First published in Cleantech magazine, November/December 2009. Copyright Cleantech Investor 2009
By Dr David Lloyd Owen, Head of Research, WHEB Ventures
Having worked on the listed equity side of the water and waste management sectors since 1989, working with a venture capital house in the water sector over the last year and a half has been perhaps the most interesting and instructive experience in my professional life. No longer the pondering over well-established outfits and their strategic nuances, but rather appraising what is happening at the raw end of the food chain, where ideas seek to become realities.
WHEB Ventures is a London- and Munich-based CleanTech VC house with £114 million under management through two funds. WHEB has adopted a research intensive approach that looks both at the companies and their competitive and market environments. The fund managers are backed by a dedicated staff of five researchers with (at the last count) twelve degrees between them as well as a lot of prior experience. In the water sector such experience matters, as water is CleanTech’s poor cousin when it comes to profile, deals and dedication. Even today, fewer than ten VC houses have more than one water sector company in their portfolios, so interest in the water sector can appear thinly spread.
Selection is about being cruel to be kind
There is only one law regarding business plans. It states that between years two and four, every company will start to make a profit and that by year five this will be a substantial one. Sadly, realities are crueller, and the principal task in VC is to identify those players who can combine technologies and techniques, understand their markets and are at the right stage of commercialisation to survive, let alone thrive. Perhaps two to five percent of the companies we see fit our criteria. This might appear to be harsh, but VC is only one of a range of finance routes and other VC houses have their own criteria. This might mean missing the next Zenon or Memtech, but it may also avoid writing down an entire investment when a good idea does not deliver.
What does the water sector need?
While there is a somewhat bizarre debate about global warming and the human factor, for anybody working in sewerage and flood management or river and bathing water quality climate change is here and now. Assessing the state of river and bathing water remains at an early stage, as do techniques for assessing what the pollutants really are and where they come from. In sewerage and flood management, the need is to replicate the absorptive capacity of a natural ecosystem in a built environment via water harvesting and reuse and optimising the performance of sewerage networks. Target oriented legislation such as the EU’s water framework directive and the revised bathing waters directive demands more distributed treatment and more to the point, real-time monitoring and data capture and appraisal systems.
Water scarcity is driven by too many people wanting too much from a watershed ill equipped to deal with their elevated expectations. Perhaps water scarcity is more a factor of feeble political will, since most areas can have improved access to water through water efficiency (metering and minimisation) along with rainwater harvesting and wastewater recovery and reuse. Finally, there is energy efficiency and climate change mitigation. The sector is both a major GHG emitter and one of those most affected by climate change.
Ultimately, it is about the need to do more for less. We have to accept that there is no political will to ensure that a resilient and future-proof water infrastructure can be developed in the UK, so the need is to understand how far we can go in our politically expedient climate.
So what are we at WHEB Ventures looking for?
Understanding the market
Are you really unique and have something no competitor can offer? How big is your market, how fast will it grow and when? What is driving your market and do you know who is actually going to want to buy your kit? For me, the lack of understanding about what the target markets are is the most striking weakness in many business plans.
Disruptive technologies
Arguably the last truly disruptive technology in the water sector was membranes and membrane bioreactors. Twenty years on, having changed the treatment game, they are becoming commodity items. As a result, most new technologies are about offering a degree of improvement for well-established techniques. Integrating such discrete advances is an art in itself. When redesigning cars, you don’t want a Hummer powered by a Smart Car engine, let alone the other way round. Likewise, a series of units offering incremental improvements when optimally integrated offer the possibility of significant progress. This is an area we are particularly keen to encourage. For example, last year we saw five companies offering a similar (but each time ‘unique’) way of using waste heat for a variety of energy efficient water and effluent treatment applications. They had the same offering but had quite different markets in mind, and two or three of them would have done well to combine their capabilities for improved performance.
Management
How much experience do they have in their line of business? Are they boffins with a brainchild or fast movers looking for the main chance? Developing an idea and making it commercial are quite separate things and it takes exceptional people to do both. Most importantly, if the company has focused just on the technology or technique, it might not have fully understood how this is to be communicated to potential clients as something they really need.
Commercialisation
Companies may have sales lined up as soon as the funding is secured, but that really remains in the realm of the early stage players. In the UK that means a full working version of a product that has, for example, been sold to one of the water and sewerage companies.
Intellectual property
A patent pending is a wonderful thing, but even better is a company whose patents effectively rule out reverse engineering by competitors. IP is about controlling the technology and how it applies to the job you want it to do.
Recession resistance
The most interesting difference between this recession and that of 1991-93 is how companies have approached it. At the Pinsent Masons/Mouchel ‘Wet Network’ water VC meetings during 2007-08, there was a subtle shift away from companies looking for investors and offering products that did things better, faster and so on to doing the job you need for less. That pragmatic approach is also a cornerstone of WHEB’s investment philosophy – for a technology to succeed it needs to save the client money as well as improve performance.
After the investment
Successful VC is about working together towards a mutually beneficial exit for the company and the investor. WHEB draws on its origin as a corporate mentor in the sector, where its founders share several decades of experience in helping companies to thrive. A lot of this is about deepening market understanding, looking for new applications and making the company part of the ‘accepted’ market, along with optimising the way its offerings work with other parts of the industry. In the UK, this is also about supporting companies in difficult market conditions and helping them to adapt to Ofwat’s five yearly investment cycles.
Dr David Lloyd Owen is Head of Research at WHEB Ventures. He also sits on the advisory boards of the Pictet Water Fund and XPV Capital, a Toronto-based water VC fund, and is a non executive director of EnviroGene Limited.
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