How do you make a Water Unicorn? Well, it sounds like no-one has the recipe. In a world that features 700+ unicorn companies as I write this article, it is surprising to see that the Water Industry never got invited to the hypergrowth table. Yet, this leaves two questions open: why? And is it a bad thing, aka, is hypergrowth desirable in the Water Sector?
This is part of the special focus I run on Water Entrepreneurship
Table of contents
- Hypergrowth: A concept first introduced by the Harvard Business Review
- Can we build a Water Unicorn?
- Venture Capital, the engine for (Water) Unicorns
- Innovation cycles may hinder the birth of a Water Unicorn
Is Hypergrowth achievable in the Water Industry? Shall we maybe first define Hypergrowth?
Sounds like a good Idea. So let’s take the broad definition:
Hypergrowth: A concept first introduced by the Harvard Business Review
The Harvard Business Review first introduced Hypergrowth as a concept in 2008. They defined it as:
“the steep part of the S-curve that most young markets and industries experience at some point, where the winners get sorted from the losers.”Definition of Hypergrowth by the Harvard Business Review
Don’t worry, we’ll simplify this!
A company that experiences Hypergrowth is expanding and scaling at a pace that has seldom been seen before. In mathematical terms, the World Economic Forum gives you a Hypergrowth badge, whenever you grow by more than 40% every year!
Hypergrowth, the ‘national sport’ of the Unicorn Companies
Hypergrowth is the typical path of a certain type of companies: the Unicorns.
You may be surprised, do unicorn exist? Sure they do.
Unicorns are private companies with a valuation of over one billion dollars. The most famous former unicorns include Google, Airbnb, or Facebook, and as per June 2021’s count, there are 712 of them in the World.
But if you want to have one, I’m sorry. I work in the water industry, and there are no water unicorn. By the way, there are no environmental unicorns either.
Hence my opening question: is Hypergrowth achievable in the Water Industry?
Can we build a Water Unicorn?
I’ve bothered many of my guests with this one, here are two of their takes, first Gaetane Suzenet from the European Water Tech Accelerator:
I don’t think it’s crazy. I think we should do it as well. I’ve been looking at different business models. Is the traditional VC model that we all know the right one for the water sector? That’s a question. I don’t have necessarily the answer today, but I think, you know, if European startups were able to sell a service and not just a tech, especially with digital water, that would change considerably the way of the success in the water sector.
I like your ambition about hyper-growth, but if we had, you know, just growth, always, I think I would be a very happy woman!Gaetane Suzenet – Founder of the European Water Tech Accelerator
Building in “Rapid Growth” mode – insider views on Water Unicorns
Megan Glover has an interesting take at the matter. Because she knows her business first, but also because as Co-Founder and CEO of 120Water, she is on a path that may lead to a Water Unicorn.
So, is hyper-growth achievable in the Water Industry?
I don’t know. You know, I think our philosophy is we just want to grow as reasonable and fast as possible, and as the market will allow. But I think the market has to be ready for it because you can’t manufacture growth. And I think you have to have venture capital, that’s willing to understand that the market needs to dictate when they’re ready to buy innovation in water.Megan Casey Glover, Co-Founder and CEO of 120Water
They somehow both cracked the secret: to achieve Hypergrowth, you need Venture Capital.
What’s that you ask? Read on.
Venture Capital, the engine for (Water) Unicorns
Venture Capital is a type of financing where investors provide fundings to start-ups and small businesses against equity in the company. For instance, when you read that Transcend, led by CEO Ari Raivetz, my guest by Season 1 Episode 17, raises 10 Million Dollars to accelerate its path, it’s Venture Capital money.
We usually differentiate Venture Capital from traditional investing because of the risk that comes with it. For instance, when Peter Thiel invested 500’000 US Dollars in Facebook in 2004 against a 10% equity, it could have been another MySpace, swiftly up, swiftly down.
Had it been the case, Thiel would just have lost his money. Instead of what, we all know Facebook’s success story. Peter Thiel sold his shares in 2012 for about 1 billion US Dollars, so he multiplied his money by a mere 2000 within eight years. (Jealous Bitcoin?)
In a nutshell, Venture Capital has a high failure rate – companies that never make it – but when it succeeds, the results are so spectacular that they cover all the losses and still bring substantial benefits.
So, if Venture Capital money is the tool needed for Hypergrowth, how much of it flows to the Water Industry today?
Venture Capital in the Water Industry
I checked OECD’s watchlist of Venture Capital investments over the decade between 2006 and 2016. I excluded later-stage ventures, to focus on Seed and Early-Stage investments. According to these statistics, about 260 Billion US Dollars of Venture Capital Money has been raised worldwide in these early stages.
I then compared this number, with the count BlueTech Research’s CEO Paul O’Callaghan shared for that same decade in his Ph.D. Thesis “Dynamics of Water Innovation.” He identified an investment of 1.75 Billion US Dollars in early-stage Water Companies.
This means that about 0.7% of early-stage Venture Capital money flows to the Water Sector.
Not tooooo bad, but clearly low when you consider that Unsafe Drinking Water is in the World’s top 5 of health risks, while Water Scarcity could cost the World’s economy up to 6 GDP points.
So why so few investments in the Water Industry? Is it because Water start-ups fail more than the average, thus raising the risk for investors? I asked Paul O’Callaghan for some wisdom.
Why don’t we see a Water Unicorn yet? Is the Water Sector different from the rest of the industry?
Do Water Companies fail more often than others, thus disappearing before reaching the Water Unicorn achievement?
Somehow, the venture capital investment community would typically anticipate that 10% of their companies might make it. That they might succeed. So the success rate is relatively in keeping with that trend. The surprising thing about the water sector is the number of companies that don’t disappear or fail but don’t really make it either. They kind of live in this no man’s land, this gray area or gray zone, where they’re not very successful and yet they kind of hang on for a decade or two. So that’s probably what’s most unique, about the water sector compared to other industries.Paul O’Callaghan – CEO & Founder of BlueTech Research
So, no, water companies don’t fail more than the average.
But if that’s not preventing them from achieving Hypergrowth, what does?
Innovation cycles may hinder the birth of a Water Unicorn
Well, you have to look at the entirety of the innovation cycle. From the point where you take an idea out of a Laboratory and you begin your first pilot to the point where it now is right in the middle of the market, with, you know, a hundred or more plants out there. And the market’s going really rapidly. That whole timeframe can take about 12 to 16 years. So if you’re a startup company today in 2021, and you just did your first pilot, you would expect that maybe in 12 to 16 years’ time, this would be a mainstream market opportunity. That’s growing very, very rapidly. And it might move a little bit faster if it’s a crisis-driven or a needs-driven market, but those are the average timelines.Paul O’Callaghan – CEO & Founder of BlueTech Research
There we are! Innovation ticks at a particular pace in the Water Industry. A typical timeline for Venture Capital, is to seek an exit from their investments after 7 to 10 years. But if you do so in the Water Industry, you’ll be trying to exit when the company is still crossing the chasm, long before it gains traction.
Will we see a Water Unicorn?
Did we answer the starting question? Not really. Is Hypergrowth possible in the Water Industry? Well, there are no examples yet, that would prove it to be possible, and good reasons to explain why it never happened so far.
Yet, if start-up founders could leverage a better understanding of the way innovation ticks in the Water Sector, they may break the curse. Let me tell you that Paul O’Callaghan shares many helpful hints in that direction in the full-length interview he gave on the don’t Waste Water podcast; you shall check it out.
Finally, another path to explore would be to see more dedicated investors focus on the Water Industry. Be it early-stage accelerators like the Elemental Excellerator and the European Water Tech Accelerator you already heard on that microphone, or specialized Venture Capital funds and Sustainable Investors.
Thus, hypergrowth may become possible in the Water Sector. And who knows, maybe even desirable? But that’s another story; stay tuned if you don’t want to miss it!