Water Tech with Burnt Island Ventures

Energy

Jan 9

Tom Ferguson is founder and managing partner at Burnt Island Ventures, which is an early-stage venture capital fund focused on technologies related to water. Burnt Island's website notes that climate change is water change. And that water is the medium through which we will feel the effects of a warming earth.

Tom has been working in water for over a decade, first at the sustainability consultancy, ERM, then at Imagine H2O, a non-profit startup accelerator for water startups. He’s been at Burnt Island Ventures since 2020.

Tom and Cody have an in-depth conversation about the categories in the water tech space, the types of startups that are emerging, how incumbents are navigating the rapidly changing environment in which they find themselves, and the types of investments he targets with this firm. There are whole episodes to be recorded in each of Burnt Island Ventures' focus areas, but for now we appreciate learning about water from Tom’s perspective.

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Episode recorded on Dec 7, 2023 (Published on Jan 9, 2024)

In this episode, we cover:

Importance of water in the context of climate change
Changing global water systems and the need for infrastructure upgrades
Burnt Island's approach to different water categories
The role of software and hardware in water tech solutions
Corporate water pledges
The importance of embracing entrepreneurial innovation while balancing production success
Burnt Island's portfolio breakdown
The need for improved storytelling and lobbying efforts in the water industry
First-of-a-kind projects in the water space
Tom's climate journey and how he ended up at Burnt Island
The investment focus and criteria of Burnt Island Ventures
The launch of the podcast "The Fundamental Molecule" by Burnt Island Ventures

Cody Simms:
On today's episode of My Climate Journey, our guest is Tom Ferguson, founder and managing partner at Burnt Island Ventures, which is an early-stage venture capital fund focused on technologies related to water. Burnt Island's website notes that climate change is water change. And that water is the medium through which we will feel the effects of a warming earth.
Tom has been working in water for over a decade, first at the sustainability consultancy, ERM, then at Imagine H2O, a non-profit startup accelerator for water startups, and at Burnt Island Ventures since 2020. We have an in-depth conversation about the categories he sees in water tech, the types of startups that are emerging, how incumbents are navigating the rapidly changing environment in which they find themselves, and the types of investments he targets with this firm. There are whole episodes to be recorded in each of Burnt Island Ventures focus areas, and I think Tom and I could have gone on for much longer than we did, but I had a blast talking with him and learning from him and I hope you enjoy it.
But before we start, I'm Cody Simms.
Yin Lu:
I'm Yin Lu.
Jason Jacobs:
I'm Jason Jacobs and welcome to My Climate Journey.
Yin Lu:
This show is a growing body of knowledge focused on climate change and potential solutions.
Jason Jacobs:
In this podcast, we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help.
Cody Simms:
Tom, welcome to the show.
Tom Ferguson:
Thank you so much for having me. It's desperately nice to see you.
Cody Simms:
It is great to see you and Tom, the work you're doing I think is so important and frankly under discussed, I guess is the word I would say. In the broad space of climate change, I'm going to guess you might share this perspective that I have, but to me water is frankly going to be one of the biggest symptoms of climate change and as a topic, honestly maybe less polarizing than the word quote unquote climate change. Are you going to say, "Hey, do you have issues with drought? Do you have issues with flood? Do you have issues with water contamination, water scarcity?" And I'm going to guess most people, regardless of maybe their political proclivities or whatnot are going to say, "Yeah, that stuff's important." Whereas, if you say, "What do you think about climate change?" Unfortunately, it can be a polarizing thing. So with that set up, I suppose would love to hear how you think about that?
Tom Ferguson:
Yeah, I wasn't expecting to start by invoking the name I'm about to invoke, but you are absolutely right. Obviously, seven levels of depressing that something like climate change can be viewed as a political issue kind of at tool. But when you have, in terms of the acceptability across the aisles, it really is one of the last things unfortunately that it appears that certainly the U.S. Congress is able to really agree on.
When you have Lauren Boebert, Republican of Colorado saying that there are three things that Coloradans care about, water, water and water. I mean it's obviously like Expedia in the fact that she was talking about the Colorado River at the time. But yeah, there is a really helpful overlap here. Within the climate change, I try not to spend too much time banging the drum too much because we're getting rid of carbon out of our overall lives and processes, adding to the stock within the atmosphere, removing what is already in the atmosphere is obviously incredibly important. But there is no question, well firstly, water is going to be the principle medium through which climate change is experienced. We don't take that idea seriously enough. We can obviously go into that.
But then also it is enormously overlooked within the overall climate space. Really no more than 1% of climate funding has gone to water over the last, well, certainly the last 10 years, but since the Cambrian explosion of climate funding over the last four to five years, water is enormously overlooked. We've just wrote a piece as to why I actually don't think people are just throwing it away. I think there's a ton of stuff that's inside investors' circles of competence and water just happens to lie outside the cycle of competence of most investors. I think there's an interesting and increased demand to bring it into their circle of competence, but it's an esoteric beast like every market that serves us, I think fairly well for the moment. But if we're going to solve our water challenges, I think it's incumbent upon us in the water sector to start telling our story a bit more effectively, which is not something we have historically done well.
Cody Simms:
We had an episode on the pod maybe six or nine months ago on geopolitical risk from the head of risk management. I'm going to get his title wrong, but he works in risk at Macquarie, and one of my takeaways from that conversation from Alan Leung, was his name, is that when you look at big global risk profiles and you think about climate change, climate change itself isn't the risk. The risk is extreme heat causing migration, causing destabilization, and then in many cases one of the other big risks is either too much water or too little water, flooding or drought. And when you really take a step back and look at what's causing destabilization globally and think about it related to climate change, water is obviously one of these huge factors that is going to potentially paint the global geopolitical map for the unfortunately at least the next 50-plus years, or put another way, our lifetimes.
Tom Ferguson:
Yeah, I think that's right. One of the things that I've always really liked about water is that there's nothing like a unidirectional bet. If you're going to say something with 100% certainty, water is only going to become more important. It's only going to become more visible. It's only become a more attractive sector for the destination of dollars, which is obviously the half of what we're doing. But in terms of our ability to survive in the world, we in the Global North, I guess I'm not super happy with those assignations, but in the Global North, we're so lucky that we spend so little time thinking about it. When you don't have access to water, it's the first thing that you think about when you wake up in the morning, it's the first thing that you solve. But yeah, your previous guest is exactly right.
One of the things that I think is probably most overlooked is that when you have the intersection of moving populations, where do they end up going to? They intend to go to urban environments. And urban environments tend to be coastal, and so when you have intersection of rapidly expanding populations in urban environments on infrastructure that even if it is there, it has crumbled to the extent that it is borderline, well it certainly, it's in need of some renewal, let's just say that. But when you have rising sea levels at the same time and the increased salinity of coastal aquifers, even before you get to the ability to clean and convey the water, you're looking at quite a negatively spicy mix that you want to get as far ahead of as you possibly can.
Cody Simms:
So let's continue to pull on that thread a little bit. How are our global water systems changing right now?
Tom Ferguson:
So to put it in some sort of context, federal funding in the U.S. fell out of bed at the end of the '70s and has only recently started to recover. This was just one of those things that they decided to stop paying any attention to, and when you are a consulting engineer and you build these infrastructure assets, you know this, they're built for basically a forty-year useful life. And so the corollary of that, we're sitting here in 2023 about to be 2024, it's not an unreasonable statement to say that a very large proportion of U.S. water infrastructure and wastewater infrastructure has aged out. And the ASEE ratings of, I think it's now C minus and D. I think there was a little bit of an upgrade thanks to some investment that's happened, but it's still, this is busted.
I'm from London. We subsist on really very good, but nonetheless, very Victorian sewerage infrastructure. They've spent the last period of years basically dividending out any excess cash to their shareholders rather than actually investing in the underlying assets, which was not a good idea for the overall resiliency of the system. Basically, what I'm trying to say is that if you are thinking about essentially the quote unquote western world, Global North, whatever you'd want to call it, is that the systems that are there are precarious. So Italy for example, loses about 48% of its drinking water that actually goes into the pipe systems. Spain is north of 40%. California is still I believe, north of 20%. So you treat the water, you stick it into the pipe, 20% of it falls out. In California, which we all know is not exactly what we shouldn't be thinking of is replete with water resources. So do we have it? Yes. Is it falling apart? Also yes.
And then you look at the rest of the world where you really don't have the best mental model for this is that this is water infrastructure that is still there to be built essentially. A lot of it is kind of cobbled together. You're putting together a specific development and then you have the pipes in the ground, but they connect to the main thing. It's not like city of Chicago where MWRD do a really fantastic job. It's all a little bit cobbled together. And so if you're thinking about the overall infrastructure, there is a real opportunity for leapfrog, exactly the same way as we've seen in the banking system and the telephony system and the data systems and all the rest of it, is that it's a reasonably safe bet that you're going to be looking at a very high degree of decentralized infrastructure both on the drinking water and on the wastewater side of things.
Exactly how that's going to manifest is difficult. There's still a huge amount of work to be done on existing centralized infrastructure on a unit basis. It's still the most efficient way of getting wastewater and water services to people. But on a de novo basis, there is a really interesting inflection point happen where you are starting to see the advent of decentralized systems not only in whatever you call it, Global South, but also in large buildings now have purple pipe systems that involve the reuse of large, large quantities of water that come out of those buildings around and around. It looks like we're getting over the yuck factor, but that's kind of how we think about it.
In general, the overall message is there is an enormous amount of work to do, whether or not you actually already have the infrastructure in place or whether you don't yet have it in place.
Cody Simms:
I'm curious, when you think about the subsectors of the water space, for lack of a better term, obviously you at Burnt Island Ventures presumably have your own thesis around this. I don't know if there's any universally acknowledged categories. I would tend to think of it as you've got access to clean water, presumably mostly for drinking or sanitation use for individuals. You have agricultural water, which is probably a different category. You have commercial and industrial water in some way, shape or form. So those are different customers, different uses of water I guess.
Then you have the impact we face from water that may be out of our control, so drought, flood, et cetera, all of the risks and infrastructure inherent therein. And then you've got natural watersheds and you've got the ocean. When I think about the space, I have not spent a bunch of time drawing boxes and frameworks, but that's how I tend to think about things. I'd love to hear how you do?
Tom Ferguson:
For sure. It's so funny, our overall desire, I sometimes wonder whether I'm being lazy and I don't know whether I'm being too open. But our desire is, people, especially within this profession, to be able to impose order upon chaos is something that unifies us all, I think. And we obviously do it. It's really important that we understand the verticals of use and various incentive structures that govern those verticals of use, the levels of activity that need to be done for sure.
One side thing I will do is that there are sometimes I think that this idea of VC thesis building is interesting is that the reality of the world is so complex. It's so complicated living out there in the world to introduce a tool into the hands of an operator of a wastewater treatment plant outside Indianapolis or something, and for me to sit here at my desk, despite the fact that I've only been doing early-stage water for like eight and a half years now. Even I'm like, whoa, this feels at best optimistic. At worst, oddly intellectually, is out of arrogance is the right word?
This is the reason why we love, why we love when people walk through the door and they tell even us as water specialists about a sub-segment that we immediately know is going to be big enough to hold a very large business that would be almost impossible to underwrite from a desk, because they have an understanding of the reality that it's almost impossible to get there. It also means it's very likely to be competition. I'm going to shut up about that because it's one of these things that I can get so boxy about.
The best way we think to think about it. So when we put it up on the market slide deck, we have the drinking water side of things, so the full stack, the conveyance in the whole treatment infrastructure, the digital elements, so all of the monitoring and sensing and all of the software layers that are on top of that, the conveyance out. Then there's a whole bunch of stuff around the people that are doing work within that plant. The chemicals that are used, basically just capex and opex within the drinking water infrastructure. And then the capex and opex within the wastewater infrastructure. So same, these tend to be multi-stage operations, everything from membrane filtration but also just settling tanks, all of the stuff that needs to be done sometimes as simple as rock, but there's a huge amount of potential points of upgrade or deriving economic value out of that capex and opex on the wastewater side of things.
And then we have broad-based industrial commercial. So how is water used? Again, capex and opex across everything from mining to big-box retail to semiconductors to whatever it is. Ag is worth putting on its own because it's actually quite a weird one. Ag uses an enormous amount of water, 70% of available freshwater resources. We haven't been able to find it a desperately productive market for us because what irrigation infrastructure tends to be there if people are buying it at scale and they are loath to replace it on any cycle. It is there until it's busted and then when it's busted on goes the tape and it remains. The upgrade cycles are really, really tough.
So in general, it's actually not that big a market. We think about agriculture separate quite reasonably separately, especially given its growth rates. And then you've got consumer, so it's really important that we do not... So everything ex-consumer and ag and aquaculture is about a trillion dollars. But if you put Ag, aquaculture, and consumer in particular and consumers' the lion's share of this, depending on which way you cut it, you're looking about an extra $450 billion of capacity. We buy an awful lot of bottled water, shame on us. And that is a big and juicy target. If I can make the prospective future shareholders of liquid death slightly less happy, I will be very happy indeed. Not to necessarily pick on a single brand because they all kind of suck. So that's how we think about it.
But the last thing I'll say about how you should organize this in your head really is just like where does the droplet of water flow? So classic, I was 11 years old in a slightly old-school desk in a geography. Then somebody put up a picture of a cloud going up over a mountain and then the water falls down. It either goes to a river or it goes to groundwater, and then it is used into some kind of beneficial use either for drinking water or out onto the agriculture. If you just follow it through the flow of society, you can generally have a pretty good breakdown of where the opportunities are to build new solutions for the overall sector, which is everywhere. People often say that water is like energy 40 years ago. It slightly makes me wonder about energy 40 years ago.
Cody Simms:
Interesting. So make sure I captured this down. I heard you say the categories you track just for all of us just to... You're the expert on this and we're all learning, so you track drinking water as a whole thing. You track wastewater as a whole thing, which I didn't even mention in my summary of the space, which is ridiculous. You track commercial and industrial as a whole thing. A subset of that or a side box of that is ag because it's so big and impactful and then aquaculture is even another subset of ag because it's so different. And then consumer and basically our... Which is separate from the drinking water space, just the consumer post-production purchase of water I suppose is its own category.
Tom Ferguson:
Exactly, and that includes every faucet, every shower head, every bathtub, every whatever it is, recirculating showers. There's a huge amount of ways as we as consumers interact with water, there's an awfully large market. There are about eight and a half billion shower heads in the world. These are things that can be improved upon.
Cody Simms:
Just about every human takes a shower or a bath I guess at least once a week.
Tom Ferguson:
Well, I've got a couple of mates back in London...
Cody Simms:
And I guess toilet, right? Everyone's using the toilet to the extent there are a lot of people who don't have access to clean sanitation, but in the Global North.
Tom Ferguson:
Exactly. Toto is a big business. Kohler is a big business, actually run by an old classmate of mine. She's amazing. But the Kohler is a really, really big business. And then it's also just remembering as you're looking at all of these things, it's not remotely surprising that you gloss over the whole entire wastewater. This again, it comes back to are we any good at telling our story? No, we're absolutely terrible at telling our story because everyone takes it for granted.
But if you actually go to a wastewater treatment site, it is an unbelievable feat and marvel of engineering run by some of the most dedicated professionals that are foundational society who do an amazingly good job, unbelievably quietly. And as a result don't get the resources they need to go and do that job. It drives me absolutely bananas. But it makes me very grateful to people like John Oliver who get incredibly excited when a wastewater treatment plant renamed themselves after it renamed themselves as the John Oliver Wastewater Treatment Plant on the basis that they were both full of shit.
Cody Simms:
Well, and also shame on me for leaving that category out because quite literally the pod that I recorded immediately before this episode with you is with the chief revenue officer at Sedron Technologies, which that's what they do is wastewater. So like, oh my gosh, I just spent an hour of my life diving deep into the topic.
Tom Ferguson:
I like those guys. No, it's also really hard. Everyone was like, "Oh yeah, the Bill Gates reinvent the toilet challenge." You got to give a lot of time, a lot of effort, a lot of energy, a lot of money to not get that far. This is really difficult as a way to move on. But there is a pot of gold at the end of the rainbow for the people who unpick that particular lock and we keep our ear very close to the ground.
Cody Simms:
And then I didn't hear you talk about what I would call the... This is going to sound strange given we've just talked about a bunch of things that are heavily resiliency oriented. But when I think of climate resiliency, I think of flooding, I think of drought, I think of those categories. It sounds like you would think of those within the opportunity set of the systems that you define?
Tom Ferguson:
It's a layer underneath all of it, and it goes to digital as well. But resilience and adaptation because for everyone else, like all of us, really interesting things happen when you get to inflection points. There are inflection points happening all over the place, but resilience and adaptation is a theme is obviously a big part of where we're going to. And so what we overlay onto drinking water, wastewater, commercial, industrial agriculture, consumer is okay, what's going to happen when the seas rise? When the amount of water falling out of the sky gets both larger and smaller and more unpredictable? What happens?
There's an insane article I was reading literally yesterday, is that the overall amount of water that is being used in the western states is going down, but the peaks are going up. How the hell do you design a water system that needs to have the latency to take into account a rising peak? But where the average overall usage is going down because of the heat. Water remains like a phenomenally effective medium for cooling and heating, actually.
One of the weird things is that in the industrial side of things, the world still runs on steam. We just elect never to talk about it. The industrial boiler is insanely ubiquitous in terms of the overall stack along with the individual wastewater treatment system. They happen to be two of the elements of the industrial system. Reliably, the people who are running that system want to have absolutely nothing to do with because they're the ones that have been imposed upon them.
Cody Simms:
It's interesting, if the industrial world runs on steam, the digital world runs on cool water because that's how our data centers work.
Tom Ferguson:
Yeah, exactly. And it's one of these larger questions which comes back to this idea of circle of competence for us. One of the first deals that I was faced with in 2021, or not faced with, I mean we'd seen a lot of stuff, but it was one of the first times where I'd run into... This is fascinating. It was a really interesting dyeing technology based outside Oxford in the UK and it promised to be able to reduce essentially the water use within the textile process by about 70%, which if you know anything about the surface water issues, especially in India, Bangladesh, and Pakistan, that would be a really, really good thing. Just having 70% volumetric reduction would be great. I just happen to know very little about how people integrate new dyes into their textile process. How is it that you can go into the suppliers for Zara and H&M and whatever and get to actually change their dyeing process? I don't know. Then that seemed like an easy landmine for somebody like me who was like, "Yes, I want the water reductions." But this doesn't fall within my circle of competence.
I know enough about data centers to be dangerous and this is one of the things that we're actually looking very, very closely. One opportunity in particular at the moment that promises direct to chip cooling, if that comes then it's going to be a lot easier. Because the last thing that Google wants is people protesting it in Uruguay, which happened about two months ago. Is stick up a data center, you get into competition for water resources and the next thing you know you've got your logo on a newspaper in exactly the place that you do not want it to be. And otherwise, we all saw the Gemini release yesterday and all I could see was data requirements. It's going to be a Meta theme for a while.
Cody Simms:
On that note too, Microsoft, I guess famously has made a fairly large corporate water pledge, which seems like one of the early trailblazer I guess in that regard perhaps. I don't know how much you can share about that or how much you know about it off the top of your head?
Tom Ferguson:
Yeah, they're very good. Well, Eliza Roberts who runs Microsoft's water work is phenomenal. She's really great. I don't want to throw shade on data providers in water because as far as I can tell, they do like yeoman's work, but she gave an absolutely fantastic presentation at the CEO water mandate basically pointing out that we think we know things about groundwater and we don't. Whenever you look at the publicly available databases of groundwater, a lot of time when this comes up everyone's like, "Nah, that's cool. We've got the NASA data." Nope. Anytime you've got anywhere close to understanding exactly what the stops and flows are of groundwater, which is the best way of thinking about that, it's your current annual savings account run together. The fact that we have no idea basically how it works until the floor of the Imperial Valley drops 12 feet over six decades, this is not a good thing that we don't understand how groundwater works in 2023.
Anyway, that's just one example of the work that she's done. The Microsoft, the head of water, Apple, absolutely phenomenal work. Google's sustainability team has done a really, really good job. These are all doing excellent. The market being what is that they're going to have things to look at. It's actually a really interesting vertical. Nobody wants to be running water in and around a data center. One thing, two things that should not interact, it is unbelievably expensive Nvidia chips and water. As you're looking at things that you would want to remove things from, that itself.
But then it is also like, okay, how do we have unbelievably accurate leak detection system? How are we absolutely certain about the quality of the water that is moving through the coolant system? How do we make sure that that, given that we're going to be spending so much money on pumping the water around, because water's really heavy, how are we going to make that as efficient as possible? How do we know when the pumps are going to be operating as efficiently as they can? How do we know when they're about to break so we can have more effective systems without having to build in massive redundancies? It gives you an idea of the rabbit hole of when we're looking at ourselves as water investors, all of this stuff is well within our purview.
Cody Simms:
Somehow I've managed to pull us to the topic of big tech.
Tom Ferguson:
Hi big tech. We don't cross over with it all the time. They're a great group of professionals.
Cody Simms:
Let's pull back from that because it's interesting in climate as well, they're doing a lot of very forward-thinking work. But you compare their impact to the impact of big oil and gas or big industrial and obviously it's smaller. And so I'm curious for you in water as well, where are you seeing large-scale change being desired by incumbents? And what do these business development or commercialization pathways tend to look like? And I know we just talked about multiple sectors and very different types of technologies required. I'm curious where you're seeing there being a lot of appetite for change today?
Tom Ferguson:
The stuff that hits their headlines and the stuff that doesn't. Taiwan Semiconductor wants to be putting it up. I'm going to say it's wrong. It's either Arizona or New Mexico, I can't remember. Probably one in each, I guess, access to water, a fundamental predicate of their siting decisions. So things like the massive expansion in all of that work. Essentially the manufacturing onshoring, when you are looking at everyone from Shell to Ford to whatever it is, if you're expanding all capacity, one thing you look at whenever you look at any new plant, you know that there is a wastewater and a treatment of the water on the way in, the capacity is there. That, increasing and renewing your manufacturing capacity, everything from making cars to making Pepsi or whatever, there's just a huge amount of water that's there. So the increase in manufacturing capacity is really interesting.
One of the areas that is interesting and in flux at the moment but has been a very interesting market in terms of its potential, not necessarily in terms of actually what's shaken out for reasons that I'll touch on. Domestic oil and gas is one of the things that the U.S. is now full-time the size the producer of Saudi Arabia. I mean this is beyond serious. I know we are both in the game of not being hugely excited about the continued use of oil and gas, but the good people of the Permian Basin, which is four times as productive as the rest one. They just had a 5.4 Richter scale earthquake two weeks ago. It's not on a fault line. This is not cool. The degree of pressure that is there, subsurface, it is going to be enough for the Texas Railroad Commission to shut down production in the Permian Basin unless you have a way of sequestering the water, which is, it's another part of it.
Cody Simms:
I grew up in Kansas and we have earthquakes in Kansas now.
Tom Ferguson:
Exactly the same thing. Yeah, it's wild. That's been another driver of it. There are a gazillion different parts of it. But then there's the stuff that really is overlooked. There's still some really dumb things out there. So advanced metering infrastructure, I mean you spend a lot of time in the power world. There aren't that many power meters now that don't throw off data back to a centralized position so that it can be run from a large set of screens in the utility itself. AMI has only reached 45% penetration within water utilities in 2023, so each of those needs to be read basically by a human.
Cody Simms:
AMI, Advanced Metering Infrastructure?
Tom Ferguson:
Advanced metering infrastructure, basically the way we should say is that like throwing off the... We just have dumb meters. It's absolutely insane. We're looking at pain points against which you can build business cases. There was a period in 2022 where the city of Houston had a 21% vacancy rate in its water utility, so one in five people were not sitting in their seats. These are not tons of fat, everybody's just pushing paper around organizations. These are run very, very lean. They have very low budgets. And if you've got one in five people not sitting in their seat, you need to basically transform the way in which you are running that thing because they can't hire. They're not competitive in terms of what they pay people. So it comes to do, okay, we need to do more with less. And that is really interesting for a whole bunch of things, especially on the software side of things.
Just as an aside, I bumped into a guy who I really like who runs Delta Diablo up in the north of the Bay Area, and he had more or less changed his personality. He used to be very tied by the book, walked around in a beautifully pressed gray suit and blue shirt and a tie and all the rest of it, [inaudible 00:27:32]. And I saw him, he had an open-neck collar, wasn't wearing a jacket, he's grown a beard, his hair had gone a bit longer. And I was like, "I mean, so what's the deal? Are we microdosing or what's going on?" And he was like, "Yeah, the way in my leadership style wasn't working for my utility anymore. We couldn't hire people to do the job and so what I needed to, change the culture, do something that was far more entrepreneurial, far more straight outside your lane, far more just we need solutions all the time. And me running rule books all the time was getting in the way. So I had to relax." It's fascinating.
Yin Lu:
Hey everyone, I'm Yin, a partner at MCJ Collective. Here to take a quick minute to tell you about our MCJ membership community, which is born out of a collective thirst for peer-to-peer learning and doing that goes beyond just listening to the podcast. We started in 2019 and have grown to thousands of members globally. Each week, we're inspired by people who join with different backgrounds and points of view. What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change.
Some awesome initiatives have come out of the community. A number of founding teams have met, several nonprofits have been established, and a bunch of hiring has been done. Many early-stage investments have been made as well as ongoing events and programming like monthly women in climate meetups, idea jam sessions for early-stage founders, climate book club, art workshops and more. Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to Mcjcollective.com and click on the members tab at the top. Thanks, and enjoy the rest of the show.
Cody Simms:
It's fascinating, but it also strikes me thinking about parallels with energy as being a space where yes, you want to embrace entrepreneurial innovation but you can't embrace the idea of failing quickly in production when you are trying to distribute water to millions of people or deal with wastewater, for example.
Tom Ferguson:
Yeah, Eric Reese is an amazing guy and he is done a huge service to the overall site and it doesn't work in water, especially not in drinking water. So our third partner who just joined us at the beginning of last month is a wonderful guy called Steve Kloos who's been investing in water for a very long time and he's probably the best hardware guy in the world, specialization in filtration and all the rest of it. And you don't want to get him started on how little there is a fit between move fast and break things or fail, or the lean startup model when you're dealing with critical infrastructure. There is a necessary immune system for critical work that needs to be there and everyone's always like "Utilities are just really slow." No, you're not making a good enough argument. They know their job.
You can't sit there as an entrepreneur and complain that utilities are too slow when you haven't been able to unpick the problem of their incentive structures. Those that do do very well. And is there an inbuilt advantage to incumbents who are doing essentially incremental innovation just to like one foot in front of the other taking advantage that go-to-market pathways? Absolutely. These relationship count for a huge amount because the relationships are built on time and trust, which neither of those startup have.
But there is a ton to aim at. But I think the corollary or the implication of what you said is that utilities are always going to be slow. It's just not true. The Daupler who are our largest holding in Fund I, they're an emergency response management system.
Cody Simms:
They're a Techstars company too. I've been involved with Daupler in my past.
Tom Ferguson:
Techstars, Kansas City. John is amazing. I was just with them last week. He's done an extraordinary job. Amtrak just reached out cold. I sat in front of them in their full company meeting. I was like, "Guys, you are aware you're acting on one of the organizational principles of the world. Anybody that has a set of fixed assets with which the world interacts needs to understand what information is coming in, you need to be able to automatically triage that information and you need to be able to dispatch people against that information."
Anyway, Daupler's great. Time to close, 34 days. It's like lightning for SaaS. Ziptility who has done an absolutely amazing job this year. They're at 42 days to close. If you understand your customers and if you're speaking their language in terms of their pain point, if you're talking in terms of the value proposition, if you understand who to look for, if you understand how to get through the RFP process and all that kind of stuff. There's another interesting observation about RFPs I'll go into in just a second. These can be really, really productive customers. And they never fire you. So you can underwrite to absolutely amazing LTV equations. But yeah, if you're dealing with really, really critical, especially in and around drinking water, you've got to build the company from the ground up, not based on hope. You've just got to build it from predicates of the market and too few people do that.
Cody Simms:
That's such a good reminder. What are your validated assumptions? What are your unvalidated assumptions? And how do you go out and get your unvalidated assumptions validated as fast as possible?
Tom Ferguson:
Progressively burn it down. There's an interesting inflection point on the drinking water side of things, just to give you an idea about how ridiculous the water sector is. So the fundamental reverse osmosis technology was created in the '50s, into the early '60s, commercialized from the '60s into the '80s and is still the building block upon which we predicate the treatment of water. If you just think about that in the context of you literally can't really do it in terms of software, you're going all the way back to punch cards. In terms of the electronics, what was happening, what were we using in the '80s compared to what we're using now? We have so much ground to cover.
Cody Simms:
Let's actually look then a little bit at the Burnt Island portfolio briefly. I'm curious what percentage you are funding or seeing that are software solutions to these challenges? And what percentage are hardware or infrastructure or process related solutions?
Tom Ferguson:
Yeah, so we thought it was on the way in we... Water is a physical molecule, if you're scared of hardware, you shouldn't be investing in water. All of the largest companies are going to be probably going to be on the hardware side of things just because of the interaction with the physical molecule. But software is a slightly more durable business model or at least it's somewhere that people like me and you, we all know that the economics can be. And the scaling ability can be more attractive for obvious reasons.
We thought it was going to be 60/40 software/hardware. Actually reversed, so we're actually 60% hardware, 40% software by dollar value in Fund I. And we'd actually probably anticipate it being the same. We'd like it to be a more even split, but for whatever reason the people with the most compelling arguments and they are layering software elements on top of it, they want to obviously get to that ARR flavor of revenue for obvious multiple reasons, but also just the advantages within the overall cash flow model for the business themselves.
But we were slightly surprised by our overall, I mean it wasn't really willingness. With a lot of the hardware stuff, the check was dragged out of our hands. It's like when you ask yourself is this the best overall argument for a business that we have seen so far? The answer was just yes. Our last check was into a company called Irrigreen, run by a fantastic guy called Shane Dyer, real IoT veteran. They basically rebuilt the sprinkler from first principles, slightly apocryphal story, but one of the CTO is one of the godfathers of inkjet printing. He's responsible for an embarrassing amount of the IP in any given inkjet printer. And so looking out of his kitchen window, he watched his sprinkler merrily throwing water onto his driveway. And he was like, "I can get the tiniest dot of yellow ink to the most improbably precise location on a piece of paper in a plastic box and do that reliably for years. And I have something that's throwing a droplet onto concrete. This is insane."
And then so he went and rebuilt it from the ground up. So it's basically a single point that can throw water to any given external configuration, including just to the base of trees and bushes, if you're working in a rock garden or working with native plants. Absolutely phenomenal, but built in within that, the CAC is as low as we expect it to be. The ASP is as high as we expected it to be. There's actually been some really interesting bloopers and promises. There's one go-to-market pathway that we expect to be super productive. Actually it turned out to be a bit of a tougher nut to crack, but the blooper came in because they really understand marketing. The e-commerce platform has been kicking off, absolutely exceptional.
But then there's also other stuff that we're really interested in that a lot of people would be like, "Oh, all right sunshine, are you sure?" And who knows? Maybe it won't work out in the end. But when you look at Beagle Services, a plumbing company is not exactly who people who have got the VC playbook in their hand, they're not necessarily saying, "You, go find services businesses because they're great and fit what you're trying to do."
KKR bought Pimlico Plumbers, my local plumbing company in London for 450 million pounds last year. These are very large businesses. And what Paul, who was the CRO of a company that was bought by Moen called Flo Technologies, which is basically a shutoff meter. So you put it in the front of your house, it detects when there's a leak, shuts all the water down so you don't actually have the leak so you don't have to go in through the river of awfulness, that is a home leak. But they weren't being deployed because no plumber wants to learn how to do anything new. They want to make their money at 2:00 in the morning, gouging the hell out of their customers. It's how they've been doing it for 40 years, et cetera.
But Paul was like, "This is nuts. We've got the technology, the homeowners want it. The insurers want it critically, this is the number one avoidable payout for insurance. I'm going to build the plumbing company that's predicated on the deployment of IoT and then I'm going to be the first point of call for the data. So I have a really credible argument for owning that." I mean, on average we spend about $750 bucks a year per household with plumbers. It's just a great business. I mean it's not on the hardware side of things, but it's certainly in slightly, it's a part of the overall economy that usually wouldn't be looked at by VCs.
But as far as we're concerned, hardware, software, hardware enabled software, even the services side of things, as long as the entry price is right and we can see a pathway to really scaling revenues in the way that it has to be, everything is absolutely on the table. And frankly we love hardware because there are pricing advantages and we think we're really quite good at it, especially with the addition of Steve to our team.
Cody Simms:
So you mentioned software and SaaS, you've mentioned software enabled hardware or basically hardware product that is a thing you can buy and install. You mentioned services business here. One piece you haven't mentioned yet is infrastructure-related hardware companies, which I presume you're seeing lots of these. And one area I'm curious about in that regard is in the climate space there's a lot of conversation right now on first-of-a-kind financing and how do these more infrastructure-oriented hardware companies get their first plant financed? They may have $50 million in LOIs, but until they build a facility like it's a piece of paper.
In the energy space and in the industrial space, you're starting to see large corporations step up and provide some project financing in addition to maybe equity. You're starting to see some specialty funds emerge in that space, but it's still pretty undefined. I'm going to assume water is similar, but you tell me otherwise.
Tom Ferguson:
It rhymes. I mean in terms of our own underwriting, I mean it's not like we don't need to put in, I don't know what the equivalent would be, either like a Solugen plant. We don't need that level of... I mean some companies do for sure. If you're doing like super critical water oxidation at scale, at the utility scale, yeah, we run into exactly these things. There is a risk profile there that is quite difficult for us. We have found it quite difficult to make the case that it is there.
But in terms of the first-of-a-kind financing, the first part of it is that if you're going to run into something that needs it, you've got to make sure that you have the depth on the balance sheet to be able to really do it yourself basically. This is something that we've really kept in mind and we've been lucky to work with some really wonderful financing partners on all three of them. ZwitterCo and Aclarity just to honk on, $15.6 million Series A, you've got to have the capacity to be able to build whatever it is on your balance sheet straight out the gate.
We all obviously all love what Jigar and the team are doing at the Loan Programs Office. They are not allowed to invest in water infrastructure. They're not allowed to do it. It's not within their purview, which is seriously annoying when they just got another quarter trillion dollars in the Infrastructure Act. Anyway, no shade on them. It comes back to us being able to tell our story in the right rooms of being able to do that.
Cody Simms:
There's no equivalent in Ag or DOD or other U.S. Government agencies?
Tom Ferguson:
Bits and pieces, the [inaudible 00:39:49], the state revolving funds got everyone said about it that made it look like it was new funding for them. There's a little bit of new funding, but it's basically just topping them back up. It's what was already there, and everyone's clapping themselves on the back. It's fine in terms if you're thinking about things that are overlooked, not only are we overlooked in terms of the private financing, but in terms of the public financing. And it drives me absolutely nuts. When you actually look at the amount of money that is spent on lobbying, this is what is publicly disclosed rather than what goes into dark pools. I'm sorry to take us here back again.
Cody Simms:
I think I need to get you a meeting with Lauren Boebert.
Tom Ferguson:
I'm sure we'd both love it. But when you look at Vestas, the energy companies, sorry, the electric energy companies, the renewable energy companies, these are not a lot of money that they are given kind of campaign contributions. It's not a difficult leap to think that actually, oh, when they were putting the IRA together, is it a wonder that an awful lot of it went to the energy companies? Because when you look at what the water companies spend on it, it's not a lot. Don't get me wrong, I'm not getting on the back of the people who are doing really, really important work in terms of engaging with the people who are writing laws and all the rest of it. It's just that we don't speak in one voice like so many of the other sectors. We have the wastewater people and the drinking water people and then we have the clean water.
Cody Simms:
It's interesting. Yeah, you look back even through our pod archives, at the various guests we've had on the show whose whole organization exists to tell the climate story and to package it, and help people understand the talking points. There are orgs out there that exist to do this work.
Tom Ferguson:
No, it really does. I was talking to someone relatively senior within one of the large tech companies and she pointed out that we had a vote solar movement. Why shouldn't we have a vote water? As if we haven't looked at the largest and most effective? I always wonder, well, "Got Milk" worked for the milk industry. What's the equivalent of that for the water sector? Just going back to the Capitol Hill. If you're going to be living in a world where you can write your own rules, go play the game. And that is something that we've elect not to do and it drives me kind of nuts.
Just to take us back to the first-of-a-kind financing, I've said about, we touched on the lack of it. Though, things are improving a bit. There are a $100 billion in the last 24 months, so specifically three different bills, but it hasn't found its way into the market yet. We'll see how long it takes to do it. If you're going to get into this, you've got to have a deep enough balance sheet and that means making sure that you're building the relationships for it.
But then the other ones, even economics help an awful lot. Endline Systems, basically they fit onto industrial boiler to replace a pressure step-down unit, which are prevalent on all industrial boilers. This is the intersection between the water, well, we call it the water energy nexus. They're operating at about 60% to 80% efficiency. But what's a real killer is that they're just really profitable on unit basis. Now 55% gross margin and they get 50% of the cost of the unit upfront. Which means that they're not embedding a whole bunch of equity cash in stuff.
One of the most effective actually interventions within the water sector, a wonderful pair of people called Neil Berman and Linda Heitzman, they run something called Bertzman Social Ventures. They had a relatively large slug of change from an exit that Neil went to. And they looked at the various interventions. I met them at SOCAT in 2019 I think. And they were just looking around like, where can we actually act in the climate world that we think would be really additive? And they landed, they had a bunch of conversations. They landed on what they were going to do. They were going to establish a working capital revolver for early-stage water companies.
This is low cost financing for working capital. And it really turned the lights on for me at that time, which is like, this is insane. We turn equity capital into circuit boards and pipes and joiners and bolts and whatever it is, and then it sits there and then hopefully sometime, I mean depending on your sales cycle, we're going to be able to turn that back into cash and then we can use it again. This is just a weird tax on company building where we could be spending it on far, far more productive elements of our activities. And that's what Bertzman's intervention helps to do specifically for water companies. And I think this is one of those interventions that are reasonable level now. But you could multiply it by a thousand and still be enormously oversubscribed. We should all think about the provision of that kind of support.
Cody Simms:
Well, thanks. I mean between that and between highlighting the work that you think is gapped right now on lobbying and storytelling, hopefully you've given folks who are listening, who are interested in this topic, some ideas of ways they could potentially contribute to the problem that you are working on here. Which is what we aspire to do is help people find different ways they can contribute.
Tom Ferguson:
Yeah. Here's hoping. There's an awful lot to work on. I've got to say one of the things that water has a habit of grabbing people and not letting people go. I started on it in 2010. I specialized this in 2015. It's a really wonderful place to work. Everybody appears to be really rather nice and friendly to each other and very cooperative. I found the same thing when doing early-stage companies in San Francisco and now in New York. And it's just great to be part of these two communities that are so relentlessly supportive of each other. There's a lot of work to do. So if anybody's interested, you should have a look. Water's a great place to build a career.
Cody Simms:
Tom, let's chart your quick path here and how you ultimately decided that for-profit venture investing was the pathway for solving some of these problems because that wasn't the orientation you started into this space with, as far as I understand it.
Tom Ferguson:
Yeah, no, I wasn't. So I got my start in, I was a sustainability consultant. I wanted to dedicate my whole career to sustainability this end of 2008 into 2009. And so I thought the best vantage point was in a consulting firm. So I joined ERM who are great, really awesome, lots of great relationships still there. I was the cheapest person in the building in 2010 when they did a pro bono project for the Carbon Disclosure Project writing their first water disclosure report. And so they gave me the thumb drive and were like, "Make sense of this." And so I wrote that.
And then anyway, this is the fast-forward five years after spending quite a lot of time working on around water things, the opportunity came up to join a nonprofit accelerator called Imagine H2O, which is an amazing impact organization and I had a really phenomenal time there. I ran the accelerator for five and a half years and it gave me a vantage point. And I realized that the beginning of 2020, that two things were true. Firstly, I had access to a data set that basically no one else in the world did. I had a really differentiated point of view on the clear answer to why now? Why is this a good time to start a seed fund?
Cody Simms:
Boy, that is exactly my experience having been at Techstars for so long and seeing the climate tech movement take off. So I am right there with you on that one.
Tom Ferguson:
Exactly. I'm sure it's exactly the same thing. I finally had a margin of safety on the number of high-quality water entrepreneurs. If I was going to start a seed fund, I could be wrong and say no to a really good one and still have enough of a pool to be fishing in that you're able to right those mistakes. So it's really the critical mass of the number of quality of entrepreneurs. And it doesn't show up in the literature. Everyone's always talking about products and the amount of investment that's out there and the exit or lack thereof within water, et cetera. What is the fundamental predicate of all of those? It's the people in the seat making the sequence of decisions out of which the company has made.
Cody Simms:
And the amount of talent flowing into the space. The amount of talent that's putting up their hands saying, "I want to do this."
Tom Ferguson:
Yeah, exactly. So are they going to be able to do it? We're at this interesting inflection point within water because whether you're thinking about insurtech or fintech or garden variety stats, all of these markets go through this. I mean, starting with Fairchild Semiconductor, all of these go through this product of you have the first big wins and the first big wins beget the people that then seed the next one. Whether you are a CMO or a CEO or the people who then go into venture, specialist venture with all of it, all the rest of it. We haven't got there yet. We are just in act one of doing it. The BIV companies are all pretty well capitalized. They're going to do about $40 million in bookings, $12.5 million in revenue in Q3 across all of them. This is the starting to look a lot like a broad base group of companies that are going to be at worst kind of going concerns.
Cody Simms:
BIV, meaning Burnt Island Ventures.
Tom Ferguson:
Wow. Having to be corrected not to use acronyms for your own firm. Good one, Tom. Yeah, this is the Vanguard. There've been some really fantastic founders before, out of which a lot of the talent that we're working with at the moment have come out. But you are going to see this is the advent of the overall building of the entrepreneurial ecosystem that will stand water in good stead. We just think we're right at the beginning of it.
Cody Simms:
And founders who are interested in working with you, want to understand how you operate. Maybe just break down a little bit about what you look for, what stage, what size of investment you're tending to make, et cetera.
Tom Ferguson:
Yeah, so for the second fund, we've got a $2.5 million circle around each company. How we break that up is basically predicated on where you are and what you're doing. We want to be as early as we possibly can. So pre-seed is going to be a concentration, but if we can't get $750 to $1.25 million into that company at the pre-seed stage, then we'll size down and it's obviously going to be relative to it. So we're very flexible within it. But ideally we're looking to park about $600K to $1.25 million per company. We've got a very concentrated portfolio, so we've got 20 companies that are going to be the investees for all the portfolio for Fund II.
Cody Simms:
So I'm hearing primary entry point is pre-seed?
Tom Ferguson:
Ideally pre-seed. Seed is the sweet spot. We flex down a little into Series A, especially later in our deployment periods for time for company-building reasons. But anywhere between pre-seed and Series A is, you are definitely on our radar. And we may be able to flex even further down from that depending on what happens to us in 2024, but TBC, so that's what we're trying to do.
And then in terms of what we're looking for, we are big believers that entrepreneurship is just a sequence of decisions and the quality of decision-maker is the thing that makes the fundamental... The market's got to be there, and the prospective product's got to be there. But really we are very much kind of team and especially founder focus at the seed fund. But really there's a reason why we ask people to write on our website the first time round is that amazingly, if you cannot articulate the depth of the pain, the value proposition that you plan to provide in order to solve at least some of that pain, and then articulate the product that is going to deliver that value proposition in response to that pain, you're putting yourself in the top 5% of stuff that we see.
And that's literally what we ask for on our website, plus a little bit of your progress so far. And we want to know what the team is because the team is going to identify the pain, diagnose the value proposition, then build the product to deliver the value proposition in response to that pain. If you can do that, you've got our ears because it is really oddly rare everywhere. And I don't think that's just a problem in water.
But other things that we're really interested in, resilience and adaptation is a big one. Decentralized drinking water and treatment. We're really interested in software that can especially look at services that are provided by consulting engineers at the moment. There's an awful lot of work that's being done on a time plus a margin basis that we think really should be done by software.
We're very much interested in filling in the gaps in the base of data within water. So quite a lot of hardware enabled software we think is going to be quite interesting for us. And then if you're just making something dumb, smart, there is so much infrastructure out there in water where it's just like, "Wow, are we really using this?" That's often what turns our heads. But we are very easy to find. You can literally apply to be considered to buy us through our website. Just go to the For Founders section and fill in your details.
Cody Simms:
And for people who want to hear more of your thoughts on what's going on in the space of water, you've also just launched a podcast?
Tom Ferguson:
Yes, absolutely. The obligatory VC podcast and in our trailer for it, there is the line, in some respects we're sorry. But we really do think that we're here to find fun and support the best entrepreneurs in water globally. Finding and funding them fine, but supporting, it's in our interest to be able to allow everybody who's building a water company to have access to a library of the best people to ever do the job. And people who can elucidate the nature of the incentive structures within business. People who have run large companies within water, people who have started small companies in water, people who have failed to build small companies in water. We just want to build the compendium of insight to be able to do that. So it's called the Fundamental Molecule. We have two episodes out now, one with Bessie Schwarz, who is the awesome founder of Floodbase.
Cody Simms:
A co-investment with MCJ, I should mention.
Tom Ferguson:
Absolutely, it is a co-investment with MCJ. We're all big fans of Floodbase. Pretty great name check from Samantha Power at COP today, Floodbase's work. Yeah, really cool. And then the other one is with Mirka Wilderer who has now just been hired by Bay Capital Double Impact to run AqueoUS Vets, but she's took De Nora through their IPO. And she's phenomenal. Very, very talent-focused. So that's where we are.
And then we're very active on our blog. The blog is great. If you didn't understand what the hell we were talking about, we do have a blog on there called, What Do We Mean When We Say Water. Which is quite helpful. And if you are interested in the overall business case, we've just published a piece that's really about, especially for the impact investment community, we're very active in the Confluence community. And Align Impact was very generous to publish this one as well. But it's really making the basic argument that climate change is coming and climate change is water change. And the sooner we act accordingly, the better. So you can find out all of the stuff there. Plus I'm embarrassingly easy to find. You can just find me at Tom@burntislandventures.com.
Cody Simms:
Where did the name Burnt Island Ventures come from?
Tom Ferguson:
Because I think all of the islands are going to be on fire. No, that's not what I think. No. So I think names are really important. We use them all the time and every time that we use them, it has some kind of mental association. So you may as well make it positive. And you see behind me there, obviously your listeners can't hear it, but behind me is a picture taken from my favorite viewpoint in the world, which is just above the village of Tighnabruaich in Western Scotland. It's about two hour drive west of Glasgow, and it looks down the East Kyle of the Kyles of Bute, which is an impossibly beautiful place on the west coast.
At the mouth of the East Kyle, which is basically just the body of water in between the island of Bute and the mainland are three islands that stand sentinel that a very, very narrow channel that boats can get through. And I think they're amazing. I suppose, I spent all of my youth swimming around them and jumping off them and all the rest of it. But they kind of stand sentinel at this extraordinary passage of water. And they've watched the tide come in and go out for six hours a day for thousands of years. And there's something deeply permanent and beautiful about them. And I suppose just at the bottom of it reminds me of home. And it tends to engender the question, which I think is helpful.
Cody Simms:
Are they called the Burnt Islands?
Tom Ferguson:
They're called the Burnt Islands. There are a few of them. There are also some Burnt Islands off the coast of Maine. There is a Burnt Island opposite Edinburgh, which is often what is confused for. But this is, yeah, if you hop in your car at Glasgow and drive up Loch Lomond, hang a left, then drive down Loch Fyne, you'll find yourself in a beautiful village called Tighnabruaich. And there you can go and see the Burnt Islands in the flesh.
Cody Simms:
It's clear where the Burnt Island Ventures Summit needs to take place one of these years.
Tom Ferguson:
Not on there. I went again for the first time in a very, very long time. My parents took me down not long after we founded it because they thought it'd be fun to get a photo on it. We went and we anchored, we rode over, and there were just a lot of seabirds. And it's very, very noisy and covered in shit. And it's very inhospitable. And I thought that there was something really interesting about these things that from far away they're very, very beautiful, but when you get up close, they're very noisy and covered in crap. And I thought that that was a really interesting analogy with the early-stage startup.
Cody Simms:
Tom, that's a great note to end on. I don't know if you have anything else to add?
Tom Ferguson:
No, I don't. It's really, really kind of you to have me. Thank you so much, Cody.
Cody Simms:
I really appreciate it. I learned a ton, and thanks for joining us.
Tom Ferguson:
Brilliant. All the best.
Cody Simms:
Thanks again for joining us on My Climate Journey podcast.
Jason Jacobs:
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem-solving capacity.
If you'd like to learn more about MCJ Collective, visit us at mcjcollective.com. And if you have a guest suggestion, let us know that via Twitter @mcjpod.
Yin Lu:
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Jason Jacobs:
Thanks, and see you next episode.