Scott Mosley | Director of Investment Strategies | The Water Council
Water does not play by the usual rules — it simply does not behave like any other resource or any other commodity. Not oil, not carbon. Water is unique.
Water is not priced in the global marketplace. When water is priced locally, it is priced irrationally with locations in dire water stress often pricing lower than locations with water abundance. Water is necessary to survive. Yet too much water can cause catastrophic damage.
And like water, investing in water technology does not follow conventional rules.
For those of us who pay attention to water, 2015 was an extraordinary year. Much was done to move water and water stewardship to the fore of the public consciousness. The California drought occupied headlines for most of the year only to be eclipsed by the Flint lead crisis in November and December. Then water had a central role in the Paris climate change talks.
Organizations like CDP, Ceres and The Alliance for Water Stewardship made enormous strides toward integrating water risk management into the lexicon of business decision making. CDP queried 1,073 of the world’s largest publicly traded companies about their water risks. A record 405 companies responded.
Throughout the year, the CFA Institute published information and held webinars about their new research paper “Environmental Markets: A New Asset Class”. The paper contains an excellent overview of the broad set of opportunities in water and water infrastructure.
Because of these efforts, asset owners are now pushing their asset managers to account for water, water risk and water sustainability, and those managers are in turn demanding that companies disclose water risk in their own operations and in their supply chain.
The tragic case of Flint has highlighted the massive need for investment in our country’s water infrastructure. Writing in the Nov/Dec 2015 issue of the CFA Institute Magazine, Sherree DeCovny cites estimates from the American Water Works Association that $1 trillion will be needed to rehabilitate US water infrastructure in the next 25 years. DeCovny suggests that there will be significant opportunities for asset owners in the muni markets in the coming decades because of these infrastructure demands.
In November, The Water Technical Working Group released proposed eligibility criteria for Water Climate Bonds. The Climate Bonds Standards Board is expected to finalize the Standard in 2016.
If you accept the argument that capital follows opportunity, you might think that funding for water tech companies, and especially start-ups, must be in good shape. The space should meet the criteria VCs look for in markets:
For all of the movement focusing on engaging institutional investors and asset owners in solving water issues, there is a shocking lack of angel/venture capital in the water technology.
To put the size of the water tech community in perspective, it may be helpful to look at the broader startup ecosystem. 500 Startups is completing its 15th cohort and has invested in over 1500 companies. Founded in 2006, Techstarshas invested in 762 companies and deployed $2.04 billion to those companies. YCombinator deployed $12.8 million to its Summer 2015 class alone!
According to Mattermark, almost $60 billion in venture capital was deployed in 2015, with the average A round coming in at $10.4 million. The Cleantech Group tracked 430 clean tech deals in 2015 totaling slightly over $2.0 billion.
According to data from PitchBook, there were 39 water start-up/early stage VC deals in 2015 totaling a mere $44.17 million in deal flow. Here is the breakdown:
That’s only 2.2% of the clean tech funding market and 0.07% of the broader startup market.