Sink or Swim: Challenging times in water start-up fundraising

If the raw venture investment data is anything to go by, it seems these are trying times for water technology start-ups hoping to raise venture funding. After a modern peak in 2013 of 113 deals and more than $400 million invested, both annual dollars invested and deal volume have declined at a compounded rate of -24% per year, to just $148 million invested across 37 deals in 2016.

In addition, 2016 marked the first year since 2010 in which our i3 Platform tracked more growth-stage (Series B or later) venture deals in the sector than early-stage (Seed or Series A) funding rounds. As one might expect, the venture landscape commonly relies on a higher volume of early-stage than growth-stage deals, to keep a healthy pipeline of viable technologies progressing as non-viable companies are allowed to fail. Seed rounds are commonly under-reported in the press and so the figure may still be positive, but the data is nonetheless telling.

What are we to make of all this? A recurring theme from our conversations with market participants is that the low prices water utilities charge do not reflect the true cost of water delivery, aquifer depletion, and infrastructure maintenance in many jurisdictions. Are venture investors finding the economic case harder to justify? Or, were the 2013 highs driven primarily by higher oil prices and the need to treat more and more produced water, suggesting this decrease is merely cyclical?

All is not doom & gloom

Lower investment numbers notwithstanding, the diversity of businesses raising funding in 2016 is notable. From wastewater treatment platforms like Axine Water Technologies and OxyMem, to water infrastructure and smart city planning technologies like Cityworks and Civic Resource Group, to smart irrigation in agriculture with innovators like CropX, the 2016 venture deal list still paints a picture of a robust ecosystem.

All of these companies will be setting their compasses by the success stories of an admittedly precious few recent venture exits in the space. These include the acquisition of NanoH2O by LG Chem for $200 million in 2014 (backed by Khosla Ventures, Oak Investment Partners, Rusheen Capital, BASF, Total, and others) and the IPO of Aquaventure Holdings (backed by North Sky Capital, TPG Growth, Element Partners, Elevation Partners, and Virgin Green Fund) for $101.5m in 2016. The company is currently valued at $588m. Though few and far between, such examples demonstrate that success is possible for water technology innovation.

Further, we continue to see a dedicated group of broader ecosystem participants and facilitators of new technology including large corporations like Veolia and incubator programs like Imagine H2O, both partners in our upcoming Water Executive Summit, January 25th in San Francisco.

We can certainly posit our own theories on what ails water innovation or where it’s headed, but we’d rather hear from you, and facilitate a productive discussion that benefits all participants. Come set me straight and rub elbows with Veolia, Imagine H2O and other colleagues including Fathom, Axine Water, Edison Water Resources, XPV Water Partners, and others on January 25th.

Is water innovation/venturing/fundraising your thing? Email us for an invite to our Water Executive Summit. Cleantech Forum attendees enjoy free access (although an invitation is still required) while a limited number of others can register only for the Summit.