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In this series, we are discussing the role of investors, technology developers (startups as well as established companies), accelerator programmes, end-users (e.g., water and wastewater utilities) and industry-experts in the battle against climate change with targeted reduction and mitigation technologies in the water industry.
Climate change often presents itself as a water issue (floods, droughts or water quality problems), and it comes as no surprise that many adaptation or mitigation technologies are in fact water technologies. Funding for sustainable technologies is urgently needed and potentially offers great opportunities for water technologies in general and sensor technologies for water monitoring in particular. According to a survey by Morgan Stanley, investments in sustainability are on the rise in 2024, with investment interest in water technology sharing third place with the circular economy, after climate action and health care. More money invested will help tremendously to get those technologies out there and do a lot of good. Provided of course, the money is invested in the right technologies. We have no time to lose.
I work a lot with sensor technology startup teams looking to gain a market share in the water industry, and over the years, I have assessed numerous monitoring technologies which aim to quantify and thus help mitigate climate change issues or support reductions in the costs and carbon footprint of water (treatment) processes. Currently, investment success is elusive, with only one in about ten or thirteen technology investments turning out to be successful and creating enough value to compensate for the lack of profit or even losses of other companies in a (C)VC’s portfolio. Although this does not mean that the other nine or twelve technologies are completely unsuccessful, or that the technologies do not make it to the market at all, it may take considerably longer to generate a significant impact. In his thesis on the dynamics of water innovations, Paul O’Callaghan observes that “in many cases where the company fails, the intellectual property is handed on to another company and may exist in a latent state until the market conditions are favourable.”
When it comes to investments in sustainable technologies, we have two problems. First of all: how do we define a successful investment? Is success to be measured only in financial terms? What about the sustainability benefits to be obtained? Secondly, in order to combat climate change effectively, we simply do not have the luxury of getting it right only once in ten times, or waiting fifteen or more years for a technology to become widely implemented. Every investment needs to be a hit if we are to use our limited resources wisely and achieve the necessary impact as soon as possible. If a climate change disaster is to be averted, and if we are going to rely more on private and philanthropic capital to accomplish this, we need to do better in the selection of promising ideas and focus on bringing all the helpful ones to the market successfully in the shortest possible time. This means that the early-stage diagnostics of such technologies need to be improved, criteria for success redefined, and adoption rates accelerated.
In 1958, my grandfather died of colon cancer. At the time, the doctors concluded that the hardship he endured during World War II – he had to eat (poisonous) tulip bulbs to stay alive in Amsterdam during the terrible winter of ’44-’45 – could have contributed to him developing the disease. In 2017, my father was also diagnosed with colon cancer. He had a successful operation and five years later, he was declared completely cured. The difference in outcomes can at least to an extent be attributed to major improvements in cancer diagnostics which were accomplished somewhere in the sixty years between these two diagnoses. Nowadays, doctors can detect the development of certain types of cancer at a much earlier stage, and as a result, have more and better treatment options at their disposal, leading to (much) higher survival rates.
For investments in water technology, we need to do something similar. According to Bob Zider, eight components are critical to the success of a company, and failure at only one of these can sink the whole company. These factors are related to the technology/product to be developed, the team, the business (customers and sales strategies) and the finances. Zider argues that winners look a lot like losers at an early stage of their company’s development, thus making it very difficult to spot the promising startups successfully at this point.
In medicine, early-stage cancer patients look a lot like healthy people, but as the example of my father and grandfather illustrates, research and hard work can result in the ability to successfully identify patients in need of treatment at that very early stage. And this is exactly what we need to do if we want to improve the identification of successful startups at an early stage. Despite the similarities between ‘winners’ and ‘losers’, we have to identify the specific characteristics that can help us to distinguish the most promising water technology startups. And then we need to provide them with the support they deserve in order to bring their products to market in the shortest possible time.
We do not need to start from scratch; we have many tools and loads of expertise at our disposal, as I will show in this series. This month, I will be posting a piece of the puzzle every week, covering the technology, the team, the business and the finances. After that, I will regularly keep adding new topics to this series.
In next week’s episode, we will see that ‘talking tech’ is essential from the very start of the interactions between technology developers and investors, and cannot wait until the technical due diligence review, when the term sheet is already on the table. The week after, we will explore how accelerator programmes, despite their best intentions, can muddy the waters considerably when it comes to identifying potentially successful startup teams, and what changes in their approach are needed to remedy this. We will also discuss how this alternative approach has an additional bonus in the form of a solution to the diversity issue in water tech startup financing. Next, we will explore the power of drilling down into customer segments and an early focus on ESG-principles to boost the chances of a successful market entry. And finally, we will take a closer look at the definition of success for a sustainable technology, how we can increase the odds from an 8-10% success rate to 70-80% and accelerate the adoption of successful sustainable water technologies by the market.
