is at an all time high and exit opportunities are increasingly appealing. Let there be no doubt about it: the world is facing some towering water challenges. But rapid scientific and technological advances present entrepreneurs with opportunities like never before. The case for investing in water technology is getting stronger and more exciting by the day.
Thanks to Tom Ferguson and Daniel Zillante for valuable discussions.
