VC and WaterTech: Changing the Tide

Water is conceivably the most fundamental human resource – and perhaps the most undervalued. Before we reach the next decade, global demand for freshwater is expected to outstrip supply by 40%.[1] While the world’s population has grown ~5x in the last century, freshwater use has increased ~7x, unsurprisingly most concentrated in the U.S. and China.[2]

Water is essential, not just for human survival, but for nearly every product, service, and system we rely on. The World Wildlife Fund puts the total global quantifiable economic use value of water (as of 2021) at nearly $58T – 60% of global GDP.[3] Despite its importance, the actual cost of water (and the negative externalities resulting from its use) are not appropriately priced into global markets. As reality sets in on the critical shortages and disruptions to human activity inherent to a dwindling freshwater supply, the impetus for aggressive action, investment, and innovation, is rapidly mounting.

Putting aside regulatory and policy uncertainties in the midst of a new U.S. political regime, market forces alone should spur both public and private sector stakeholders to prioritize investments in water solutions: higher demand (e.g., from rapid electrification), diminishing supply (largely due to climate change), increased systemic risk (e.g., from aging infrastructure, public health concerns, and fear of supply-chain disruptions) will all inevitably raise the cost of water. As advanced technologies gain commercial appeal and large-scale adoption, the return on investment is becoming more and more compelling. And if some of the most water-intensive sectors begin to mobilize in earnest, we may yet be able to (quite literally) turn the tide.  

KEY SECTORS & USE CASES

Thermoelectric power generation (natural gas, coal, petroleum, and nuclear) accounts for the largest share of water withdrawals in the U.S. – using over 130 billion gallons per day (as of 2021).[4] Even as some of the biggest culprits to climate change, these industries are retiring highly water-intensive processes like once-through cooling in the face of more stringent regulations, and increasingly tapping into more efficient water reuse technologies.

Agriculture is responsible for over 70% of water use in the world (and over 40% in the U.S.). In addition to the USDA and NSF granting millions toward research & development efforts, external capital has poured into upstream food and agriculture technologies – $18.2 billion in 2021, up an average of 38% year-over-year since 2013.[5] Farmers are now leveraging software, hardware and service-based solutions to increase efficiencies and solve major pain points – dialing into precision agriculture, water-lean crops, and better biosolids management.

Industrial sectors (e.g., oil refineries, pulp and paper mills, primary metals factories, chemical manufacturing, food & beverage production) draw roughly 18 billion gallons of water per day. These industries are also integrating more sophisticated treatment and filtration mechanisms that enable higher water reuse and safer discharge – to optimize operations, lower long-term costs, avoid regulatory penalties, and de-risk supply chains.

Across energy, agriculture, and industrial sectors, some companies are focusing on extracting valuable byproducts (e.g., heavy metals & PGMs, organics, and fuel material) from concentrated brines, wastewater, and flowback – revalorizing them as inputs to create additional revenue streams or offset costs to facilitate commercial adoption.

Public and private utilities are increasingly seeking innovative, cost-effective solutions to a wide range of challenges. In April 2024, the EPA introduced the first-ever national, legally enforceable drinking water standard to reduce PFAS exposure[6], incentivizing accelerated investment in water treatment and quality monitoring solutions. Labor shortages and cost pressures are also driving adoption of automation mechanisms (e.g., leak detection sensors, smart valves, remote control capabilities), advanced data & analytics (to better predict demand and weather patterns), and infrastructure monitoring technologies (like unmanned drones) allowing for more precise and cost-effective interventions.

Aging infrastructure is of particular concern in the U.S. – the EPA estimated a total water infrastructure funding deficit of over $1.2 trillion in the next two decades.[7] While the Infrastructure Investments and Jobs Act (IIJA) earmarked $55 billion toward water infrastructure [8] – a key focus being the removal and replacement of lead pipes – much more remains to be done. And it should be worthwhile – making the needed investments in U.S. water infrastructure could add $4.5T and ~800K jobs to the U.S. economy by 2039.[9]

INVESTMENT LANDSCAPE: PAST & FUTURE

For a long time, water tech has not been seen as a particularly appealing investment sector for private capital – and not without reason. These startups often sell into highly-regulated, low-margin industries with long and complex sales cycles (utilities in particular). As a result, some take years, even decades, to validate and commercialize. Outside of B2B SaaS and platform solutions, many water technologies are capital-intensive and require large-scale facilities to validate performance and secure profitable contracts. Startups also face strict NDAs, preventing them from communicating pilot results to other potential customers. And because advanced solutions often target very specific use cases, VCs view the market opportunity as too limited to generate attractive returns for their LPs. More recently, as water tech has begun rising in popularity, many investors find their inboxes full of highly technical pitch decks – finding it difficult to discern truly differentiated, promising technologies without a thorough and resource-intensive diligence process.

But despite these challenges, the need for water solutions is there – and growing.

Thousands of startups globally are actively developing solutions to water challenges. In the U.S. alone, nearly 800 water and wastewater management technologies have secured funding over the last decade.[10] Public sector financing is a meaningful catalyst, but private capital markets are arguably indispensable in achieving the accelerated growth this sector needs – and some investors are gearing up for battle. Venture funding into water technologies increased substantially from 2013 ($92.4M) to 2022 ($1.8B)[11] – a CAGR of ~39%. Many VCs are making their first forays into water tech, despite traditional resistance to the sector. Of the ~$48B in private capital raised to fund climate solutions in 2023, 3% was allocated to water technologies – which is meaningful, but far from sufficient.

The path forward requires deep understanding from entrepreneurs, customers, and investors of one another’s needs to forge long-term, strategic partnerships. Some startups are pivoting to serve more industrial and commercial customers with higher margin potential, adopting subscription-based models to generate predictable, recurring cash flows, and maximizing revenue potential – for example, extracting and revalorizing by-products in wastewater, or combining hardware and software solutions into stickier offerings. Learning to effectively communicate value proposition, performance, defensibility, and meaningful TAM is key – and founders often find the requisite resources and support to do so from increasingly specialized incubator and accelerator programs (like Imagine H2O).

In return, investors like Burnt Island Ventures are proving that betting on water technologies can be worthwhile. Yes, VCs will still fundamentally prioritize solutions that are capital-lean, serve attractive markets, and can show a quick path to scale – but investors with a keen understanding of this space can be quite successful deploying patient capital, by supporting founders through the validation phase, opening doors to high-revenue partnerships, and planning early to enable attractive exits (e.g., to strategic acquirers).

Finally, industry leaders piloting new technologies can benefit from more transparent, collaborative practices – even without letting go of NDAs, these organizations can find ways to work with industry coalitions and innovation hubs to enable anonymized data-sharing that sheds light on what works, and what doesn’t. Democratizing access to information and cooperating to validate solutions means startups with real commercial potential can attract funding and reach scale much faster – to everyone’s benefit.

It most certainly will not be easy, but what has thus far been a market with major untapped potential can be unleashed into a vehicle for explosive growth and critical, global change.