From what we’ve gleaned at Capital Hedge via our FINTRX Platform, family offices, along with venture capital firms, are beginning to show real interest in the water technology sector - cutting 37 deals for $148M in total in 2016, from the CleanTech Group. But Is VC truly a fit with water? In VC’s purest sense, no. Can entrepreneurs build solid companies that can return 5–7x within 7–10 years? Certainly. This market is about creating successful companies with sensible unit economics that can lead to great outcomes for entrepreneurs and investors without ringing the bell at the NYSE.
In 2016, accelerator Imagine H2O was on track to raise $30m by the end of Q2. Their 2017 cohort has already raised $17.5M. Investment is certainly a factor in the water innovation puzzle but we have yet to see a company that has deserved to raise money unable to do so just because they’re in water. Expecting VC involvement is naïve, and encouraging it broadly ill-advised. Investors shouldn’t expect a social media-type VC return profile (a shot at 100x within 5 yrs). The velocity of sales is simply at odds with VC expectations. The good thing is that VCs aren’t that big a part of overall available capital. There was $127B in global VC funding in 2016, vs $6.6T in debt sales in the same year, and in alternative assets, VC only accounts for about 12% of $6.8T in AUM in 2014. It’s important not to over-generalize.
Currently, strategic investors and family offices - often those with an impact thesis or realistic revenue expectations - are taking interest we’d otherwise see VCs having in water. Family offices especially are showing an emerging interest in the sector. (A UBS survey of 242 family offices showed their combined AUM north of $181B, establishing them as a strong investment target.) A recent meeting of over 25 offices focused on the opportunities and barriers in water, and more and more IH2O companies are attracting family office attention. Collaborative efforts like the CREO Syndicate, TONIIC and the ImPact are helping family offices unlock opportunities in the water sector.
In water, it’s a good thing for company development that most VC, with its dedication to growth over profitability, stays away. The lack of VC money means that companies are insulated from being asked to implement unsuitable business models that fit the VC picture. For the case of water tech, family office investments could have better performance than those of VCs, in the long run. This will remain to be seen.
Take a closer look at the expanding family office world, by utilizing our FINTRX Family Office Platform.