Venture Capital and Water — Let’s Stop Worrying Where the Cool Kids Are

Tom Ferguson
Imagine H2O
Published in
5 min readJun 19, 2017


IH2O’s Water Gala ’17 in San Francisco — All types of companies, all types of capital

There is a near constant refrain from the water conference circuit (and what an extensive circuit it is) that it is A Bad Thing that there is barely any interest from the Venture Capital (VC) community in water technology. For the record, that’s right, there isn’t any real interest — 37 deals for $148m in total in 2016 according to the CleanTech Group. It’s high time we recognized that not only is this entirely to be expected, it’s also A Good Thing.

Is VC a fit with water? In VC’s purest sense, no. Will we see the water equivalent of SNAP Inc. within 5 years? Almost definitely not. Can entrepreneurs build solid companies that can return 5–7x within 7–10 years? Certainly. This market is about creating successful companies with sensible unit economics that can lead to great outcomes for entrepreneurs and investors without ringing the bell at the NYSE.

IH2O’s 2016 Accelerator is on track to raise $30m by the end of Q2. Our 2017 cohort has already raised $17.5m this year. Investment is certainly a factor in the water innovation puzzle but we have yet to see a company that has deserved to raise money unable to do so just because they’re in water. Water represents only 0.25% of venture investing, but a) that is to be expected and b) if it was higher I would be worried because then there would be a lot of disappointment about to shake out. Disappointments tend to be blamed on exogenous factors about water that further jeopardize the reputation of the sector, rather than any shortcomings in investor due diligence.

There are structural issues in the sector that are at odds with venture expectations. The UK has 24 water and/or wastewater utilities. France has 3. The US market has the opposite problem, with 155,000 water systems, a disproportionate amount of which are serving very smaller markets without the required financial or human capital to adopt new solutions. Even if an entrepreneur is to isolate the 400 or so utilities in larger markets, rapidly acquiring customers is a distant reality. Few customers and long sales cycles mean hockey stick growth is rare.

Of course, customers other than utilities are available. Take Imagine H2O’s Beta Partners. This growing network includes 50+ leading utilities and corporate partners committed to deploying water innovation sourced through our programming across a range of sectors. There is one caveat — despite the promise of point of use solutions for customers, B2C companies remain a risk even though there are signs that the “Nest for Water” success story is out there waiting to happen.

Expecting VC involvement is naïve, and encouraging it broadly ill-advised. Investors cannot expect a social media-type VC return profile (a shot at 100x within 5 yrs). The velocity of sales is simply at odds with VC expectations. The question should not be “Why can’t we get more venture money?”, it has to be “where can entrepreneurs find the right capital to build the companies that can solve our scarcity, security, safety, and supply issues?” We need to be agnostic about the source.

The good thing is that VCs aren’t that big a part of overall available capital. There was $127bn in global VC funding in 2016, vs $6.6trn in debt sales in the same year, and in alternative assets, VC only accounts for about 12% of $6.8trn AUM in 2014. VCs take up way too much airtime relative to their overall importance as a source of funding in water, even though they are clearly crucial in markets where the model does fit. Other sources should be cultivated and educated about the sector given their size and fit for funding in water.

It’s important not to over-generalize. Active VCs in the water market bring much needed commercial and operational approaches (urgency, discipline, focus on ability to scale) to early stage companies, driving value creation. Angel investors are clearly key to the sector, and IH2O has seen numerous examples of companies that have secured vital capital that is truly patient, and is now, 8 years later, starting to see real payoffs from those early bets.

Currently, we’re seeing strategic investors and family offices (often with an impact thesis or realistic revenue expectations) assume the role VCs might play in water. Notable strategic investors in IH2O’s network include Suez, Kurita, Tencent, and others. A UBS survey of 242 family offices showed their combined AUM north of $181bn. US charitable giving rose to $373bn in 2016 which is good news for entrepreneurs who are building natural targets for grant funding and impact investment. Family offices are showing an emerging interest in the sector. A recent meeting of over 25 offices focused on the opportunities and barriers in water, and more and more IH2O companies are attracting family office attention. Collaborative efforts like the CREO Syndicate, TONIIC and the ImPact are helping family offices unlock opportunities in the water sector.

In water, it’s a good thing for company development that most VC, with its dedication to growth over profitability, stays away. The lack of VC money means that companies are insulated from being asked to implement unsuitable business models that fit the VC picture. Rather than externally financing an all-out race for growth and figuring out the unit economics later (a recipe for disaster given the sales cycles water startups face), companies are forced to look after margins and unit economics from the outset so they are better able to deal with water’s extended Valley of Death.

Fundamentally, entrepreneurs need financing that fit the realities of their business — VCs that don’t understand water will be bad partners, and there are only a handful of VCs that understand the market. The more productive approach is to build the corpus of smart money that fits and likes the realities of the sector and wants “predictable, solid growth”, rather than have entrepreneurs sell a story they can’t make reality in order to fit the VC model. IH2O is fortunate to partner with investors that fit that description, and we think they’re in a great position to benefit from the inevitable changes coming to the water sector in the coming years.

Thanks to Steve Kloos, Debra Coy, Dan Martin, Henri Lambert, Christine Boyle, Nimesh Modak and Scott Bryan for their advice and input on this. I’m extremely grateful for their ongoing support.

Visit us at to learn more about how we are working to empower people to develop and deploy innovation to help people solve water challenges. Tweet @imagineh2o and find us on LinkedIn and Facebook. Feedback and engagement with our programming always welcome.



Tom Ferguson
Imagine H2O

Managing Partner at Burnt Island Ventures, supporting the best water founders globally. Water underpins society, so let’s act accordingly. Twtr: @inverynefarmer