Splashy returns in water investing?

Julien Lepleux
9 min readJan 24, 2024

A deep dive in the question of water and VC investment opportunities in the space.

A recent conversation with another climate investor about a hyped up investment round in water tech prompted me to write this short memo. Initially, I was skeptical — water and its related businesses don’t typically scream ‘lucrative opportunity,’ especially with the hassles of dealing with water utilities and government red tape.

It seemed like a potential venture nightmare, a high CAPEX one, and a low venture return profile ‘wake up’ on the other end.

But this game isn’t about being pessimistic and right, and some are already taking the plunge in the water vertical. So here’s what I found.

Framing the need

First of all, the need state is a strong one. There is no point in investing in SaaS businesses if water security is an issue. Maslow said it first. Sifted wrote a good overview of the issue, highlighting that 52% of the world’s projected 9.7Bn people will be located in areas where demand>supply. And S&P global puts at 66% the risk for companies having at least one asset at risk from water stress.

Sorry Alaska, I cropped you out. Source: S&P Global Trucost. Data showcase is based on a high climate change scenario for the water stress risk indicator.

Other data points confirm the diagnosis (some good ones to be found here). But the challenge doesn’t stop at accessing the water: It’s also a question of what we find in it, and how we use it.

From PFAS (known as “forever chemicals”) in drinking water to grey water and industrial waste contaminating our aquifers, the list of problems runs deep. A recent EPA study showed that 44 million people have been drinking from contaminated sources in the US alone. (Confused about why we should care about PFAs? Read this).

Our industrial sector is also falling short in efficiently using resources (no need to be when water is a cheap commodity). Look at the textile industry: A massive 10,000 liters of water is used to produce just one kilogram of cotton. And it’s not just about the quantity; it’s what happens to that water. Pesticides used in growing cotton, chemicals in the dyeing process, and microplastics shed from our discarded textiles — all these pollutants end up in the water.

Tailwinds: The why now

With looming supply and demand imbalances, the future paints a different picture. The era of taking water for granted is fading in the background. According to Bluefin Research, the cost of water bills has risen by 50% over the last 10 years.

Cities more exposed to drought have had to face tight water supplies, which has exerted inflationary pressure on water rates. For consumers, the cost of water access has outpaced both average annual income growth and inflation rates.

Water rates from 2012 to 2021. Source: Bluefield Research

There’s also the issue of aging infrastructure: According to the EPA, the US will face $470Bn in costs over the next 20 years to upgrade its infrastructure (full report, addressed to Chuck Schumer here). That’s a pretty hefty bill. And one that gets passed on to the customer through water rates and taxes.

Regulatory compliance is acting as the accelerant to force an improved supply management, especially around processing and distribution. In the US, the Department of Energy has provided a clear roadmap on ways to reduce the carbon intensity of our industries, which includes efficiency improvements in energy systems tied to water usage.

Droughts and hydrologic stress on water sources have been on the rise, particularly in the Southwestern United States. These increasing occurrences are partly attributable to human activities and partly to the general warming conditions.

Aridification of Colorado River. Source: PNAS.org

Finally, water usage is a source of GHG emissions, a concept known as the water-energy nexus. CTVC explores this topic in greater detail, but the gist is as follows: 20% of the electricity used in the state of California is for pumping, treating, and heating water. It’s also used in fracking and throughout the value chain for oil and gas exploitation.

Investing in water tech

On the other end, VC money has slowly started to follow the source: $300M was invested into water tech in 2022 in Europe, up from $150M in 2021. The first wave of investments went naturally towards familiar SaaS business models, mostly around water risk monitoring (which can be sold as software), impact monitoring and mitigation management. Those solutions started leveraging improvements in satellite imagery, public meteorological data and hydrological models.

Waterplan is a good example of this: An SF based Software company, having raised $18M in total from a series of climate investors (👋 MCJ, Giant and Transition) in less than 2 years since launch.

But software alone won’t be enough to solve the issues of water access, distribution and treatment. And if everyone leverages the same mix of public data and climate models, we’re guaranteed to see rising competition competing returns away. Not a good omen for long term VC returns.

So, where is the real innovation, and defensibility in the water opportunity?

Components of a drinking water system. Source: GAO analysis of EPA information

First, let’s breakdown the value chain (no need to reinvent the wheel here, CTVC did it well already):

(1) Source & Manage — watershed health, groundwater recharge, efficiency and conservation, supply chain water stewardship, smart homes

(2) Treat & Distribute — water treatment, pipe installation, leak detection, distributed drinking water, asset management

(3) Collect, Treat, Reuse — processing and/or reusing wastewater, environmental remediation, industrial cooling

(4) Storm & Floodwater — storm and floodwater management, discharge detection and elimination, weather prediction

A new technical stack is emerging to effectively tackle the growing challenges of droughts and hydrologic stress. At Bleu, we’ve broken downthis development into 2 key components to understand and leverage its potential better:

A) Supply management and optimization: Water risk and forecasting, watershed, processing, distribution, industrial cooling.

Sensor technologies and predictive modeling are the core drivers of innovation in this category. While software won’t clean up our aquifers, understanding the health of our water supply remains a challenge.

The direct clients? Think businesses that rely heavily on water for transforming their inputs — like farmers needing water for crops, or industrial clients who use it for everything from power generation to cooling, washing, and diluting. The cost impact of water usage for these businesses is tangible and substantial.

Given that the industry accounts for a whopping 19% of global water use, the opportunity here is massive. Then there’s the insurance angle. The data harvested by these technologies is a gold mine for insurance companies in their risk prediction models.

Public water utilities also need to ensure compliance, and water reporting is a big piece of that. Providing potable water to residents hinges on stringent quality monitoring. Organizations like WaterStart are leading the charge, pushing technologies that enhance water tracking and management.

Companies we’re following:

  • Ketos: Monitoring of ionic, environmental and water health parameters
  • InVizion: Optimization of budgeting and planning processes for project data
  • Klir: Help faciliate the permitting process for large water utilities
  • Ellona: Sensor technology
  • Watershed: Measure water and waste data
  • Constellr: Leveraging satellite data for water monitoring

Another opportunity we’re particularly excited about is industrial cooling. Here’s the thing — these systems are major energy hogs in the manufacturing world. Increased efficiency can reduce this consumption, leading to cost savings. A particularly relevant topic for chemical manufacturing, food processing and data centers.

B) Impact mitigation: Collection and reuse, impact reduction, wastewater management, discharge detection and elimination

While the first category is mostly focused on observation and analysis, this one is more focused on the innovations that help us mitigate the effects.

The key customers here are mixed, with public water utilities and local government comprising a sizable part of the addressable market. Not the ideal client mix for selling quickly at startup pace, but likely to generate long-term, stable deals.

Take Daupler, for instance. They’ve successfully sold to cities like Kirkland, Durham, Springfield, and Bellevue, among many others. What this tells us is that there’s a real appetite in the public sectors.

These public-private partnerships, when done right, are not just good business; they’re a smart use of taxpayer dollars. Everyone stands to benefit — the public entities get efficient, cost-effective solutions, and companies that get the stability and scale that come with these governmental contracts.

Collection and reuse solutions can interface with consumers as well. Hydraloop, which raised 4Me in a seed round, is a good example of how we can improve the management of grey water at home directly. The case might be difficult at first, requiring heavy investments from households to install those solutions. In some cases, customers can break-even fairly rapidly by installing more water efficient fixtures: Modern toilets use only a gallon per flush, compared to several gallons for previous models.

Companies we are following:

  • Wint: Water leak prevention and consumption optimization
  • Syrinix: Leak detection via acoustic monitoring
  • Pani: Virtual water plant
  • Oxyle, Ecospears and Gradient: PFA monitoring
  • Spacedrip, Hydraloop and zwitter filtration: Wastewater treatment
  • Bunt Planet: AI to monitor and control industrial discharges
  • Epic Cleantec: Redefining urban wastewater with on-site treatment and reuse systems

In that list, Spacedrip presents an interesting use case for modular and “easy to install” waste water treatment bioreactors, helping to cut costs by up to 50% by avoiding wastewater & greywater reuse for discharge, toilet flushing, irrigation, laundry, and shower. A cool use case was the installation of a Spacedrip’s waste water reuse systems on a forward base of the US army.

Building for venture returns: A case for hardware heavy businesses?

The first ingredient for venture returns is large market size and fragmented competition. And it turns out that the water markets are huge and growing: BCC research estimated in a 2023 report hat the global market for wastewater treatment technologies, at $303Bn in 2023, would grow at a CAGR of 11.2% for 2028.

The exit environment also needs to be favorable: A few of the largest publicly traded companies in that space are 3M, Aquatech, Dow Chemical, Dupont de Nemours, and Veolia Environment. These companies are acquisitive in nature, aiming to consolidate their product offerings and preserve their market leadership.

The third key element is the return on invested capital. The basic idea is simple: for every dollar invested, the goal is to yield a substantial enough return to enable 50%+ IRRs. Part of this strategy involves leveraging equity and supplementing it with debt financing. In the context of software companies, this principle is particularly clear-cut. These companies often go through multiple funding rounds, channeling this capital into enhancing their product and boosting their sales efforts.

So no issue on the horizon for the sensors (hybrid hardware and SaaS business models), monitoring and predictive technologies around water.

In the context of hardware / research heavy companies, the value of research can be monetized at the exit, and non-dilutive financing can play a key role in avoiding excess dilution.

Another question worth asking is whether or not the timing is now for water businesses. On the hardware part, let’s go back to the hefty bill we mentioned earlier: The US will face $470Bn in costs over the next 20 years to upgrade its infrastructure. That’s a fairly large budget to be invested, and water agencies and large consumers have already started joining forces to evaluate new technologies.

On the monitoring / prediction end, critical water supply is already a key input source. We predict more rapid adoption for solutions that directly cut costs (leak management for instance) compared to climate change forecasting. Indeed, it’s a longer tail risk that is moe difficult to quantify financially.

Our perspective is that we are in the initial stages of a significant opportunity. In the near term (1–5 year horizon), solutions offering immediate cost mitigation are likely to see more rapid adoption. For those solutions, scale will be unlocked through negative green premiums or a short payback cycle to justify the initial investment. Conversely, longer-term opportunities, such as climate change forecasting, may take more time to be embraced.

Which funds to follow in the space?

We particularly like the content published by the following specialized investors: Mazarine Ventures, XPV Water Partners, Burnt Island Ventures, True North Venture Partners, Pureterra, Emerald Technology Ventures, Colorado River Basin Fund, Waterstart

Market maps to keep at hand

Our short list: AENU water map, CB Insights, SIFTED, Tracxn, Planet A’s biodiversity map.

AENU’s market map. Source: Melina Sanchez

Interested in digging deeper?

About Julien Lepleux: I am a Franco-American investor, based in Miami, born in Singapore, investing across Europe and the US. My goal is to partner with the companies that are rebuilding the systems of sustainable consumption, from hardware and physical infrastructure to software.

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Julien Lepleux

I am a Franco-American investor, based in Miami, born in Singapore, investing in sustainable progress.