Risk, Excellence, and DNA

The following is the Keynote address to the MIT Water Prize 2021. You can find the recorded version at the bottom of the page.

Hello and thank you. I’m Tom Ferguson, the Managing Partner of Burnt Island Ventures.

We want to be the best water entrepreneurs’ first phone call when they’re raising their first dollar of outside capital. I went full time on this at the end of October 2020, and so far we’ve made 6 investments totaling $5.3m and that will be $6.7m by the end of the month, across 10 companies. I want to spend a little time on how we see the opportunity in water, and then move on to some advice that’s tailored to the founders and entrepreneurs in this room, but I think is pertinent to anyone building or running a business.

So firstly seed stage water investing - why did we go after this opportunity? At its core it’s about this graphic which is repeated across the world.

Demand is outpacing supply, and it’s not happening in 5 years or 10 years, it’s happening now. The megadrought in the southwest is very serious indeed, and if you look at the levels of Lake Oroville it’s below where it was at the height of the drought in 2016. The Sierra snowpack, which provides CA with 30% of its water supply, is receding at a record rate. And these patterns are repeated across the world.

US Intelligence estimates that global demand will exceed current sustainable supplies by 40% by 2030.

I’m not very smart, but this is the kind of graphic I think it’s reasonable to invest behind, because innovation HAS to be a big part of our continued existence on this planet no matter what else happens. Water is at the bottom of the bottom of Maslow’s hierarchy, and there are no substitutes. These are market fundamentals I’m ok hanging my hat - and by hat I mean financial and professional future - on.

Water is a collection of very large markets, $900bn in total, that are about to undergo enormous and to our view inevitable change in the coming decades.

From municipal drinking water provision to the most intense industrial processes, these are vast markets that will increasingly be forced to be dynamic. Dynamic is not usually a word associated with the water sector, but we’re seeing a pace of change across a variety of verticals that we have not seen before.

So we’re here because of simple building blocks we think we can generate excellent returns for our investors. We have better founders , operating in better, more dynamic and fundamental markets, and we think there is going to be a better market to purchase these companies in 7-10 years.

And so turning to tonight, the wonderful MIT team asked me to have a think about what might be useful for the founders to hear, and I decided I wanted to talk about themes and ideas that are often talked about, but equally often forgotten in the live fire of building a company.

I wanted to talk about the Year Ahead. I feel like now I’m 6 months into the journey of being a founder I say all of this with even more empathy than I did when I was with Imagine H2O. In the Year Ahead, all of you will be faced with exceptional challenges, but your only way through is to make good decisions at the margin - how you react to each subsequent challenge, so I want to talk about Risk, Excellence, and DNA.

Starting with RISK.

The first thing I want to say is that most people think about entrepreneurs as these great risk takers, off into the brave new dawn, willing the world to bend to their will. That’s 180 degrees wrong.

Great entrepreneurs hate risk. Hate it.

They want to take off as much risk as possible before they make key decisions - that’s why they talk to customers, conduct interviews, prototype their products, spend small before they spend big. That’s why they act like scientists, proving out hypotheses as far as possible. But there’s a limit to this.

No matter how much work you do, there is always residual uncertainty. The world is unpredictable - pandemics, wars, stock market crashes, Peloton recalls, Dogecoin - and the lesson from these events is not that you missed some indicator that was obvious in retrospect, with thanks to Danny Kahnemann the lesson is that the world is inherently uncertain. And the ONLY thing you can do is to do the work (and actually do it, not kid yourself you have after 20 interviews), and then adjust for the risk landscape. So how do you do that?

The answer is to Think in Bets (and if you haven’t read the book by Annie Duke you should). You have to assess the data you have about your market (and also the data you know you don’t have), assess the resources at your disposal, try and estimate the risk of getting punched in the head by the unknown unknowns, and then choose the best risk-adjusted pathway to the outcome you want. That may be global domination and a centiunicorn, in which case you will likely want to and have to be repeatedly aggressive - but it may also be to work towards cashflow breakeven early and have the future in your own hands, a much less aggressive series of bets.

The best thing about thinking in bets is that it scales. The way in which you think about key decisions now is the same way as you should think about key decisions in 9 years when you have $200m in revenue. There’s no difference in the structure of the decision, just a change in the inputs (especially the resources at your disposal - the larger the resources get, the more aggressive you can be without putting the company at risk. This is a key scale advantage).

Just remember that sometimes the world goes against you - 80/20 bets fail one in every five times in the long run. So don’t beat yourself up if the world goes against you - as long as you learn something and don’t go out of business as a result (even though you are likely at one point or another to have to bet the company). Anything multiplied by zero is zero. Just know what you’re doing, and why. There are no sure things - and your decision-making should reflect that.

Now EXCELLENCE

I’ve spent 6 years being pitched to on a regular basis and it’s striking the extent to which this word is overlooked. Excellence is worth pursuing for a bunch of different reasons and I want to hit on two here.

Firstly, it’s awfully competitive out there, and you shouldn’t underestimate the breadth of your competitive set. Take capital provision, for instance. If you’re pitching Burnt Island Ventures, you’re not pitching against your direct competitors in your chosen vertical, you’re competing against all the other potential destinations for that capital, and that means you’re competing against all other water startups. With us you have the luxury of us focusing solely on the water sector, but if you’re pitching LowerCarbon Capital or Congruent or SJF you’re pitching against every other cleantech company, and if you’re pitching YC or First Round or Afore or the other top tier seed funds, you’re competing against every other startup.

Finally, if you assume that the bar for startups is always going up, you have to be amongst the best prospects the investor has EVER SEEN. This is a very high bar, so never give anyone a reason not to think you’re amazing. Design matters, logic matters, structure matters, writing matters. My pitch deck took me three months of solid effort, and it’s still not where I want it to be. Set the bar for everything high.

If you take this idea seriously you get rewarded in the long run, because you can’t help but build a brand. Brand building is an odd idea, because enduring brands are built almost passively, as the result of a long track record of being really, really good.

You can SEO and design and do all the window dressing, but true brands are underpinned by consistent quality - Nike, Apple, Lego, Marvel, Yo Yo Ma, LeBron James - are a function of high quality, low variance (so very narrow-band consistency) over a long period of time. And a strong brand is a consistently underestimated source of long term advantage if you keep at it - just ask Warren Buffett and his position in See’s Candies.

DNA.

If you think about your company as an organism, the DNA is the instructions that are handed on to the elements of the expanding entity as it grows. This is how we do things, this is what we stand for, this is what’s important to us, these are our standards of quality, this is how we treat people. The explicit and implicit instructions that are passed from the CEO on out. And I want to touch on three of these that are consistently important

Firstly, talking to your customers.

There is no substitute for setting a habit, a muscle memory of speaking with your customers, especially as the CEO, as often as possible. What do they care about, what’s their experience with the product, what works, what doesn’t, where else can you help? You need this now, and you need it forever. You ever email jeff@amazon.com? It works…

Secondly, be careful of convenience, especially early in the company lifetime. You’re taught to look for hacks, for shortcuts. You have a ton of them - cheap laptops, AWS accounts, SEO credits, 3D printers, Zoom. That can’t lead you to try and avoid what is important for you to learn.

When I started the BIV raise I had multiple offers for capital-raising professionals to help me shorten the road, and I said no because a) it’s expensive and b) I HAVE to learn how to sell this idea, I have to go through the pain, I have to learn the resiliency that comes from fundraising, but equally comes from selling a product, looking after the first customers, dealing with suppliers, hacking through the spit and sawdust days - going through these experiences, rather than looking for ways to reduce discomfort, is an underrated endeavor.

Thirdly, if you think about your DNA is a transmission mechanism, be very careful of who you choose to transmit it.

Companies are just a group of people taking a sequence of decisions that result in actions that result in more decisions. Who you let inside to take those decisions and actions matters. So be careful, because the wrong people will mutate your DNA in ways you do not want. If you let the wrong person inside, take immediate action with no wishful thinking. This is something we ask all our companies.

So that’s Risk, Excellence and DNA. I just want to talk directly to the emerging CEOs because this is a REALLY hard job, and you really have three responsibilities, and thanks to Fred Wilson for his classic articulation which often has key parts overlooked.

First, Sets the overall vision and strategy for the company - most people only get that far but the second part is by far the more important - and communicates it to all stakeholders. Internal and external, from board members to interns. You have to communicate it effectively. My personal favorite is the metronomic update, first of the month without fail. I think every founder should do it, and we expect this of BIV companies.

Second, Recruits and hires (interesting that these are separated, but so far so good) - then the bit that gets missed - and retains the very best talent for the company. People matter and you have to hold on to good people. 

Third, makes sure there is always enough cash in the bank. That one’s simple, but not easy.

To this I would add a fourth - look after yourself. Your companies rely on you to do the other 3 jobs well, and you can’t do any of them well if you’re a mess. Lean on advisors, friends, parents, loved ones, therapists, your houseplants - whatever it takes because companies are sequences of decisions, and if the key decisionmaker isn’t bringing their A game the rest of it doesn’t matter.

Good luck, god speed, and thanks for having me. 

Here is the recorded version. Thanks for reading.