Rising tides: Why Water-Tech should be top of mind among VCs

Key Insights:

The scarcity of clean water due to climate change, affecting over a billion people and driving industries heavily reliant on freshwater, highlights the need for innovative solutions as global water demand continues to rise.

Where others see threats, we see opportunities for innovation: Mission-driven founders are tackling challenges to water by pursuing transparency, enabling recycling, transforming waste to value, and increasing efficiencies in supply generation.

Context:

Water is essential to life on Earth, yet the availability and quality of this precious resource is being threatened by climate change. From droughts and floods to sea level rise and ocean acidification, the impacts of a warming world are already being felt in our water systems today. According to the World Wildlife Fund, more than 1.1 billion people lack access to clean drinking water and the COP27 predict that by 2025, half of the world’s population will be living in water-stressed areas.

As one of the most important resources for humans to survive, water is also an essential resource for manufacturing industries to thrive. While our planet is covered with water, 97% is salt water. Of the available freshwater we withdraw, nearly 90% is used for industry and agriculture. The global demand for freshwater continues to rise unabated, driven by population growth and rapid urbanization. At the same time, climate change is diminishing freshwater supplies. Around 25% of the global freshwater supplies are considered “high stressed”, meaning that their ratio of total annual withdrawals to total annual supply exceeds 40 percent. As an example, in California, where agriculture amounts to $50B p.a. in revenues, companies and policymakers are actively looking to mitigate the adverse effects of water shortages. Other industries highly dependent on water include textiles, pulp and paper, petrochemicals, metals and mining, and other manufacturing services.

Given its gravity to multiple industries, businesses need to rethink their water strategies, thus opening up opportunities for new players to offer innovative solutions to tackling this problem.

Nucleus’ perspective:

At Nucleus Capital, we are particularly excited about solutions tackling water monitoring, treatments & recycling, and valorization:

• Monitoring and reporting: While software cannot solve our challenges to climate change alone, it is still a necessary enabler to provide insights on status quo vs. targets. Solutions collecting data, e.g., on consumption and degree of contamination, provide the enabling layer for businesses and homeowners to predict and optimize their water consumption, wastewater production, and water leakages. We also see an opportunity for startups to tap into the growing biodiversity market, as water treatment and emissions play a critical role in compliance. Having a clear view of the impact of water handling (emissions, withdrawals, secondary effects) on biodiversity is becoming ever more critical to sustainability managers in organizations. Companies to watch: Pipe Predict, Constellr, Nala
• Treatment and recycling: With increasing emissions into water from the manufacturing industry and agriculture (e.g., nitrates, phosphates, fungicides, and pesticides), businesses need to find a solution to reducing water emissions by treating wastewater appropriately. Especially in agriculture, we have seen players tackling emissions to water by placing specifically programmed micro-algae into lakes and rivers to effectively reduce the concentrations of harmful chemicals in the freshwater. We have also seen players like Concert Bio, who build a platform to leverage microbiomes in hydroponic systems (indoor farming connected through water) instead of using fungicides, thus reducing emissions to water in the ag sector. Other players like Rhizocore harness saprotrophic fungi to treat wastewater in forests and fields. Finally, in a world in which water scarcity becomes evermore prevalent, also private household consumption should be rethought. Using potable water for laundry, toilets, and oftentimes watering gardens seems vastly unsustainable. Retrofitting households to recycle greywater might provide new opportunities. Companies to watch: Concert Bio, Rhizocore, Hydraloop, Matter
• Valorization of waste streams: Wastewater streams can contain high-value materials such as Lithium from mines and magnesium and NaCl from seawater. We are particularly excited about companies leveraging innovative solutions such as novel enzymes or electrochemical approaches to extract these minerals from water streams. By tapping into new sources that other businesses formally have dubbed as waste, businesses can not only reduce harmful emissions to the environment but also open up doors to new forms of supply for minerals highly critical to the energy transition (see the recent list of critical elements here). Watch out for our next investment announcement in this space! Other approaches we have encountered valorized waste streams from food and beverage production, pulp and paper, and manure waste to create green energy, e.g., through microbial electrolysis or gasification plants. Companies to watch: Aquature, Shit2Power, Green Hydrogen Technologies
• Water extraction: As demand for water increases, businesses and communities not only need to think about water treatment and recycling but also about converting seawater into freshwater e.g., through desalination plants. More and more players are moving into an old market, offering solutions to the currently still energy-intense process by replacing parts of the electrolyzer or providing new membrane technologies. Others are trying to capture water from plain air, such as through “fog and cloud” harvesting. Companies to watch: Oneka, Waterwhelm, Permalution

One of the big challenges we see with regard to water investments is that water in many areas is still considered a commodity, thus supporting venture-scale growth cases from a water-tech company can be hard. At Nucleus, we particularly look for founders who understand the respective industry’s pain points that they are aiming to solve and how these pain points translate into multimillion-dollar opportunities. Most importantly, we look for founders who have derived smart approaches to monetizing their solutions in order to reach a sustainable business model.

Another challenge to overcome involves access to industry networks and capital, especially for companies reliant on building and scaling hardware. We firmly believe that startups need to build strong relationships with the industry. Corporate players have extensive experience in building plants and factories, scaling logistics and operations, and collaborating with regulators. They also have deeper pockets to support scaling a solution from a small demonstrator to a first full-blown plant. As financing hardware will require access to larger pools of capital, we recommend founders pursue grant funding and initiate conversations with debt and co-financing opportunities through partnerships early.

Summary:

Given the tremendous business value (and value at risk) tied to water, we strongly believe that innovation in this space should be on a VC’s agenda. In a world facing the imminent threat of climate-induced water scarcity, the vital significance of water for both human survival and industrial prosperity is evident. Successful startups will find smart approaches to monetizing their services, demonstrate relentless execution abilities, and engage strategic partners for knowledge transfer and financing early.