The Secret Formula for Profit in Water Tech Venture Capital

Venture Capital has long been said to not be a fit with Water endeavors. As the water sector is deemed to be conservative, success stories in water entrepreneurship were thought to be unpredictable and irrational, hence impossible to invest in. Yet, with the rise of specialized funds such as Burnt Island Ventures, all these preconceptions may well be proven wrong.

In 2022, Tom Ferguson closed Burnt Island Venture’s first fund, with the thesis to find, fund and support the best water entrepreneurs. Did he succeed in these endeavors? Why? What’s the secret sauce? What can you replicate in your investing or entrepreneurship path?

Let’s explore:

with 🎙️ Tom Ferguson – Founder & Managing Partner @ Burnt Island Ventures

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Resources:

🔗 Have a look at Burnt Island Ventures’ website

🔗 Read the BIV Blog

🔗 Listen to the Fundamental Molecule

🔗 Read Brian Iversen’s article I refer to in the introduction

🔗 Come say hi to Tom on LinkedIn

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Full Video:

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The Myth of Water Tech’s Conservatism

The world of water tech venture capital is rife with preconceptions, notably the belief that the sector is too conservative and challenging to yield high returns. This view parallels the underdog story of William Signius Knudsen, whose journey from a modest immigrant to a key figure in America’s industrial boom underscores a vital lesson: overlooking the value of experience and established practices in pursuit of innovation alone can be a costly misstep.

In the water industry, this wisdom rings especially true. Despite its essential role in our global ecosystem, water tech investment has been narrowly defined and, by some accounts, underestimated in its potential for significant returns. This article aims to dispel these myths, drawing insights from the experiences of successful investors like Tom Ferguson of Burnt Island Ventures, to reveal the secret formula for profit in water tech venture capital.

Debunking the Venture Capital myth in Water

The narrative that water technology investments are fraught with high risks and low returns is as pervasive as it is misleading. It’s a narrative that fails to recognize the evolving landscape of the water sector.

The reality of Water Tech Opportunities

Recent data paints a different picture from the conservative tag typically associated with water tech. Last year, the sector saw a record $708 million of equity commitments across nearly 100 deals, signaling a robust interest and belief in water tech’s potential. Notably, Gradiant’s $225 million Series D financing and 120Water’s $43 million round showcase the sector’s ability to attract significant investment​​.

The conservative approach: a double-edged sword

The water industry’s cautious approach, often misconstrued as resistance to innovation, stems from its mandate to provide an essential, life-sustaining service. This industry is not conservative due to a lack of vision or understanding but because the stakes of providing clean, reliable water are incredibly high. The sector’s deliberate pace, akin to the strategic moves of a chess game, reflects the critical balance between innovation and reliability.

Venture Capital’s Role: a misaligned perception

The early venture capital rush into water tech, while filled with optimism, encountered the harsh realities of the sector’s unique challenges. Many early-stage water tech companies faltered, not due to a lack of innovation but because of a misalignment between traditional VC expectations and the water sector’s growth patterns. This experience highlights the importance of understanding and respecting the sector’s incumbents and their invaluable experience.

Shifting towards a new investment paradigm

Contrary to the venture capital model, which seeks outsized returns often ill-suited for water tech’s growth trajectory, growth equity and private equity models offer a more fitting approach. These models focus on business models over technology alone and seek investments across the water value chain, aiming for consistent returns that match the sector’s growth patterns. This strategy, exemplified by firms like Cimbria Capital, underscores a nuanced understanding of the water industry’s complexities and the realistic prospects for growth and returns.

The Burnt Island Ventures Advantage

At the heart of changing the narrative around water tech investments is Burnt Island Ventures, led by Tom Ferguson. Ferguson’s approach, molded by his extensive experience with water technology accelerators, notably Imagine H2O, mirrors the industrious and innovative spirits. It’s a strategy not just of financial investment but of nurturing and understanding the intricacies of water tech’s potential and challenges.

Leveraging Experience for Innovation

Tom Ferguson’s background is a testament to the power of combining deep industry knowledge with a forward-looking investment strategy. Tom applies his insights from developing early-stage entrepreneurs to identify and support water tech ventures with the potential for significant impact and profitability. This approach has already seen successes, with companies like ZwitterCo and Aclarity making notable strides in their Series A funding rounds, showcasing the potential for high returns in the water tech sector​​.

Understanding the Sector’s Unique Dynamics

Burnt Island Ventures’ success is not just in picking winners but in understanding the water tech sector’s unique dynamics. This includes recognizing the importance of founder-market fit, the strengths required of entrepreneurs in this space, and the critical role of portfolio diversity. Ferguson’s strategy is informed by an appreciation of the water industry’s complexities, from regulatory challenges to the essential need for sustainable and efficient water management solutions.

The Burnt Island Five: a Formula for Success

Adopting a philosophy Ferguson refers to as “The Burnt Island Five,” Burnt Island Ventures focuses on fundamental aspects that contribute to a water tech company’s success. This philosophy emphasizes the importance of solving real pain points, establishing solid unit economics early, and building a business model that can sustain growth and adapt to the water sector’s evolving needs. It’s a strategy that champions value creation over chasing the latest trend, ensuring that investments not only yield returns but also contribute to the sector’s broader goals of sustainability and resilience.

Embracing the Future of Water Tech Venture Investment

Burnt Island Ventures exemplifies the shift towards a more nuanced, informed approach to water tech venture capital. By embracing the sector’s complexities and focusing on long-term value creation, Ferguson and his team demonstrate that with the right strategy, water tech investments can indeed offer significant returns.

In an industry as vital and complex as water, the path to success lies in recognizing its nuances and opportunities. As we look forward to the release of Tom Ferguson’s interview, let’s remember that in water tech venture capital, as in all endeavors, the blend of experience, innovation, and strategic investment can unlock incredible potential.

Call to Action: Don’t miss the insightful interview with Tom Ferguson, Founder and Managing Partner at Burnt Island Ventures, releasing this week. Dive deeper into the strategies that are shaping the future of water tech venture capital and discover how innovative thinking and respect for the sector’s heritage are paving the way for a new era of investment success.

Full Transcript:

These are computer-generated, so expect some typos 🙂

Antoine Walter: Hi, Tom. Welcome to the show.

Tom Ferguson: It’s really, really nice to be here. I’m a big fan.

Antoine Walter: Me as well. So it’s an encounter between fans. Great. We are in the Brooklyn Botanic Garden, which leads me to a very simple first question. You’re running a California based company out of Brooklyn. Yeah. How’s that possible?

Tom Ferguson: Well, it’s the wonders of modern, like, digital magic, I guess. We moved here 18 months ago.

It really is nice to be in the Botanic Garden, to do, well, anytime, to especially do something like this. I first moved to California in 2014, so basically straight out of business school. And we had an amazing time in the Time there completely changed my life. It basically rewired my attitude to risk, especially professionally.

California is like one of the untold facts. It’s a bit like living on the moon. It’s miles away from everything. And my parents are still in London, and my wife’s parents are in D. C. And we have family here. So we turned over the table and moved to Brooklyn 18 months ago. heartily recommend it. Wherever my laptop is, that’s where Burntisland Ventures is.

Well, less so now, actually. That’s very insulting to all of my wonderful teammates. Burntisland Ventures is now a woven web of four, soon to be five, people who live in Seattle, New York, Raleigh, Durham, sort of Frankfurt now, but was in Paris for a bit. And then in Colorado. So we are a distributed, but I think mighty team, of people and wherever our laptops are, we’re very much a virtual business.

Antoine Walter: Because you grow on the team. You’re now the second Burnt Islander which I interview because I had Wayne Barne on that microphone. But before him joining you

Tom Ferguson: God, I’m gonna have to live up to Wayne, what a nightmare. No, Wayne’s been really fantastic as our, as one of our venture partners. One of the most fun things about actually building this thing is that I get to now work directly with the people that I Admire most in this industry.

It’s really fun. I don’t know why they said yes, but a lot of them did. Wayne, Paul, obviously Christine, who’s our, our partner now, David Stanton, Ivy Union, who was a, uh, imagination Oil, was also a member of our investment committee. Nicole Leman Brady from Renewable Resources Group. Steve Gluck. Peter Fisk, such a wonderful group of people who have really helped me get this going and in a slightly more mature phase,

Antoine Walter: I’ve looked a bit up your path to prepare for that conversation.

Okay. There was the part on you. I’ve been reading your blog for at least the past two years. I knew about your Imagine H2O story. I’ve had Scott Bryan on the microphone. We discussed it a bit. Great stuff. I didn’t know that there was an important step before, which is you are the one who wrote the first CDP report.

I just did a piece on the last CDP report, which just showed the 2. 3 trillion opportunity in water. I’m betting that By next year, the next CDP report will say there’s a 3 trillion opportunity in water. It was the story of the very first ones.

Tom Ferguson: It’s kind of dumb luck. I guess I sort of choose that word very carefully.

I was, um, Even more useless then than I am now. And I was working for the really exceptional consultancy, ERM, and I was the cheapest person in the building. When they took on a pro bono piece of work for the Carbon Disclosure Project, a friend of mine marched up to me with a zip drive, and said, here you go, write a report out of this.

And so I spent, you know, three months with the data and strategies of 150 of the global 300, and then in very much in a, in the land of the blind kind of situation, I knew more about Water sustainability on the corporate level than anyone else because nobody knew or cared anything about that And it was it was difficult right because it was 2008 people were putting themselves back together as businesses They weren’t thinking about their work water footprint I very consciously chose sustainability at the beginning of my career But I thought water was super interesting because it was a juxtaposition is so obviously totally vital and Totally overlooked and I thought there was a really interesting Kind of juxtaposition there that I filed away for the next Whatever, five years until I re specialized in, in 2015.

Antoine Walter: You then moved on to work for Imagine H2O, you’ve built the programming there. I’m going to take like 2000 million shortcuts. Great. In your investment thesis at Burntisland Ventures, you define how what you’ve built over the years at Imagine H2O kind of created a special source. And now that’s me adding that, you got frustrated because Imagine H2O doesn’t invest in companies that have this zero equity approach.

And you said, I want to go the extra mile, hence Burnt Island Ventures.

Tom Ferguson: You’re basing me. I wouldn’t characterize it as frustrated. I had a really wonderful experience at Imagine H2O and I am deeply, profoundly grateful that I was able to have the time and space to get to truly diminished marginal surprises.

In terms of the job that I do, it’s really, really important to have a high end, to have seen a lot of companies, because then you develop this muscle memory of What you’re looking for, what the forehead flags are, what are the characteristics. And actually, people always say don’t invest with your gut, but your gut is actually really important because your gut is the synthesis of all of the stuff that you have learnt.

It’s an instinctual reaction to what you’re seeing in terms of the pattern recognition. And Imagination World afforded me the opportunity to do that, work with ridiculously smart people, all of whom were much, much better than me, to try a whole bunch of things. I don’t want to sound like an idiot saying this, but it taught me the importance of We didn’t have many reasons for really smart people to come and join our program, right?

We didn’t have, we weren’t enticing them with the check. We won’t, you know, do whatever it is. What we did have was the beginnings of a track record and a brand when I turned up. I cheated, right? There was five years of amazing work from Scott and Tannin and all of the team that came before me. So to fast forward to the end of it, the genesis of Burnt Island came from a very honest entrepreneurial place.

I saw A value proposition that needed to be provided to a set of customers, a seed fund that could make a difference in the trajectory and lives of an increasingly able group of entrepreneurs. And I felt that because of my experience at Imagine H2O that I had an unfair advantage in terms of being able to go and build that organization to provide that value proposition to that set of customers.

And I thought that the unfair Insights and information that I had as a result of the work at Imagine H2O would build a pretty credible case to a bunch of people who look to invest in people like me, who don’t know anything about water, which is basically all of them.

Antoine Walter: When you mention unfair advantage, at what stage does it characterize the most?

Is it in your selection process of the rights? Companies to sit in or is it then in the later stages?

Tom Ferguson: Well, like everything else, I’m a huge fan of the mathematical principle of inversion, which is that I think that especially in water venture, and I have a feeling we’re going to get into this. It’s a little bit like the Hippocratic principle, which is first do no harm.

Like if you want to be smart first, avoid doing dumb things, being close to the sector and understanding a lot. And it comes back to this idea of diminishing marginal surprises, right? Is that. At least I felt like I had an unfair advantage, again, that idea. An unfair advantage in terms of being able to understand what dumb looks like.

What is a bad idea in water? And we, we both know like a hundred million different examples of what this might look like. It’s a quote on our website from, from Charlie Munger is that everybody’s trying to be brilliant. I’m just trying to not be idiotic, but it’s harder than most people think. Good things happen when you really first avoid the landmines and then hopefully you can put brilliant on top of it.

There’s another great quote about investing from a guy called Richard Oldfield. It’s literally the title of his book. It’s simple but not easy. What we’re looking for is a sort of a set of characteristics amongst the the companies that are sort of taking care of the downside risk from a whole bunch of different characteristics which again we can kind of get into.

But when you see that little sprinkle of potential like upside magic or some way of they’ve identified a mechanism by which they have a credible story about how they will be able to grow fast enough to justify. Like what I need, which is basically a 10 year kind of hold period to become a really, really big company.

You know, it’s very, very exciting when you see it, but again, like the intellectual architecture of it, it came from a whole bunch of different sources, but it was all through that experience at Imagination2O and it’s really just what we’ve tried to enact and, and build upon as we’ve taken it out into the for profit, money on the line, money where your mouth is kind of stuff that we’re hopefully doing reasonably well now.

Antoine Walter: You mentioned Seed Fund. Yeah. Another way would be to say. Venture investors?

Tom Ferguson: Well, I mean, venture investors are of all stripes. I mean, the best way of understanding it is that the sort of passage of funding through a company’s life cycle, the nomenclature is basically angel, which is first check, let’s go and start the dream.

Friends and family. Exactly. Friends and family. Yeah. Pre seed, which is, um, the sort of the first small kind of equity round where there’s a small fire burning and it’s putting another little twigs on it. Then there’s the seed stuff, which is still very early, usually pre revenue. And then Series A, which was, the reason it’s called Series A is it was the first round of financing.

And then BCD, which is all the gross stuff, but it’s all venture investing. We have a Slightly higher, uh, risk factor. Though I would argue that the way in which we appraise companies reduces that significantly. And that’s the whole point of due diligence. But the angel’s the most risky. Highest potential returns because your entry valuation is so low.

When you’re doing Series C, which is growth venture investing, everything’s basically sort of baked. You’re just trying to get in, like, relatively de risked money into something that is growing so fast that even very high valuations look cheap. So like the Googles of the world, that’s not our game. It may become so one day, depending on what happens to the field of startups in, in water.

But yeah, I classify it all as, as venture investing. It’s riskier than some people might like.

Antoine Walter: So Seed and Series A, that’s your playground.

Tom Ferguson: Pre Seed, Seed, Series A. We want to be the first check, eventually the first check that the smartest entrepreneurs in the world, who are starting from the very beginning.

start of their idea. We want to meet them the day after they decide to commit to the company and be a funding partner all the way through that evolution. That’s like the mission of BIV is to find funded and support the best entrepreneurs in the world.

Antoine Walter: You mentioned 10 year hold. So that’s your horizon.

I’m not the biggest specialist there is, but sounds like slightly longer than traditional venture. Is that true?

Tom Ferguson: Yeah, especially in Europe. In Europe, they tend to be a little bit more kind of impatient. I think one of the nice things about doing this in the U. S. is that people are used to 10 year timeframes.

Technically, ours is eight, but there are two, there’s still a two year extensions that are at my behest. We can extend it further than that if we want to hold on for positions that were growing or like for whatever reason it would be, but that’s part of the oversight of what’s called an LP advisory committee.

And so we can extend it longer, but 10 years is about right. It gives you enough time to, especially for water. It gives you enough time to get in early in a company that can then figure itself out, establish itself, and then start growing in a meaningful way. And hopefully compound up to a place where, you know, with a revenue multiple of not that high, that you can have people that come along to pay for that company, put a lot of cash back into the pockets of the, um.

Investors, especially that came in early.

Antoine Walter: You’re super familiar with Paul O’Callaghan’s thesis on the dynamics of water innovation. Yeah. We just chatted about it before starting the recording. Love Paul. He’s showing how you have 10 years of R& D, so your product’s not even in the market. And from the moment you start with your product, it takes 12 to 16 years, assuming you have a winner to be in the middle of the market.

Yeah. So that means you need to, whether have a way to make everything much faster. Yeah. Or you have to leave them in the wild, assuming that they are on the right track. And so that you can get some validation back.

Tom Ferguson: That is absolutely what the data says. In many ways, the fundamental question for what we’re doing is that has something changed, which will can mean that there will be meaningful outliers.

From additions to that data set, can stuff get big an awful lot faster? That’s the sort of central question. And it comes down to timing. A lot of what we’re doing is that like, like C stage investing in wardrobe has historically been pretty difficult. There’s a wonderful quote from Steve Close, who’s been a mentor and advisor and friend and for ages.

Water remains a pretty productive place to lose money. To which I went, oh christ. But he’s right. If you come charging into this without sort of knowing what you’re doing, it’s really easy to tread on landmines. Partially because what seems obvious actually isn’t. What seems obvious is really difficult for a whole bunch of different reasons.

I just had this conversation with quite a large Silicon Valley fund the other day. But to go back to the, to the Escovers, what I noticed in 2020, and I suppose Megan Glover at 120 was probably at the vanguard of this, but there’s, she’s now by no means alone, is that we were starting to see people build revenues faster than anybody had ever seen it before.

And I realized that the thing that brought all of these opportunities together was that the quality of the founders are no shade on anybody who’s started a company before. It’s just a. The field is getting stronger. Like, the quality of the founders was night and day by 2020 than it was in 2018. When you change that key variable, which is the central decision maker, but it’s even before making the decisions about the company.

It’s about the selection of the company. It’s about the identification of the pain point, an understanding of the value proposition that needs to be provided to solve that pain point, and then an understanding of the product that needs to be built to deliver that value proposition. Those three elements, if you’re a better entrepreneur.

You select better paying points. You understand the value proposition deeper. You really understand products. You understand how to get it into the market. You can outpace those 12 to 16 years. By years, you can cut that in half, more than half, judging by some of the data that we’re seeing. The quality of the founder is a key variable in Whether or not there’s going to be adoption, whether or not there are going to be returns, whether or not these companies are going to grow fast.

Antoine Walter: So you need a consistent way to identify outliers and to bet on the outliers?

Tom Ferguson: Yeah, essentially. I think you need to have a consistent mode of appraisal. Part of that is the, is the person an outlier? Do they have some kind of Inherent advantage of what they’re trying to do. Do they think about this in a way that I agree with that in terms of all of the companies that I’ve seen, that they are as good as we have ever seen in terms of the way in which they’re structuring their thought process, because we don’t have evidence, right?

We’re investing so early. The job is not to. Like judge whether or not they have product market fit is, are they exhibiting the leading indicators of product market fit?

Antoine Walter: You coined the term entrepreneur market fit. That’s the thing you’re looking after. I mean, for every single investment you’ve done, there’s a blog entry on your website.

It does get repetitive. And in all these blog entries, the one common trait is the entrepreneur is amazing.

Tom Ferguson: Yeah, it is. We have to believe that at the beginning and mercifully we’ve been right so far. Um, even with the stuff that stumbled and all the rest of it, really, really phenomenal bunch of entrepreneurs.

The reason why founder market fit entrepreneur market fit is so important. Or you could argue that this is true for life in general, but all of the stuff that goes wrong within company building happens in the gap between the actual reality of the situation and the perceived reality of the situation.

All the bad stuff happens in that gap. And the reason why. Uh, Founder Market Fit is so important is that there is no gap. If somebody has been living their pain point for the last 10 years, they know everything about it. Upside down, back to front, inside out. The other articulation of this is that those people couldn’t build a product no one wanted if they tried.

There’s a difference between that and having a big enough market. There are lots of people who are, like, looking to, like, they’ve got wonderful pain points. Really understand the value proposition and have built a great product. The market is just too small and we still can’t do that. We’re subject to all of the sort of slightly hand wavy venture laws as much as, as anyone else.

But yeah, founder market fit is, is often crucial. There’s one caveat to it though. You can create market fit as a person by doing an unseemly amount of work. So you can interview, essentially, your way into really understanding, but very few people actually do the work. Going back to Megan, this was one of the first times I’d seen an outsider do this.

Marketing background, decided she wanted to do something about water, and then, I think it was about 350 people she spoke to? She was so bored by the end of it. And she was exactly right, because when you get bored, that’s where you’re, again, you’re seeing diminishing marginal surprises. So you can get to A very thin gap between reality and your understanding of reality.

But that’s why I found a market fit is important.

Antoine Walter: That’s a super interesting point because it’s something I discussed with Anne Perrault from Evoqua, who was sharing how it’s not just about interviewing people, it’s about ensuring that they don’t mislead you. There’s a book I love about that, which is the mom test by Rob Fitzpatrick, which is a methodology to ask things that even your mom.

Can’t lie to you so that you get feedback in a structured manner because 350 interviews if you ask just The questions in a leading way you might know you’ve got a crap out of it And I’m surprised that the first feedback you give about the ones which might not be fully aligned or there’s nothing for you Is that the market is not big enough because to me the biggest hurdle for water entrepreneurs is solving a problem that doesn’t exist You have so many pitches we start with 2.

0 people miss water on earth hence My super tech does this and that and there’s absolutely no link between those two events.

Tom Ferguson: No, no, it drives me nuts. I literally call it the 2. 1 billion problem whenever we see it, which is very patronizing and I don’t mean it to be patronizing. It’s just that pain points are really specific.

The 2. 1 billion problem is a tragedy, but it is singularly unhelpful as an intellectual basis for a company. It’s not even context. It’s a weird and lazy attempt, I think, at trying to set context for, like, what happens next. And, you know, in the same time, I don’t want to say take us down a kind of a rabbit hole.

There’s a kind of, there’s a really interesting sort of setup in the, in the venture. kind of process. One of the ways in which we look at people who are coming to us with ideas is that for that interaction we are their customer. Coming to me with something like the 2. 1 billion or like anything that doesn’t like put appropriate context it’s kind of it’s not good it’s not a good way to treat your customer.

You’ve got to understand when you’re in front of a customer like for somebody who’s going to be really good at selling and all founders have to sell out of the gate right you there’s no way around initial founder sales. If somebody’s doing that, it’s kind of a weird leading indicator that they’re going to do other stuff badly.

It’s kind of a bad intellectual, like, place to start, or logical place to start. And if someone’s starting in a bad logical place, they’re going to do other stuff that’s like weird as well. Whereas when you see the antithesis of that, which is, I don’t know, zeptility. This is a picture of a water operator’s desk.

In a town of 10, 000 people. And it’s like a hide back chair with a wheel missing, and it’s like a 1997 Dell PC in stacks of paper, post it notes, boots on the floor, jacket, like, everywhere, hard hat, some kind of like Budweiser commercial on the side. I’m not exaggerating. Somebody starts there, I’m like, Ah, you’ve told me a bunch of really important things.

Firstly, you’ve told me that you really understand your customers. Or at least you’re, I’m interested in how well you understand your customer. Secondly, you understand tourist storytelling because you’re giving me a world in which to situate all the rest of the information that’s going to come after it.

And then I’m thinking, well, that’s really helpful for me. It’s also when you’re selling this to people you’re not going to start with a picture of their office because they know their office but you are I can have confidence that you’re going to start in the right place when you’re telling that story to them that’s what’s rare and I just going back to this 1.

1 billion thing again it’s a piece of feedback we always give give people whenever we see it which is if you feel the need with other investors as well but like just be careful because you know that we’re a water investor you really shouldn’t be starting that place you need to assume that we are already

Antoine Walter: I will steal your 2. 1 billion problem because I was knowing it as the 1 percent of China fallacy, which is there’s a market for it because if 1 percent of China takes it, it’s okay, I’m good enough. It’s the same thing here. It’s like 2. 1 billion people.

Tom Ferguson: It’s the same thing. It’s the same thing. That we call, 1 percent of the market problem, again, it’s at best lazy.

What you want to see in terms of the overall opportunity is. Somebody who’s actually sat back and thought, what is actually an opportunity? Like an opportunity is like the interaction between the overall potential, and you’ve got to be very careful about what you choose as the overall potential. I actually busted one of our companies doing this the other day.

They were like, the entire construction market is like four trillion dollars. And I’m like, are we sure you’re using that as a reference point? Are you sure? But it’s the a priori, bottom up, what are you selling, multiplied by how much, how many of those things do you think you’re going to be selling over time?

What is the actual possible and honest and clearly appraised and researched number of like the genuine overall real credible addressable market? When someone’s done that maths, I’m in. But as soon as I hear, if we just capture 1 percent of wastewater treatment plants, I’m like, ah.

Antoine Walter: You mentioned you’re a water Investor.

I would use a different term. I would say you’re, if not the, one of the very few water investors.

Tom Ferguson: There were definitely some really excellent people and I just actually found out earlier today that a really wonderful guy in Canada is just about to close a 30 million fund. There are a few of us and everybody’s doing awesome work.

Antoine Walter: But especially in that very early stage.

Tom Ferguson: There are not, not so many of us. There are, there are others, but I appreciate the sentiment.

Antoine Walter: My question is, you’re saying that you see an asymmetry in that market, which is only going to grow because the two ends have been missing for a while. Good entrepreneurs were missing and then the exit perspective were missing.

You see the good entrepreneurs coming and you say that by the end of this decade, the exit perspective is going to be there as well. What makes you so confident in that and how can you support those claims?

Tom Ferguson: So the first one is that there will always be a market for good companies. It really shouldn’t matter that the company’s being built in water or aviation or Farming or consumer products or whatever it is, good companies that have good margin profiles have growing revenue growing a reasonably fast.

Somebody is want to going to want to own those cash flows. So that’s the first thing, right? Is that like that is what a company that will have demand looks like. The question then becomes, can you build those in water? And I would argue that. In water, just given the characteristics of a whole bunch of different things, actually has a series of overlooked advantages.

So, for example, Doppler is doing like mid seven figures in bookings and has churned I think 25, 000 this year. Once they’re in, they don’t get installed, and they also have a net revenue retention of 244%, which is basically every year the average size of their customer grows by 2. 5x. So you have a combination of not only top line growth, but you have an engine underneath that when you get in, you get natural growth from the stuff that you’ve already sold, so your customer acquisition cost is through the floor.

But crucially, once you’re in, nobody uninstalls you. And so if you take it back to, like, what does a, an attractive company look like, when you look at it through the lens of private equity or even, you know, incumbents within the water sector, that is a really amazing moat. But once you’re in, you’re in, like, the world, the sort of the commercial world, like, really relies on, like, lifetime values.

And lifetime values in water are really long. I’m going to go here because I think you’ll appreciate it. Charlie Munger, who is Warren Buffett’s partner, one of his side gigs is the chairman of something called the Daily Journal. which used to be a newspaper and is actually a little bit like a kind of a mini Berkshire, they have a array of different kind of holdings.

But the core revenue of their business comes from the legally required dissemination of legal data from counties. So it’s something that has to happen by law, the legal data has to go out into the world. They get 100 percent of their contracts from RFPs. And we are aware of RFPs, right? This is sort of like how the water sector works.

All venture investors, like, hate RFPs. They hate long sales cycles. They think it’s terrible, you have to be able to, like, fly off the shelves, magically, and grow to the moon, and all this shit. Charlie Munger, who’s probably one of the smartest people in the world, loves RFPs. Loves them. Because if you’re good at them, you win all of them.

And once you’ve won them, they’re never uninstalling you, and so you get repeatable revenue streams over time, basically forever, and it prints money. Like, your customer acquisition cost is amortized over years and years and years and years and years of cash flows. So your unit economics on the way in are amazing.

The stuff that is chosen as a reason why water is crap is actually really easy to Put on its head and say if you can do it, if you can get through that morass What you’ve built is an amazing set of advantages for a business. So going to the exit like idea There is a world in which you can build great businesses kind of within water It’s just a question of like can you grow fast enough to be able to get an exit a liquidity event that justifies the price You paid for those shares In terms of the exit market, if you believe that there will always be a demand for good companies, that there are characteristics of water businesses that are actually really, really, really attractive, that there’s already a trillion dollars of CapEx and OpEx, and so whether it’s the current incumbents slash strategics, whether more and more high quality companies with very deep balance sheets are going to get more and more interested in water, everyone from Siemens coming back in, Schneider Electric, Mitsubishi, whatever it would be, and then we had Enix Filtration, Aquaporin, Energia, and 2021.

If you build good companies, public markets are going to want to have access to the potential growth profile and all the rest of the stuff that makes these companies credible. There are four areas of exit. The problem is none of them are proven yet. And so for my investors, the 99 amazingly generous and like really excellent, and I think very wise and handsome and beautiful people who decided to take a chance on us at the beginning of this.

They happen to agree with me that we’re setting the table now for liquidity window in seven to ten years time and everything I’m hearing from very, very large bodies of capital, very, very large companies is that this was a reasonable. But you do have to be careful on entry valuations. It’s not a good idea to go and sort of buy shares in a company at kind of a hundred million pre money expecting it to be a 1.

5 billion dollar like exit. Is that likely? No. Is it possible? Like very like small, but in terms of the the way in which that Kind of transaction is, is set up at the moment. I see absolutely no reason why there can’t be a very healthy market, which now for me in four to seven years time, I have had. So many conversations that are basically along the lines of where can we park 400 million and I’m like we’re working on it Like not many places at the moment, but I think they’re coming

Antoine Walter: I think that was the the conclusion of Christopher Gasson at the end of this year’s Global Water Summit that from his experience it was the first time in history that the investment flow in water was decorrelated from the global economic trend.

The global economic trend is slowing down, investments are slowing down, not in water. So, that goes along your

Tom Ferguson: Well, Chris is a very smart guy. No, I think he’s right. One of the weird things to consider, though, this is, is time frames. Everybody’s sort of, you know, like, well, are you, are you worried about, like, interest rates and kind of the, you know, economy cooling down, everything going sideways?

Absolutely not. It’s great that this is happening now. It’s not great it’s happening now because there are real people’s livelihoods at risk and all that stuff. I don’t mean to be flip. But Like, I would much rather it happen now than in our liquidity window. So at the time when we’re really looking for these companies to exit.

So actually it happening now is kind of a good thing. But also, yeah, we can’t get sort of tied up with macro stuff.

Antoine Walter: One of your routes for exit IPO has Wouldn’t that be nice? You mentioned the cool kids, Alex Filtration, Aquaporin, arguably they are on a solid path and I believe they will get to places.

Use the capital wisely. Yeah. But if you look at the valuation, they’re down compared to the IPO. considerably down. And you have even stronger outliers like, like LeakTech, who was almost flat when it was Nasdaq’s darling when they rang the bell two or three years ago. I guess it’s not about name and shaming those companies at all.

No, no. It’s, but my point is they could be also just breaking things, which kind of then disproves one of the exact paths, which you envisioned being mature 10 years.

Tom Ferguson: Yeah, it’s possible. Which is why it’s really important. But when we’re talking about the four exit pathways, we’re like, look, IPOs are possible, like, who knows?

But it’s not off the table. Whereas previously, I think the assumption was that like, I mean, when you were looking at this in like 2016 or whatever, and somebody brought up the idea of like a kind of like a water company IPO ing, it wouldn’t, you know, no. Right. We’ve moved on to the point where it’s on the list.

Are things happening where stock tickers are going in different positions? But like, both, I mean, just to take, you know, Annex Filtration and Aquaporin, they both, when you’re that early, you’re still building the business underneath you. You know, that’s not necessarily written. If the performance is there, if the margin profile is there, people will want exposure to it.

And then there’s also, just as a kind of an aside, it’s a very interesting phenomenon within the market. So for, whatever, the spin out of Viralto, there’s kind of built in demand. For it, people who want allocation to an index are going to put something of that size in their index, which automatically puts demand not only kind of at the IPO, but also as people are adding more money to the water indices.

There’s a natural tailwind. And it still has to perform, but people are going to want more public markets exposure to water. Anyway, there’s a whole kind of bunch of stuff over there, but you’re absolutely right. And it’s very, and it’s an, it’s an astute point that like things going badly in the public markets is not good for me.

Because I need to be able to go and point to things that are like, look, liquidity part of a pathway, go good. Like, you know, this is something that we want to go and kind of. I always come back to, are there going to be options on the tables for really, really strong companies? The answer is yes. The job is to build really, really strong companies.

Then you have to get strategic about the exits and build a relationship two years ahead of time, all that kind of stuff. But the job doesn’t change. It’s build the best company that you possibly can. And then the rest of it will take care of itself.

Antoine Walter: I’ll take A ton of shortcuts again. Addicts filtration, aquaporin, leak tech, all of those are membrane companies.

And it seems that a natural path for a membrane company is to go to IPO. That’s my shortcut. Super high shortcut. Your very first investment. Was in a membrane company, which has defied all the records so far on their track. They are the largest series A ever in the water sector. I had the pleasure to have Alex Rappaport on that microphone some months ago now, even twice this year.

He’s good, isn’t he? You invested in Svitico. Yes. What I’m interested in is, first, how do you pick them? And second, in that record breaking series A, is that for you an achievement? A risk because you need to invest along with the new investors, just an anecdote and doesn’t really matter because you’re still in and as long as you don’t exit, it doesn’t matter.

How’s that for you?

Tom Ferguson: It’s a really good question. I don’t say that lightly. We’re sort of playing for time. I’ll do the second one, uh, first, Alex got a, you know, he ran a really fantastic process. There was, uh, some feedback from a really, really major fund that has been invested in some epochal companies.

These are people who are not messing around. Their feedback on Alyx was basically, Where the hell did you dig up this guy? Alyx is really good. And the company’s really good as well. In terms of the valuation thing, I almost can’t overstate the degree to which it is not and should not be important for me.

markups, and people need to be on the way up. It’s, like, great. But nothing is set until The liquidity event happens. One of the major LPs in the venture business calls it the moolah in the cooler is that like marking up MOIC is a great way point on a story. And it’s helpful for people to feel kind of the wealth effects in their options and sometimes to do secondaries to be able to, you know, take some money off and buy a house and whatever as long as the behavior isn’t egregious and it’s like, it’s helpful to have this kind of trans effective thing.

But until, until the story’s done, it doesn’t matter. And I’ve always been very clear with my LPs is that you will See, optics and MOIC and everything’s kind of going fine on that front and all of that kind of stuff. But I would not mind if our companies were not re rated a single time until we exited.

That we were the last check that they took and they built. A brilliant company, just with that money, and they compounded it over time. And then the MOIC, so the multiple uninvested capital, sorry, I’m immediately into the jargon. The multiple uninvested capital stays at one, which means that there hasn’t been any re rating of nobody’s bought an extra share at a higher price.

And then the overall outcome being 36, or whatever. And there’s nothing that happens on my kind of reporting to my investors, like, in between. Because it means that we still own the percentage of the company that we did before. Because as you add capital onto companies, you get diluted and that’s like, fine.

That’s just, well, you know, it is what happens. I don’t want to say I’m necessarily a superstitious person, but I’m a big believer that nothing is baked until it’s baked. And so like, from a certain point of view, what, you know, Alex is right through running a really excellent investment process. And he’s taken on some really wonderful capital providers in the process, which will be very, very helpful to the process of building that company.

But it’s also a lot of promises. With all of these, with rounds that go very well, comes, comes pressure. And Alex is very well equipped to deal with that pressure. He’s, he’s got really, really fantastic overall process, which is a nice segue. Magically, to the first part of your question. What we’re looking for, we think a lot about entrepreneurial process.

Like, are you making the right decisions at the right junctures? In light of the facts that are out there in front of you. And, you can read about this in the launch blog of Zwittico. It’s on our, it’s on our Banana Adventures blog. Alex was very, he was punchy when I first met him. At Weftech. He was really, like, convinced that they were going to go to the moon and they had technology that was going to change everything and it was going to be absolutely awesome.

And I thought, Alright, Sunshine. Maybe. But he was clearly, like, really smart. And so we selected him for the accelerator, and he was a really great participant, and, like, all the rest of it. But the most encouraging thing, the thing that led when we finally had capital to, like, deploy, was the way in which he reacted to his first major setback, which was basically knew that he was going to be reclaiming water from, like, grease traps, basically, in restaurants.

And then when they got their first wastewater thing, they put it on the membrane, and it just went splat. Right? There was no, there was basically, kind of, it just wasn’t going to work. And rather than panic and go to the first Sort of possible kind of clutchy clutchy like any life vest or whatever which is what most entrepreneurs would do He just stopped.

He was like we need to run a process We need to get ourselves a lot of different ways water We need to understand where this thing works because he realized that in terms of the opera the entrepreneurial opportunity It’s really dangerous starting with a product because you’re then looking for the application of the product rather than responding to the pain point He stopped, they ran, I think, 270 or something wastewaters from 86 different sources, and they identified the two that they were going to start in, and then the four that they were going to move into next, and then the seven that came after.

And it was so illustrative of the importance of running a structured process, because he just solved a whole bunch of problems. He was like, ah, that’s kind of my market map. Like, that’s my market sequence. And if he hadn’t done that, and he hadn’t been like, Oh, I’m just gonna do a project for XYZ and rrrrrr, because you’re, like, feeling the kind of pain of failure.

And it’s a really difficult thing to do. It’s a really difficult thing to do. And that he did that was a super important, like, leading indicator of a whole bunch of other behaviors that he has exhibited since, which is great. The last thing I will say is that, like, the performance of the membrane at the benchtop was so striking that we were It was basically a binary thing.

It was in six days before we invested the data on their first like field. use was going to be in and if it was good the company was going to jump in price considerably and so we decided that the likelihood of that happening was high enough for the expected value to like really work for us to do an expedited first close and me to get very bossy with more and more of my lps to be able to ship this check well not only to dwitticoble so to a variety of other people but yeah it was just ahead of a a kind of a value accretion

Antoine Walter: Your relationship to ZwitterCo started in your imagination to all times, which I grasp what an accelerator does with a company.

What I’d like to understand here is once you have your different hat on, you are the investor, you’re investing in the company. There are different type of investors. There’s the investor who goes in the trunk of the car and it’s just there in case you can open the trunk and ask him for something, but he would never proactively go at the entrepreneur.

And then you’re the one which are really holding the steering wheel together with the entrepreneur. Where would you put yourself and what’s the best practice for you?

Tom Ferguson: Well, it’s never holding the steering wheel. Like what you have to do when you’re getting to know a company is you have to get yourself to a position of trust about the marginal decision that the founder is going to make.

That’s it. Like company building, marketing and outcome numbers and whatever. It’s just a sequence of decisions. It really is. Like it’s from, from what are we going to work on? All the way to, who are we going to choose to underwrite our IPO or whatever. It’s just a sequence of decisions. And so the job really is like finding the decision maker.

So if you’re too close to anything that’s going. Also, like, I would be wildly overestimating my capabilities. I am filled with awe. every day about how good our founders are and how difficult their job is and how much easier my job is than theirs. And I am so far away from having the right to take a whole bunch of, well of like, active like, overall decisions.

There are times, and we’re massively being free of these, but there are, there are times. And if I get to do this for many decades, there will be times when I have to do stuff that I don’t like the founders. I’m not my customers. The founders are our partners. My customers are people who have entrusted me with their capital.

It’s a very serious responsibility, despite what you’ve got. A lot of people sort of think about investors. This is people trying to create. Cash so that they can buy a whatever kid their first home or like being able to make sure that they are like set up for a time. And this is stuff that they want to be able to, even if they’ve got a lot of money, they want to be able to go and give it away to like all sorts of really important, like charities.

There are responsibilities to the capital of our investors and it’s a legal responsibility. The fiduciary duty that I have to my investor is to be a good steward of that capital. Sometimes that will involve. Finding someone else to drive the bus. Sometimes it will be, Look, we actually think that we, that this isn’t working.

This won’t always be our call. It’ll never just be our call. This will always be something that happens at the board level. There’ll be time for everybody just to close us down, let’s give the remaining company clear all of our debts, have an orderly shutdown. We gave it a good shot. We’re like, we’re like done.

It’s not always going to be sunlight and rainbows. It’s super important the founders like, understand what’s getting in. I’m going to be as helpful as I possibly can. But especially if I’m responsible to my LPs and then if I’m on a board, I’m responsible to all of the shareholders on that cap table, including the people who work for that company.

There’s gonna be times when we disagree and there are gonna be times when it gets tough.

Antoine Walter: Did that already happen across your 16 portfolio companies?

Tom Ferguson: Where’s wood? Do we have any wood? I need to find some wood to Oh, back of your laptop is sort of wooden. No. No it hasn’t. And like mercifully, it’s not on the, the radar, but it’s part of the deal.

Antoine Walter: On how many of the 16 boards do you sit?

Tom Ferguson: We are on boards of four and observers to an additional four. You know, serving in that capacity is a, is is a privilege, but it’s also a, like, it’s a responsibility. You’ve got a legal requirement for the way in which you conduct yourself. It’s not always happy, happy fun times.

Mercifully generally has, seems to have gone kind of like. You know, well certainly in the ones that we are close to, but it’s really important that in terms of how you work with the founder, that there is an understanding of your respective roles. To go back to your original question, there are a couple of things.

Firstly, you need to let entrepreneurs, entrepreneur, and you need to select good enough entrepreneurs that they’re gonna go and good, do good entrepreneuring, and that you are there and can be accretive when they need you to be accretive. So, sword partner, source of co-investment. Those are. Probably two of our strengths.

We’re reasonably helpful with the customer side of things as well. In terms of introductions, we have, I think, a differentiated ability to put companies up in lights by virtue of the, well, you understand this better than most people, right? The platform that we have kind of built for ourself within water and the water industry, but increasingly we’re a climate week.

We can be, uh, helpful across a whole bunch of areas. But the most important thing is that we’re the first people that they come to when they need help or when something goes badly. We cannot ever put a price on bad news. Is it welcome? No. But you can never put a price on it. Because if you set off an incentive structure where you scream and shout and you insult them and call them stupid and all the rest of it, they’re much less likely to tell you the next time something else goes wrong.

And if the one thing you cannot afford is to have bad news And so you have to set up that that’s why people talk about trust and it always sounds very hand wavy and silly, but it isn’t. It’s about information flow. That’s what I, you know, try to do be the person that people can say the things that they might not want to say to other people, and they’ll never be I see a price for doing that.

Antoine Walter: I simply mentioned your. 16 companies are invested in as of now, unless there’s a new one, which I missed. Nope. Nope. We’re good. What I’m interested in is the way you build that portfolio, because we mentioned Svitico, the next ones, if I take them chronologically, Svitico was the first one, then Ziptility, then Storm Sensor, Doppler, which you mentioned as well, all of those.

R, don’t you Ali? It’s what I would have expected from Burnt Island Ventures and it makes a ton of sense. Not that the others don’t, but the next one is a bit more surprising to me, which is N Line Energy. I mean, it’s in the name. It’s an energy company.

Tom Ferguson: Yeah, are you accusing me of being a cheat? No, I’m kidding, I’m kidding, I’m kidding.

You’re asking, like, how does this cuckoo fit in the nest?

Antoine Walter: Yeah. Yeah. With an investment thesis, which is we will be investing in water, not like all the others, which do all that bunch of stuff we do water. And then you have an energy company. Yeah.

Tom Ferguson: So, um, yeah, I sometimes think about whether or not we probably shouldn’t say this, but whether or not we sort of like got away with this one, I guess.

But actually the answer is I think, perfectly justifiable. And obviously I justified it to my, uh, LPs. One of the things that No, no, no, no, no, no. One of the things, one of the things that’s really interesting about Edline that very few people know is that they’re the best small hydro team in the United States.

They actually, within that company, they still run a hydro team, so they’re doing a huge amount of work on small dams, especially in California for the Bureau of Reclamation, and it provides base load revenue to the parent company. Which actually creates a really interesting structured kind of option for us, which is that like, N Line could wash its face doing that as a company all day long and maybe get bought out by a consultancy at some stage and whatever and it would be a perfectly serviceable outcome for it.

And so it’s definitely a water company in that way, right, in that they’re spending a lot of time fixing dams and, you know, upgrading equipment and like all of that stuff. But they’ve put on top of this, this second revenue line, which is derived from steam, basically. And steam is water. But really what Torok is sort of getting to is like the water energy nexus, right?

Is that the, the inextricability of water and energy, and by extension, water and emissions. One of the things that we’re trying to sort of figure out is that how comfortable should we be being in, like, carbon direct removal? It’s squarely in the water energy nexus. And I think that steam is, to a really weird extent, the way in which the economy still runs.

The way in which costco’s are heated to the manufacturing of pharmaceuticals to lumber to universities to, well, buildings of all stripes. Everybody still uses boilers. The point is the steam because it’s a radically efficient way of conveying. And it fits in that way. Just sort of the point that you’re, I think you’re trying to get to is that why do you have a differentiated ability to understand what the hell is going on in like an area like that?

We decided that we knew enough about it. We knew that they had the hydro expertise, but that actually it was an opportunity to work with a group of founders that really, really knew their onions and had like potential magic on their hands. Their moat is physics. It’s their, um, turbine that uses X, XS team to run backwards, operates a up to.

78 percent efficiency, which is extraordinary. It’s very, very difficult to engineer anything that, that size. It’s deeply unsexy, which is a mode in and of itself. And their, um, economics pretty spectacular.

Antoine Walter: Let me take you to another outlier because that was unsexy, engineering intensive, long sales cycle.

Yeah. Now you have the absolute opposite to that. Certainly do. Just spouts. Yeah. Which is the atmospheric tabletop generation. Yeah. Yeah. Yeah. It’s live on Kickstarter right now. If I’m not mistaken,

Tom Ferguson: they may have released it. I didn’t realize they had bad investor, but yeah, Tyler and Ruben are doing a really good job.

Antoine Walter: Atmospheric water generation is VC’s darling. It makes me laugh when I see, you know, these numbers, which is like how much has been invested in water VC over the past three, four years. And everybody sees, yeah, it’s growing slightly. But what’s the component now you take source out of that. Yeah. Yeah.

Yeah. Yeah, things get smaller. And all of a sudden it gets much smaller. Yeah, Atmosphere Equatorial Generation, oh cool, but Atmosphere Equatorial Generation, especially when it’s tabletop, is here to disrupt bottled water. Whatever will disrupt bottled water, I’m super happy with it. You have my support for that.

But bottled water itself is here to disrupt utility water. So now if you’re Backing the company which disrupts Spoutwater, which itself disrupts utilities. So you’re in a double disruption game to the rest of your portfolio. Isn’t that a stretch?

Tom Ferguson: Where I would disagree with you. I think we are ideal world absolutely with you, right?

That utilities would provide water. And there was a time actually where like Spout were. Doing a little bit of like communication where it was sort of, I mean it wasn’t explicitly, but the sort of the TLDR was like, should we trust the water coming out of our tap? And I was really clearly like, no, no, no, you don’t need to do this.

Like what you are replacing is the insane infrastructure about flying water. I mean, you are from just outside Basel, so to the south of you, I guess. It’s an awful lot of spring water coming out of the Alps. They’re getting stuck on a plane, in plastic, and it weighs a metric tonne per metre cubed. It’s asinine.

Antoine Walter: Or Fiji water, or iceberg water.

Tom Ferguson: Yeah, it’s one of the most uttered load of, and then you’ve got liquid death, which is a whole thing, which, if you want to get me started on it, I highly recommend. I think where I disagree with you, is that bottled water is a replacement for the tap for two reasons. So, firstly, the people who have moved to bottled water, I think, are very, very unlikely to go back to the tap.

Like, just by virtue of the reality of the world, whether it’s Flint, Michigan, or, you know, whatever, all the, all the, uh, unfortunate, uh, incidents that have happened after that, and the boil water notices that happen, like, this is happening because it, like, it’s not the fault of utilities. It’s happening because utilities are deeply under resourced.

It is not their fault. They are phenomenal. professionals. But I prefer to see the world as it is, not how I would like it to be. And once people move to a five gallon jug of poland spring in their kitchen in a dispenser or in an office or whatever it is, it’s very unlikely they’re going to come back. So let’s just deal with the problem kind of like as it is.

I think taking chunks out of the selling of, where are we now, where 3. 79 being delivered to people’s homes and they just keep it in the fridge and they take it out of the fridge and they do that. Let’s just stop doing that. So that’s the first thing. That’s why I think SPOUT is super impactful. But they absolutely should not be undermining the quality of utility water, because it’s super important that we keep as many people on it as we possibly can.

But the second thing is accessing places where it is much, much more difficult for the utility to do their Job.

Antoine Walter: That’s the conversation that we source on that microphone. So I,

Tom Ferguson: yeah, yeah, yeah. You know Exactly. And you’ve already been, you’ve already been here. But I think it’s really interesting. There are, there are things, a couple of things about spout.

They think that they can get their bill of materials down to about $80, which means that they can profitably sell this for 120 to solve wherever they would want to do it, to solve very meaningful access problem, especially if you can have that purchase finance. And then just given the quality of their engineering, they’re now doing about two and a half gallons a day without breaking a sweat.

That’s more than enough drinking water for a family at four. And it’s not selling at kind of like multiple world access prices at the moment. Of course it’s not. It’s just the classic Tesla model. You build a thing first for the highest willingness and ability to pay, and then you move downstream with scale as costs come down.

And that’s where we hope that they’ll, they’ll get. The other thing is that I want to be an impact investor. I want to have impact with the. Money that we’re doing, but we’re not expressly an impact investor, we’re just an investor. My job is to provide the highest returns I can to my, like, LPs. I really don’t want to have any kind of deleterious effect on the way that I’m doing it.

But one of the things I really like about Spout is that they do something in generally That in water we do very badly. Those guys really understand brand. And the reason why liquid death is such a sort of hideous waste of everybody’s time, but it’s going to make a dump truck load of money for the founders and investors is that they understand marketing inside out.

And also to go to market motion, we cannot be afraid of brand. We cannot be afraid of consumer. Product despite what might happen. I’m not gonna be involved like going to go to invest in a bottled water company anytime soon I think the idea of trucking water around is stupid and it also like long term I don’t think makes any sense And so like if you can ride that for a bit like that’s fine But those businesses they’re gonna get like slowly accreted away.

I hope by spout it fits in within our portfolio It takes up a position where it gives us exposure to the overall consumer, which has a massive amount of purchasing power. It can scale very fast because it’s only one transaction away, and then it’s on the countertop. They really, really understand marketing, and so they’ve got their, they’re within the atmospheric water generation.

They’re in a market where brand matters, and so that’s a really important part of their moat. It goes back to the business model. Unit economics are good. It’s relatively affordable to the customer. Have there been like Juicero examples at the countertop? Yes, of course they have. Is this without risk?

Absolutely not. It is a risky endeavor. All of these companies are risky endeavors. But I think that they have a shot of building a really big company and in the end Like it’s my job to try and identify potentially really big companies in this area

Antoine Walter: But we agree that it’s the absolute other side of what you were explaining the beginning of That sector might be conservative or whatever we want to call it.

But that means that, how do you define it? Low acquisition costs, long lifetime value.

Tom Ferguson: Oh, it’s, yeah, it’s a completely different business. But again, if you’re building a portfolio. Yeah, yeah, no, I totally, yeah, absolutely. And yes, for sure, love those businesses. Also, love businesses that can profitably sell a zillion units in a normal B2C model.

There are many ways to consume this gap. Are we closer to that model? Like, have we done a zillion different, like, direct to consumer companies? No, but we think we found the right founders in Reuben and Tyler who were not able to actually do the engineering So there was a German company which will remain unnamed that like with 17 million dollars at the series a failed to do What spout did on 250 grand in their garage?

These are very serious engineers And actually having a diversity of business models within the portfolio, I would argue is good.

Antoine Walter: You mentioned portfolio building and I was trying to draft patterns in your portfolios. I mentioned you have 16 companies, which I could divide in multiple of 8, which is a 6 1 1.

You have 6 kind of traditional ones, not traditional, but in the conventional exception of what you would expect from a water entrepreneur. Yeah, I agree with that. One on the edge and then one outlier. So the two outliers, we just discussed them, it spout to me. Spout and end line energy. So the traditional ones, you have a clarity love to have Juliet some fun destruction yet on that microphone to us, water, liar, sewer, AI, Beagle, swift comply, aqua fortress, and civil grids.

Okay. And on the edge to me would be. Eerie green precision watering for your loan. Sounds like a bit in this B2C or B2B2C world and cloud to street because

Tom Ferguson: Selling to insurance companies. Yeah, much different reasons. Yeah. It’s hardcore B2B. Yeah.

Antoine Walter: Is it a coincidence, this 6-1-1 or is it your way to design your portfolio?

Tom Ferguson: Again, really excellent question. Partially, it’s about portfolio design. Portfolio construction is one of the only free lunches. And one of the things about being a sort of a first time fund and first time manager, there’s a quote from a really great investor out in San Francisco, which is, You only understand how important portfolio construction is in venture when you’ve done it wrong.

And so it was really important to me that we were looking for diversity across various sectors of water. but also diversity across business models. But really, in terms of the appraisal, I think about what unites them, right? Is that each of them exhibits a very deep set of strength that I think add up to a really compelling argument around about why this business, whether it’s B2C, B2B, B2B2C, whatever, can be really big, especially relative to I was surprised that you didn’t pull out Beagle as one of the sort of the outliers.

Like, it’s not really kind of Silicon Valley gospel in the venture industry to go around investing in plumbing companies.

Antoine Walter: I’m working for GF Piping Systems, so maybe for me, Beagle wasn’t really an outlier.

Tom Ferguson: Sure. Okay. In general, not a good idea, but like Paul has very distinct advantages. He’s solving a really profound pain point that he was in an unfair position to, uh, exploit.

And also, everybody likes outcomes, right? We were talking about this. So my local plumber in London is called Pimlico Plumbers. They drive around in blue vans and they always have, like, beautifully turned out and, uh, Vans are exceptionally well organized, and they have great telemetry, and they do an amazing job, super clean, unbelievably high quality.

They’re twice the price of everyone else, and you can never get an appointment because they’re always booked. They just sold to KKR for 450 million dollars last year. And like people are saying that like investing in a plumbing company is not a good idea as a venture investment. I obviously understand like services businesses and like whatever, but like great businesses can come from anywhere and for all sorts of reasons just like the deployment of the potential owning of that relationship especially in the context of where plumbing is at the moment.

It makes me very excited every time I talk about it.

Antoine Walter: But you’re highlighting a clear bias which is to me piping system was a bit more down my alley so I was a bit less surprised by that than it was by the fact that you can survey the floods from satellites so to me that was a bit. Sure. More of a know it who word, too, but everybody has this bias.

Tom Ferguson: I’m not I think the best way to think about, uh, you know, our overall decisions and how they look together is that we have an, uh, an 18 section due diligence. Well, our overall due diligence is a lot longer than that, and that, that’s when you really have to go and go, go into the legals and details and all the rest of it.

But the initial appraisal, 18 sections, four to six sub questions per section. Is that your famous checklist? Of prompts, yeah, this is the checklist. And when someone runs the table, but it’s not like, is this B2B sass? It’s the encapsulation. Of all of the things that over the last 8 years of specializing here and I guess 13 years of being here kind of in and around water is the distillation with the input from tons of different people that I used to work with, currently work with, am bound to work with.

It’s the encapsulation of what we think is important to look for as the leading indicators. of the outcome. Cloud Street runs that list, SwiftComply runs that list, Irrigreen runs that list, Beagle does, all of it. Like, it can be relatively agnostic, but while also taking into account the esoteria of the water sector.

One other thing I will say in terms of something like Spout. Spout’s very difficult, getting traction in consumer is super difficult, the, like, when you do it, it’s, like, spectacular. And in many ways, it’s quite a lot easier. There are no points for difficulty in investing. And I think, maybe, why the hell are you saying that out loud, Tom?

Because it sounds like investing in water is like really difficult. Personally I feel like we know enough as a team. I’m not saying that we’ve demystified anything, the proof will be in the results, kind of, in the, in the end. We, I think, have a credible, like, way of understanding relatively early whether or not there is a real there there.

And I would just point you to, you know, Imagine H2O’s, and this is not all my Decisions like at all, but like an 80 percent survival rate out of an accelerator And again, I really this is not in my work It’s not even remotely all my work But like we’ll really are informed by a lot of the work that we did at imagine H2O and that’s 13 years of companies With 80 percent still in business.

Antoine Walter: And the cord is not fully cut, if I’m right, Nimesh Modak is one of your advisors.

Tom Ferguson: He is, he is, he’s our eyes and ears out in uh, Southeast Asia. He’s been very, very busy with ImaginAge to Asia, but we speak very often. He’s such a, I shouldn’t say this out loud, but I kind of, he’s such a wonderful person.

He’s a really, really great guy. I still very much consider myself part of the ImaginAge to Asia family. I try to be as useful as I possibly can. We sponsored an event, uh, with them at WEFTEC last year, which felt really nice. And I really want to, you know, hopefully build this into a financial position where we can be contributors to the amazing philanthropic work that they do

Antoine Walter: from your website.

I got that you have a 691 companies pipeline slightly beyond that now, but yeah, why do you have a pipeline? How do you watch them? And it’s all companies which at some point will go through your checklist and which you might invest in or is it just genuine?

Tom Ferguson: So market intelligence, these are the companies that for whatever reason have found their way to us Sometimes it’s us going to find them more often than not.

It’s people finding us Which is great, I feel like we’ve become relatively difficult to miss if you’re building a water company. But our job, as a specialist, miss nothing. We have to see everything that is created in the world to make sure that we really understand. We’re just not allowed to miss things.

You can be focused, but the price of being focused is you have to see everything. And you have to have a credible reason. Like the biggest sin in adventure is the, is the sin of omission, of something goes really big, especially if you don’t have a good reason for why you didn’t do it. So actually that sort of basically 700 number doesn’t quite capture a lot of the stuff that we see that’s kind of, there just isn’t a fair, or it’s like insane or whatever.

And we just don’t capture it. We’re doing much better job now because my colleague Jenny Graham is absolutely excellent and she’s spending more time kind of on the pipeline, but it’s just us tracking the companies that we see. It’s also quite kind of a manageable universe, but the number is really steady.

What’s really encouraging is what we thought would happen is happening is that the overall. The quality of the people starting companies in water is going up and to the right at a rate of noughts. And I just think it’s going to get more and more popular as a destination for really smart entrepreneurial minds.

Because you get these two things, right? You’ve got this ridiculously big market that basically literally can’t go backwards. It can’t get less popular, it’s not like crypto. It’s a trillion dollars in capex and opex before you get to ag, aquaculture, hardware, and consumer. And there’s less competition. And there are, excuse my French, but shitload of problems to solve.

So we’re very confident that we’re going to go and see more and more. But yeah, it’s a, it’s been a great field of companies to pick from.

Antoine Walter: I have to be cautious of your time, so I will limit my segways. I have one last question in this deep dive, which is How are you in terms of rollout of your capital? Do you still have money in your initial funds?

Are you opening more funds?

Tom Ferguson: I’m not actually like legally allowed to talk about whether or not I’m doing any fundraising. We are, we’re basically done with the first fund. The concentration of the effort is doing whatever we can to help this group of 16 companies be as successful as they can possibly be.

And hopefully there will be new funds in our, in our future. Hopefully we can expand the platform. Hopefully we can continue to be the partner to all sorts of like really brilliant Entrepreneurs and fund them throughout their life cycle. It’s been such a privilege and an honor, especially with the people that I get to work with, to be able to do this first fund and get it out there into the world.

Antoine Walter: As I said, I’ll behave and I’ll stop here for the deep dive. That’s also good because I have questions left, which means we should do a sequel at some point. That would be really fun. For today, I’d propose you to switch to the rapid fire questions.

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Rapid fire questions:

Antoine Walter: What is the most exciting project you’ve been working on? And why?

Tom Ferguson: I think it’s the creation of the BIV platform. Like the, the, the work of being useful to founders is never done. And it’s a really fascinating intellectual exercise to be able to build an entity that can make a meaningful difference in the progress and growth of companies that are as, uh, potentially impactful and meaningful as the ones that we back.

Antoine Walter: Can you name one thing that you’ve learned the hard way?

Tom Ferguson: Oh my god, I feel like I complain about the process of acquiring experience all the time. Information flows are really important, and if you get them wrong, bad stuff can happen.

Antoine Walter: Do you have a concrete example? No. Is there something you are doing today in your job that you will not be doing in 10 years?

Tom Ferguson: I probably won’t be doing as much administration as I’m doing. So the team will be

Antoine Walter: Yeah. What is the trend to watch out for in the water sector?

Tom Ferguson: Well, I think it’s the most powerful one, which is just the secular tailwinds that are just making this into a more and more obvious commercial opportunity, whether you’re a small company, big company, mid sized company, like you’re an entrepreneur looking for a something to place to go and solve things where you’re looking to something to work.

Like the most important trend is that this is a behemoth that is going one way upwards and there is nothing that anybody can do to stop it.

Antoine Walter: And last question, if I instantly became your assistant, so you can delegate something to me, what is the number one thing you delegate? I never said I would do it.

Tom Ferguson: God, it’s so boring. I, like, the admin again. I’m just really lucky. I really like my job, and I like all sort of parts of it. But the, there’s some nuts and bolts stuff that I have to do at the moment, which would be really helpful if I didn’t have to do.

Antoine Walter: And if you have someone to recommend me that I should definitely invite on that microphone as soon as possible, who would it be?

Tom Ferguson: Well, you’ve, Julie Mullin from Aclarity is a good one. Yeah, she would be great. John Bertrand at Doppler is really good. Any of our founders are really, really great. I don’t know whether you’ve already spoken to Peter Fisk. And I think you’d be a really, really good interviewer of Gary White. I’m doing a session with him in about a week.

I think he’s the best entrepreneur possibly ever. And Water. org is a spectacular organization. I’ve been trying. Yeah, yeah. Well, we’ll see if we can make that happen.

Antoine Walter: Tom, it’s been a pleasure. Thanks a lot. And I hope to have a sequel with you at some point.

Tom Ferguson: Yeah, fantastic. I really appreciate it. It’s been a lot of fun.

Thank you. Cheers.

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