The Derivative - Too Basic to Notice, Too Big to Ignore: Tom Ferguson on the VC Opportunity in Water Tech

Episode Date: July 9, 2026

This week on The Derivative, Jeff Malec sits down with Burnt Island Ventures founder Tom Ferguson to explore why water might be the most underappreciated investment theme on the planet. Tom walks through the $1.6 trillion annual capex flowing into water, why our pipes and treatment systems are effectively “Victorian tech” in a digital world, and how that creates a massive opening for early-stage innovation. He explains what “freshwater stewardship” really means, why utilities aren’t as slow or dumb as they’re often portrayed, and how consulting engineers act as quiet gatekeepers for change. Jeff and Tom dig into subsea desalination, digital water, leak detection, pricing politics, and the uncomfortable reality that we’re simultaneously over‑abstracting groundwater and underinvesting in infrastructure. They also compare AI hype to hard infrastructure needs, unpack how venture models need to adapt in water, and show how investors can target mid‑20s IRRs while actually improving the most basic layer of human and economic life.Chapters:00:00-01:27=Intro01:28-014:14=Water, Venture, and the Bay Area DNA: Tom Ferguson’s Origin Story14:15–26:25 = Inside the $1.6 Trillion Water Market: Infrastructure, Intervention, and Opportunity26:26–39:37 = Running Out of “Invisible” Water: Groundwater, Desalination, and Sea-Level Surprises39:38–49:20 = AI, Data Centers, and Who Really “Steals” the Water49:21–1:01:14 = Rethinking Venture in Water: Returns, Risks, and the Anti–Unicorn Model1:01:15–01:11:19 = Profits, Impact, and Water Movies: Why This Sector Deserves Top Billing01:11:20-01:17:35 = From Hookworm to Hollywood: Why Water Still Gets IgnoredFollow along with Tom on LinkedIn , on X , and be sure to check out burntislandventures.com for more information!Don't forget to subscribe to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠.Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠⁠⁠⁠⁠

Welcome to the derivative by RCM Alternatives. Send it. Hello there. Welcome back to the derivative brought to you by RCM Alternatives, where we just launched a new website. Head on over to rcmaltz.com to check it out. We were off last week for 4th of July. I was out in Colorado,

unfortunately no skiing, but at my daughter's softball tournament, 1,200 teams, 14,000 girls, overpriced courtyard by Marriott's, just what the founders had in mind 250 years ago. On to this podcast where we chat with Tom Ferguson of Burnt Island Ventures, which is doing seed investing in the water technology space. What is water tech? I didn't know either when I met with him at a conference a few months ago earlier this year.

So wanted to have him on the pod and tell us what is happening in the water space. Why water and why now? And of course debate water world versus water boy. Send it. All right. Welcome, everybody. Welcome, Tom. How are you? I'm very well, Jeff. Thank you so much for having me.

No worries. I got to ask right away what the shirt is. Calla? Yes, sorry, I realized. I dressed like a sloven for yours. You dress like a podcast host. Another VC and a T-shirt, which is all very hackneyed. No, this is Caller Systems who did a blank sheet redesign of the water heater, according to the logic and physics of the heat pump. And, yeah, $14 billion non-discretionary domestic.

market, they've essentially turned the water heater into a battery, which is really cool. Anyway, they're great based just outside of Boston. I wore my like aqua colored shirt to talk water. Very appropriate and much. Water, is this like the in line in the wall water heater? Everyone was all up in arms about that a few years ago. Oh, that's in the water. No, this isn't.

This is going to replace your kind of classic standalone large 50 gallon water heater, basically. But it's just 20% of home energy use goes into making water hot. And it's kind of the substrate of all of our lives from, you know, cooking to washing to whatever it is. And it's just ridiculously inefficient, really terrible. And now everybody's electricity is going up and it's going to go up more because there are going to be time of use rates that are coming in. So the peak out electricity is going to be at a differentiated price. Anyway, you know, it's one of these really interesting places where water crosses over with energy in terms of, you know, people's lives and the expense of their livelihoods.

And just, you know, they've been a, this is a great example of just a team that's been absolutely spectacular to watch work. Best piece of hardware execution that we've seen. Really, really amazing. A little background. So we were just talking offline. You're both Scottish and British, if possible, like 007. Like Sean Connery.

The heart's from Scotland, the accents from London, which means sort of excluded by both, I guess. but our sort of quadri apartheid country yeah no the name of the fund is actually from the west coast of Scotland burnt island ventures the burnt islands are on the west coast which is near where my parents spend

most of their time and where my dad grew up and then yeah is it literally burnt or why is it called burnt there used to be a fort on it and kind of they're these three little islands that sit in the middle of my favorite view in all the world and a very very long time ago

a couple of thousand years years, there was a kind of a fort on there that somehow had been set fire to. And so the name, it was initially in Gallic and then it was initially in Gallic, the Scottish language and then it was obviously translated into the anglicised version of it. But the burnt of it refers to the fort that had burned. And so yeah, there's a little three little islands that sit at the mouth of this sort of stretch of water next to an island called Butte. And so, yeah, we've very much.

a Scottish connection. And that's why, if you go to our website, lots of pictures of, lots of pictures of sort of the set of Highlander, basically. Nice. So we kind of keep that connection. But you were happy to see England win last night over Mexico. We were.

We were in the very, very small subsection of people who were supporting England in the place that we were, we were at. So yeah, but what's great is that we have the ability to support four different teams. you know, Scotland, England, Wales and Northern Ireland. Yeah. So this time we had two teams in the tournament with the Scots, who we were just saying, very proud of the performance. Both of the lads on the pitch and the lads off it.

Yeah, I think the lads off of it got more attention. Yeah, it did get a little bit more attention. But yeah, we, it's, no, it's fun. It's fun. Scotland and England are very, very different places with populations that don't necessarily always get on. But I like to think of myself as a bridge between those two darling communities.

I love it. And so do you consider yourself a VC guy or a water guy or both? And how'd you get into that? So definitely a water guy first, for sure. And as a VC guy, that was not my training, actually. You started off in water, firstly, as a consultant. So I used to work for now as owned by KKR, but environmental resources management, which is the largest pure sustainability consultancy in the world.

And that's where I got my start in Waterers. I did a piece of work that essentially allowed me to understand the data and strategies of a whole bunch of very large companies better than anyone else. And so that was a big part of my work while I was there. But then after grad school, I chose to focus in, I kind of fallen in love with the early stage company creation as an idea. So I went to run an accelerator. And that was my grounding, which is incredibly helpful.

Because when you're running a non-profit accelerator with essentially no budget, You've got to convince all the best founders in the world to come and work with you without giving them any money. And so you kind of have to kind of haul ass, as they say, to make sure you're as useful to them as possible, which is really, really good grounding for venture, because a lot of venture people just sort of write a check and then wander off and, you know, concentrate on the company building and assistance side of things. Whereas that was my training. But yeah, I know I did that for five and a half years, which made me into an early stage water company specialist. That was with an amazing group called Imagine H2O. Where was that?

Sorry. Where was that? I was in San Francisco. So I moved out to San Francisco after grad school in 2014 with kind of stars. So cliche. There was one accelerator here in Chicago, 1794 ventures or something. But right, like most of the accelerators are in San Francisco. Yeah.

Well, you have actually a fantastic organization. based in Chicago, there's going to be doing a lot more work. They do some fantastic work with early stage companies, but they're going to be doing a lot more of it. It's called Current, run by a brilliant lady called Elena Harkness and my partner, Steve, is on the board. Chicago is amazing kind of living laboratory for all things, water. You have a couple of phenomenal utilities that do really great work,

but Curran has done a fantastic job of kind of building it up. But yeah, it was the San Francisco move that I wanted to go and see why it was so powerful. You know, why is it the early stage companies? Why is this ecosystem come up and what did that ecosystem mean? And I think I'm really glad I did because there's one thing reading about it and there's a very different thing actually kind of experiencing it and really understanding and internalizing why that overall ecosystem is so powerful and actually very hard to replicate. Did you get your answer? After eight years we were done. What was the answer?

What's the why? Just a bunch of smart people. in a very tight space. A bunch of smart people in a very tight space with essentially unlimited capital. No, that's obviously the narrative. You know what I really think is at the core of it is there are two things and they're essentially cultural.

Firstly, no one cares if you fail. And it's one thing saying that it's fine if you fail, you can always say it. But if there's any price to it, it doesn't work. So, you know, people in kind of London or whatever will say like, yes, absolutely, we're much more accepting a failure.

Well, there's accepting a failure. And then there's actually not only not caring, but being excited when people have gone through the process of being in a company that hasn't worked. Because people naturally learn a whole bunch of really, really important things that they're going to carry with them when they try the next time. And that's why people don't mind. It's because it's such an important learning experience. But saying you don't care and actually watching people not care in the way that they don't care in the Bay Area is one thing. or two very different things. And then the second one is really fascinating

because I see it pop up all the time is that people genuinely help each other. And I'm always very surprised at the degree to which it is sort of not in the water that we swim in in a lot of other places. And it's not... One of tender. Each other.

It's actually having that natural instinct of, yes, I know a person who's doing this. I should connect to you. But that's kind of everybody's... That's kind of everybody's aspect. That's the way in which they look at the world. And it's so tightly ingrained. It obviously helps that it's very well networked and all that kind of.

You think it's all from a karma standpoint? Like, let me help them out. So someone helps me out one day? Or it's just, they're all midwesterners. They're all the light. Yeah, it's interesting. I think it's one of actually the last festiges of kind of the classic old world. Because it's now a lot more, a lot more to it.

That's much more mercenary now. But I think it's residual from its origins of, you know, people not wearing any shoes and kind of like a hippies and like the people at Atari that had like a hot tub like in their manufacturing thing where they would hold their meetings and everything was actually really kind of like counter cultural. But because everyone felt they were doing something different and they were on the edge of the country and they were breaking all the rules and technology was a new frontier, etc. They kind of only had each other versus IBM or whatever, right? And so they had to help each other. And I think that that is, it's really a kind of a continuation of that ethos, but obviously now overlaid by, you know, pretty astonishingly large kind of overall complex around it, which is obviously much more mercenary.

But the way in which it's stark culturally, I think, are the things that stand apart. And as everyone knows, the most difficult thing to replicate is culture, right? And it's still, it's still very much there. And I feel very, very lucky to have lived it for eight years. And were you the unpopular guy at the party of like all this cool tech stuff going on? And you're like, oh, I'm looking at manufacturing pumps for water and whatnot. 100%. I will tell you.

You don't have any virtual anything? That is still the case. Yeah. So, I mean, when you go there now and this was one of the reasons why, I mean, the AI takeover there is pretty extreme. It's pretty extreme. And it really is, I mean, everybody. I mean, you throw a shoe and you're going to hit four people that have gotten AI starter, which is fine, right?

That's absolutely okay. But yeah, when people sort of slightly look at me sideways, for sure. When I say, well, I mean, yeah, I invest in the early stage water technology companies. The only reaction is, oh, cool. And then sometimes there's a follow up, but mainly people just sort of move on. But I think it is fun when you meet the odd person where the light bulbs come on and you manage to kind of point out what is actually kind of true, right? which is that water is at the base of everything, right? This is the substance on which we all rely,

whether you're building a data center or building a car plant or getting out bed in the morning, wanting to have a bowl of pasta. Yeah, like water is everywhere. You just don't see it because we, I mean, certainly in the developed countries, right, that we have this extraordinary privilege of being able to take water almost entirely for granted. And so we never actually think about it. But when you do think about it, it's everywhere. I'm watching those light bulbs come on.

It doesn't happen as often as I would like. But when you do see the light bulbs come on, it's pretty gratifying. Because I know how important it is. And I love working in it partially for that reason. But most people totally underestimate it. One of the cool things about water I've always thought about is it's ancient, right? It's like one of the oldest things on the earth. But we think of it as fresh water.

Right? Like, ooh, I need a fresh glass of water. Like, that might have passed through some dinosaurs, passed through a few hundreds of thousands of feet of rock over its lifetime. It's like literally millions of years old and we're just taking it for granted. No, exactly. It's like, you know, we live on a way, the correct way to conceptualize the Earth is that we're literally in a spaceship, right? We're in a closed system spaceship, which is a whole bunch of like star dust, essentially. With a shield, yeah.

We happen to have the raw ingredients for this magical substance. I found out the other day that there was a period of history in which it rained for two million years. And I was like, well, for a Scottish person, that's like Tuesday. Yeah, whatever. So that's fine. But yeah, I mean, it's done everything, right? It's the oceans. It's shaped the essentially the entirety of the land.

It's the world's most important and sort of profoundly base substance, which I think makes it really interesting. I've always loved ideas that I think are kind of slightly hiding in kind of plain sight. And the fact that water is important is definitely up there. We can go, what's the, you know, three minutes without air, three days without water, three weeks without food, I think is the rule of three. That's the one. So right there, right next to air. Yes, exactly. Do you go up or down the chain?

Talk to me, water technology. What does that mean? Like everything, anything that touches water? Yeah. So what does it mean to you? We don't mess with the salty stuff. We turn salty stuff fresh. So we don't do ocean technology.

That's outside of our circle of competence. We know tons of people who do really, really good work in that vertical. And it's great because we really need to protect our ocean health. And it's a phenomenal way to spend your time. But we do everything that's on land. So we are freshwater stewardship, essentially. So the way in which we put it, it's any technological intervention that allows water to be delivered at the right quality, quantity, quantity, price, place, and time. But crucially, that overall system needs to be managed.

So it's any intervention in the management of that system as well. So what that gives us is a massive amount of breadth. So this is an enormous market, $1.6 trillion a year in CAPEX and OPEX. That's growing in about 5 to 8% of the year, so off that size of a denominator. 1.6 trillion a year. $1.6 trillion a year in Kappex and Opex. More than AI? What's the AI spend?

Yeah. What is the AI expense on, well, it keeps on changing because every margin. Yeah, we'll leave that as a rhetorical question for the list to look up. But yeah. Yeah. Well, the, I actually don't know what the latest numbers are for the 2026 build out. They were going to say, they said they were going to put $6 trillion in the ground last year. And then they only were able to build about 1.6.

I think, which is its own kind of can of worms about the build out. Because that also is reliant on water, even though it's not actually that much water, but we can get into that if you want. So we really are, our space to play at Burns Island is any technical intervention, well, any intervention actually in the entire stack that allows that system to be managed and managed better. What do you mean by about the way in which clean water is delivered to in your home, which is essentially a civil engineering miracle,

is that it is right it's the it's the it's the equivalent of the technological equivalent of as if you still had a kind of a brick phone maybe even older than that like a phone in a case was the was the kind of the mobile phone the cell phone yeah the Gordon gecko yeah there's a massive kind of like comedy huge brick thing right the whole of water is essentially entirely antiquated and so there are two jobs that are in process, which is sort of mind-boggling when you think about them. Firstly, the Western world's infrastructure needs to be entirely replaced, such as the nature of physical assets, right? But there is a sort of specific cycle where the bill has come due, stop investing in water at the end of the 70s. And to ever if you ask any engineer, you know,

you're building these physical assets for a 40-year useful life. We are now 46 years on from when we stopped investing and the bill is come due. And, you know, I'm from London. And, you know, I'm from And everybody gets very excited about our Victorian sewer system, but it's a Victorian sewer system. It's very impressive, it stuck around for this long, but it's, you need some upgrades. And then for vast swathes of the world, the infrastructure in which people need to rely, right? There's not actually been built yet. You've got 750 million people without access to reliable drinking water, but 2.1 billion without access to reliable sanitation, which is the real crime. And so wastewater is part of this whole thing?

Yes. Yeah, yeah, absolutely. Water, waste water, stormwater, obviously agricultural and aquacultural. We do consumer products as well. So it's really, it's any intervention that touches the freshwater overall ecosystem to delete some kind of problem. And there are. You mentioned that intervention word a couple times, but explain that to me. So not a product, not a manufacturing and intervention. Yeah. So, well, because it just sort of, you know, obviously the hardware you're going to be building is, is because products are never just products right they're a medium for a delivery of value proposition it's like it doesn't you know it's it's what the thing does rather than the thing itself that's powerful and so actually it is an intervention in people's lives because it's there to kind of you know delete some kind of problem whether or not it's having to pay by 85 dollars a month worth of

bottled water you can just extract that water from the air and it's actually cost competitive all the way to getting PFAS out of oh so forever chemicals which we we successfully poisoned the world with these chemicals now need to be deleted. But the reason we use word intervention is because it's also like the software and services side of things, right? You, you, whether it's emergency response or the installation of home shutoff valves

or insurance or whatever it is. There are so many different products to do with water, both hardware and software. It helps us think about these companies in the right way, you know? Is that like you're trying to do the hardest thing that you can do, which is get people to act differently, right? Just act of buying a new product is doing something they, by definition, weren't doing

before and people don't like doing new things. So yeah, but actually, like, no one's ever called me up on that before. Yeah. I'm thinking I've unfortunately had to do a few interventions on behalf of friends and family in my time, so it triggers something for me of like a different intervention. Right. Yeah, yeah, no, exactly. Yeah, that can definitely go in a couple of different ways.

And you obviously have to sometimes intervene with the, intervene with the founders. So yeah, we don't want. But you're just, right? It's literally like I need to put this thing in the middle of this system to make it better. Right. Exactly. Something that didn't make sense. Well, this is the thing when we think about that $1.6 trillion number, right?

Almost by definition, that $1.6 trillion number is being spent either on antiquated crap, right? Or it is being spent on paying people to participate in a job that relies on processes and technologies and tools that could be a hell of a lot better, which would free up their time to do much better things. So there's just, there is so much, there's so much to do. You know, a great example is we're investors in our growth fund out of a company called Aquambranes,

which is only the fourth physical intervention in the reverse osmosis module. Now, you may have seen the inside of a desalination plant, big, long, white cuts. I have not. Like if you if you just look up an image, you'll see these sort of stacks of big long tubes. And inside of those are essentially kind of big water filters, but they're big flat sheets of membrane all just wound up. But the big flat, the big flat sheets of membrane just sort of wound up.

But there's the fourth physical intervention. Aquamarines is the fourth major physical intervention since the reverse osmosis technology was invented in the 50s and commercialized in the 60s and is still the work course. of all kinds of water treatment up to and including desalination, which is, I mean, you can't think of many other places where the kind of core technology is something that was installed in the 60s. It certainly wouldn't fly in, you know, the telecoms or any really, like, information technology vertical. And that's really what we're dealing with, right?

We need to drag the water sector kicking and screaming into, I mean, I'd take the 20th century, to be honest, but like the 21st century. And what's the main prohibitor there? Like, you're dealing with utility companies. that are not really for-profit, right? Is there not a profit motive for a lot of these companies to implement? There are a number of things. Yeah, I mean, one of them, I really,

a lot of people just sort of blame me utilities for being slow, and it really is a phenomenal, ridiculously dedicated professionals who are insanely good at their jobs. Like the privilege of being able to ignore water, waste water, and stormwater services, essentially, right? is testament to the quality of their work. So they've got to be careful, right? So some stuff by definition is slow.

But if you pick the right company, they're not slow at all, right? They can be, you know, we have a couple of companies that are selling to utilities. You know, the sales cyclist's 62 and 78 days at the moment. You know, if you're picking the right problem to work on, utilities can move like lightning. In terms of upgrading it, there are a couple of things that it's kind of worth bearing in mind. Firstly, and I, you know, we're on their side, obviously, but we are, the people who are providing the new technologies need to do a better job of selling them, essentially. One of the really interesting parts of investing in water at the moment and the reason why we, why I decided to go after this in 2020 was that we finally had at that time and it's just, it's multiplied since then. but we finally had a critical mass,

a really, really high quality entrepreneurs. We'd always had brilliant individuals, right? We had my partner, Christine, and our venture partner, Wayne Byrne, and the venture partner, Paul Hoff, and, you know, a bunch of other people who built companies, sold them, did a great, like, did a great job. But they were also always kind of in isolation. But by 2020, we had a proper stable of really fantastic people that could go to somebody with a problem

and actually do a good job of empathizing and really understanding them and communicating them well and having the right materials and being able to couch their intervention in the language that was going to be able to be far more effective to get this to be actually adopted in order to solve the problem in whoever this person's life was. So actually the most important kind of determinant of pace and pace of change is an ability to tell stories, right, is to help people see that there is a better way and then actually do something about it. But there are all sorts of structural things that people have to be aware of when they're building into this market a big one for example is the role of the consulting engineer you know they are kind of the gatekeeper

so they you know they're obviously designing the projects the most effective and most uh the the most profitable project every every consultant actually but all we were definitely the consulting engineers the most profitable projects are the ones that you've built before and by definition the more that you change the less profitable it is because you have to learn to do new things and people, again, don't like to learn to do new stuff. And so what you've had is people just building the same thing over and over again. And so when you have a gatekeeper that's that powerful, the people who are responsible for the spec of a project, and this is just in the physical.

It's like the same as pension consultants and nobody wants to buy a new hedge fund. They're all just like, okay, check the box, get the bigger, get bigger. We're not going to get fired for this recommendation. Yeah, exactly. And this is the story of the intermediary. But there is something, you know, larger. I mean, we work way beyond utilities. Utilities are only responsible for about 23% of the income of our overall portfolio.

So actually, you know, 77 of it is servicing people other than utilities. But the utility operate, like the number one thing is stay out of the news, right? It's to stay off the pages. That's always been the guiding kind of philosophy. And actually, you know, George Hawkins at D.C. Water was kind of the first person who really, really went into, I mean, the transformation of D.C. water as an entity was one of the most impressive case studies of not only cultural change, but just kind of the upgrading of a utility. And when you go to the headquarters now, it's just amazing kind of monolith that George's

achievements. But then you have someone like Jay Berners at Hampton Road, which is also just outside D.C., something going on in D.C. that's really good. Like, when you get the right, when you get the right leadership in place, these places can really move. But in general, you know, people don't want to stick their neck out. And they, it's about the avoidance of bad news rather than getting column inches for doing awesome things. People are just, I want to be quiet, which doesn't help for, which doesn't help for, for doing things quickly. Isn't that also, it's kind of a, not to get too deep, it's kind of a problem with our whole

country, right? Kick the can down the road. Don't be in the headlines. Like this old infrastructure, it's not going to be my problem in 30 years. Yeah. But it's society's problem. like it's somebody's problem. Yeah, yeah. But the, so, and the other thing, well, deeply related to that, right,

is that our timing is really good in terms of starting this fund because we, I mean, pursuing that logic, right, we're going to kick the can down the road, whether it's the debt, the size of the national debt, or everything that's happening in the physical world, et cetera, et cetera,

all the things that need to be fixed, kicking the can down the road. There comes a time at which you cannot. Right. And with water, because it is so immediate, like, I always thought, think, that's really interesting thought experiment, imagine waking up tomorrow and going down into your kitchen to fill up your coffee pole or whatever and turning your tap on and nothing comes out. Stuff gets real really fast, you know, really fast. Versus like there's a copper shortage and my new EV isn't going to be ready on time. Right, yeah, exactly. Yeah, everything else is, you know, you can, yeah, I mean, you'll literally live, right?

But if you suddenly have to look after your water supply, you're, yeah, it's the only thing you care about. That's why I live in Chicago. It's good to go down to the lake. Exactly. Exactly. Go and dive in, go and dive in and take some big gulps, exactly. Really interesting source of edge for the Midwest, by the way. Yeah. For the Great Lakes region. We have a couple of LPs that do, exclusively do real estate deals in the,

in the lakes region now because of the fresh water supply. Absolutely fast, I do. We're working with a bunch of people in Minneapolis for the moment, land of 10,000 lakes in Minnesota, whereas firstly it's maintaining it from obviously ecological perspective, from an ecological perspective, but also they know that this is going to be a real edge for the state. Is that that degree of freshwater availability,

when you look at something like the Colorado River, slightly falling over in terms of the logic of where 43 million Americans live in a desert served by a river that was miscalculated in terms of volumes when they set up the management compact. It's like there's a lot here, but it goes back to the sort of point I was saying, which is there is there comes a point in which you don't have a choice and we are there, right? Once this stuff breaks, you have to fix it. And so that opens this Overton window for us to run into in terms of investing in the, we're investing in the companies that can really transform the landscape of how water is managed because the wallets are open now people are making buying

decisions now whereas literally in the previous four decades people were able to just kind of say everything's fine well i haven't used this for a while but i've got a chart that is the are we screwed yet graph yeah which is the like which is a red line across the top and then on a time series you have a kind of a line going up and maybe there's a little bit of maintenance that goes on which makes you less screwed but the point at which you are just before the screwed line, you still think you're fine, right? Because like, stuff breaking is binary. And when you're close, you still think you're fine when you're close to stuff breaking. But when it actually breaks, it's, you know, it's, it's, it's going on. And that's

where we are. Right. That's where we are. You think you're fine in the crashing plane right before it hits the ground. Right. Yeah. Yeah. Well, but it's without, it's as if you're, as if that's happening, but everything feels completely fine inside the plane. It's this weird. It's a very, very helpful dynamic. And look, it's a lot of people start a VC funds, obviously, in, you know, 2020 and 2021. But starting a seed fund verticalized in water was not a super obvious idea. But when we built it from the ground up, when I, yeah, when I sort of built the idea from the ground up,

firstly, it was an idea that I couldn't, that wouldn't let me go. But everywhere I looked at it, it didn't feel risky. in the slightest. In the slightest. It was just, yeah, all of the enabling conditions for this not only for one fund cycle, but multiple. I mean, you know, at least as long, so four decades of investment, right? And that's just in the US. This is totally inevitable, though the way in which water is going to be transformed in the way it is managed, in the way it is appreciated, the way it is unfortunately priced as well, that we don't participate with the other side of the trade. We want water to stay cheap. We want to fund the interventions that rip all the cost and

complexity out of the system so that people can continue to ignore their water bills. But the price is only going to go one way. So we feel very privileged that we're seeing in this market that is just kind of only going one direction up into the right. Most people are not the dentist. And I thought you were going to say, before you came on, of like, we need it for AI cooling, it's drought, there's not enough water. Like all those things are true. But you're saying it's, at least half of the problem is just we haven't fixed this infrastructure in 40 years. It's not that we're running out of water. Is that even physically possible, right?

Doesn't it? Well, both of those things are happening at the same time. And it's the layering of the problem that makes the investing set compelling. Yeah. So we've done a, there's a crazy article that came out in ProPublica last year, late last year, which in about 2012, I think, the lines crossed over where the largest contributing factor to sea level rise was not melting ice, but water being pumped out of the ground, put on the ground, and from where it then flowed into rivers and into the ocean. So we're literally pumping water out of the ground into the ocean. And now the gap is relatively sizable.

the water sea level rise, which is obviously a, you know, a huge part of the impact of climate change is actually as a result of the over-abstraction of groundwater, which is kind of a nutty idea, especially for a water specialist to have that pointed out. But then we've done a really good job of dumping a whole load of stuff into waters. I mean, just ask the Ohio River in the 60s, right? This is a very, very convenient way of getting rid of stuff because it all goes, I mean, it naturally. Yeah, away from you. Yeah. Goes downstream to whoever the poor bastard is who's left smelling it. This is a famous Chicago fact.

I don't know if you know this. That back in the 1920s or something, they reversed the flow of the Chicago River. Right. It would flow into Lake Michigan and they said, no, we don't want all this crap in our lake and reversed it to go down to St. Louis. Yeah.

Yeah. Brilliant. Poor guys. Yeah. No, exactly this reason. Right. And so we've done a really good job of degrading it. And we've done a really good job of drawing down

on our water bank accounts, which is our groundwater. We've done a really, really good job of essentially mismanaging our rivers, so we can't rely on them either. We're running out of ice that's melting. So, yeah, there's a massive supply problem. There's a massive quality problem. Water's now... Can't you not, like, matter can't be created or destroy it?

Where does it go? When it's over-obstracted, where does it go? Literally into the ocean, it just becomes salty. So then if you want to, if you want to top up your fresh water supplies, you've got to make the salty fresh. And desalination, we've actually invested in a company called Flotian who just had their first scaled water. They're making a thousand, their first box they've put down there is 1,000 litres a day. So subsea desalination, desalination, but from 500 meters underneath the surface of the ocean, which is really cruel.

I mean, it's literally like, nobody's picking stuff at all. It's not in any paper, but it's, I don't think it's an over, I don't think it's an overstatement to say that this is like somebody inventing the, solar cell for energy. Why that far under? What does it do different? So legacy desalination, I don't know whether you've seen a picture of a desalination plant, but it kind of looks like a natural gas plant.

I mean, it's like a bunch of pumping and forcing through memories. It's like tubes all over the place. It's just, you know, it's a mess, right? And it needs to be, firstly, that's just a massive amount of expense. And secondly, it needs to be put near centers of population. And so the land is proportionately expensive. thirdly you're pulling up water from surface ecosystems and throwing a whole bunch of it back into surface ecosystems which is 50% saltier than it was so it destroys the livelihood of you know everyone from you know like tourist related jobs all the way to the fishing community but the main one that's really dumb is that because you can essentially like best case you're getting 50% fresh water so you've overbuilt the physical infrastructure by 2x right? Because you built it to suck up 100% of the water and then you're throwing 50% of it back into the sea.

So theoretically, your 2x overbuild. So all of that is just a massive amount of cost. You know, the Saudis are building, you know, two and a half billion dollar desal plants for really not that large proportion of their overall water needs. But pretty much everything about legacy desalination gets deleted if you put it at the bottom of the sea. You can use ambient pressure to replace a huge amount of the energy use. You're using about 45% less in terms of energy in order to move the water through the membranes. Because it's at the bottom of the sea, you can just tap it straight into the municipal water supplies because you only need like a shed on land for the water to come back in. And if something screws up, you're not leaking 10 billion gallons of oil into the ocean.

You're just leaking the ocean water back into the ocean. Yeah, right, exactly. I'm thinking, I mean, the thing you need to be really careful of is that if you've got something at 500 meters, you really don't want to have to maintain it ever because that blows up the overall economics of the thing. So it has to be ultra reliable. But this group, they were ex-subs C oil and gas people. So they were sort of operators in the North Sea. And I don't know if you've ever seen the North Sea when it's showing off, but it is a very unhospitable place. It's a bad place to do business.

And I saw that movie where the guy, like, got his hose cut up. Like there's those guys who go in the pressure tanks and then work on the pipelines. Yeah, yeah, yeah. For like way longer than they can be down there and his hose gets cut. And he was dead for like seven minutes down there and they got him and he came back to life. It's so wild. Those those operators. And they have the world's most reliable subsea park, which is the kind of crucial element because that's the thing that always fails.

It's the things that move fail first. Right. And they decided to stop doing oil and gas. And partially because, you know, decline in the overall market in the North Sea, but also partially because of the direction of the family. Same family that invented the sleeping bag amazingly. Well, really cool. They're serious inventors.

Anyway, so they were like, well, what happens if we pump freshwater back to land? How would that work? Anyway, so they built a world's first subsea decalination company, and it's absolutely amazing. But going back to your original point, you know, we are going to need to replenish our supplies. We're going to need to replenish our supplies and desalination is the way in which it is done. So we're always interested in the next. Is that even possible to replenish that all?

I mean, yeah, absolutely. I mean, or there is no other option. There is no other option, right? Yeah. There is no other option. The only other option is. Wait for it to rain a lot? For it to rain a lot.

And there are various people who get into kind of the cloud seeding side of things. A few people who are making. some column inches, actually a very old industry, has been, you know, the Chinese, for example, have been doing this pretty consistently since the 60s. We think there's mostifiable risks to that. And there are some really interesting ownership questions that come up. If you make it rain on one side of the mountains, like, what are the people you didn't get that rain on the other side of the mountains going to say about that, right? You're just, you're getting into, like, difficult what-if questions that we think it's

slightly unstraith forward. There's some really interesting technology. going after it and we're certainly tracking it pretty closely. But any meteorologist will say that this is a, it's a quite, yeah, it's kind of, it's a very, very complicated, unpredictable, independent system. That throwing a wrench into the middle of is, it is going to be very useful, right? It's going to be very useful. But the question is, is that can it be, you know, really a step change better than what is currently done?

The material science would suggest that probably yes, but we haven't quite found the right entry point for that side of things. But in terms of any kind of scale, really, yeah, you're, we're going to need an awful lot of desalination capacity. And it's a $24 billion market growing in 11%. You know, this is, this is, this is already big, big dollars. Does it ever drive you crazy of like, all the money going into AI and, right, like, we had some uranium guys on the podcast earlier, of like, that's the only answer to electrification of like, hey, like, why do we need a data center to help me build a picture of myself when I was 12 or something. Like, and just figure out the water first. People need to drink. Like, I'm sure you're doing it for profit

motives, not necessarily all altruistic motives, but part of me's got to be like, and I'll shout out my buddy George, who's always arguing this, like, what are we doing? Like, we're trying to build all this AI crap to put everyone out of business and, and like, what's the end point? Anyway, I don't know if there was a question in there, but it's like, it's like there's real problems that need solving here. We're like literally running out of water. Yeah, in my more more kind of like judgy moments, myself, I obviously work on water and I feel pretty good about it, right? This is the bottom of Masloff's hierarchy of needs. We're going to, you know, et cetera.

And I certainly derive a huge amount of satisfaction from it. And so, you know, when I, I'm not going to name individual jobs because they might be able to say, like, I do think that it would be really great if we could turn the time and talent of all of these incredibly smart people. especially who are hold up kind of in the middle of the belly of the beast of kind of like large tech into things that would actually solve real problems in the real world rather than being a product manager for some section of like Instagram or whatever not to like throw a shade I just think this is pretty I think

there's an awful lot of work to be done but then if I what's your point we don't think about it we don't know it's a problem well when I find myself feeling sort of sanctimonious I then think about my amazing wife who works 55 feet from me through a couple of doors. And she works the International Rescue Committee. And she works on, I mean, she started off her work in childhood malnutrition amongst refugee population. But all of her work is basically looking at completely overhauling the world of humanitarian aid. And that's real work in the real world. You know, those are absolutely extraordinary people who do all of that.

So I kind of dial down the sanctimony. Yeah, yeah. I dialed down the sanctimini. But in terms of the AI stuff, look, intelligence on demand is you can do all sorts of stuff when that's available. We use it for a lot of total crap, but I think the pricing mechanism is going to

pop those kind of recreational uses, or at least we'll see what happens with the various structures. I mean, like open source and low-cost stuff is going to be there to do it. I would say that on balance, I'm probably an AI optimist. But it's what we are professionally, what I'm, you know, asked to do is kind of underwrite the physical build out of it. And for us as a market, it's not that great, which it sounds really weird because they're going to be building a lot of.

Firstly, the building of it is actually incredibly unpredictable. And so if you're a water intervention, you are fully reliant on the actual building of the actual data center. And that is becoming increasingly unreliable as to what's going to get built and what's going to get shut down by communities. And communities are going to get better and better and better at doing this, which is a totally excellent. existential problem for the AI companies, which they haven't quite come to deal with yet. We need to put your, I was in a conference in Puerto Rico, they were talking about putting one on the bottom of the ocean. Then it can be all cold.

It's out of everyone's same. Yeah, about every six months, every six months for the last kind of eight or nine years, I think that they've, a picture comes up of like, you know, Microsoft are going to do this in the Bay Area or whatever. Yeah. The latest one, I think I just saw one last week from, I think it's a China. Chinese experiment that's happening. I can't remember exactly where. Yeah, I mean, put them in space, put them the bottom of the sea. Like, yeah, sure. But, you know, again, if you're going to put them in the sea, you need to, there's awful lot of things that, like, water and electricity don't mix well. And people can keep, obviously keep them separate. That's like, you know, not a particularly tricky engineering problem. But there are just, yeah, there are also kind of easier, easier ways of doing it. But in your space, it's doing the water cooling.

Water is predominantly used for cooling. But when you think about AI and the sort of water, in water's interaction with AI, it's so the 3% of it goes into the data center. And then the remainder is split evenly between water for the energy needs. And that will be, that will, you know, change depending on the overall energy mix. But that's about 50% of the 97%.

And then the other half is in semiconductor manufacturing because water use in semiconductor manufacturing after price is the primary determinant of profitability because it's the primary determinant of yield from the, uh, from semiconductor production, ultra pure water using to use to wash the chips after every etching. And so the volumes actually really show up in semiconductor fabs and in power plants. I think a decently illustrative so data centers use about 143rd of the water that golf courses use 143rd

and that really isn't going to change that much they've already done a really good job of essentially making these things kind of closed loop but everybody's working on it concurrently but what I've been really surprised at is they just are very very bad telling that story but it's difficult right You know, it's a really good argument against something to say you're going to steal all of my water

because people freak out and refuting that. I can't remember exactly what the law is, but, you know, it takes an order of magnitude more. If you say, we're not going to steal your water. Your first instinct is they're going to steal my water. Yeah. Or like if somebody says they're going to steal your water, it's almost too late, right? Yeah. Because getting people comfortable again is really, really difficult.

And actually, they need kind of a should that the hyper, scalers need actually a shot like I know I'm no idea why they don't just go in to communities and solve all of their water problems it really would not be that expensive it really wouldn't be that expensive that'd be brilliant hey let's do a little trade here yeah absolutely they should do it for energy and they should do it for water you go and you know all there are a million people in the central valley right that don't have access to reliable clean drinking water you can just go and solve that problem and then they'll let you build whatever you want right I just yeah I It's annoying.

It's annoying to me because, you know, what you could have actually in terms of lost revenue and slower build out of and like people hitting their limits and competitive, you know, all the hundreds of billions, trillions of dollars that are at stake in this insane arms race that's going on. I mean, it really would be a very, very simple and very, very helpful use of not that much proportionately, right, in order to. Yeah, for their budgets of like carve off 5% or something. Yeah. Solve everybody's water problem. Solve everybody's sanitation problems. Hookworm is back in the southeast of US, which is why the Rockefeller Foundation was started in the first place.

I mean, we are going backwards. It's really mad. Yeah. And when I think of the problems, I think of like Flint, Michigan with the lead pipes, right? But that's a simplistic. You're saying, like, hookworm is a result of what, computer systems? In antiquated home, home sanitation. So essentially, fecal matter, urine in people's yard, essentially, and then kids running around.

I mean, this is a problem in the U.S. today. Because they're on, like, septic or whatever. They're not on a... Yes. Or often not even on that. Often not even on that. Oh, good. It's a really, it's a, there's a, there's a, there's a fantastic book on this called Waste,

and the wonderful author's name is escaping me for the moment. But the, the stuff that we all take for granted, in, you know, this state of modernity that we find ourselves in the United States is not accessible to everybody. And it's certainly well within the wherewith all of the hyperscalers to go and just, you know, materially improve the communities and the pocketbooks of the people in the communities in order to establish a license to operate. But there's been a kind of resistance. There's been a resistance to it, whereas actually you just need to skip to the end. This is probably where they're going to have to end up in anyway.

There's a lot of work that's been, and I know a lot of people who do the replenish what will work, and it's great. Like, you know, they're replenishing, do projects to replenish the water within a given watershed. But if you take it to, you know, like any more person where you want to build a data center in Ohio or Kentucky or Maine or whatever, you know, the first question is going to be, what the hell is a watershed, right? Nobody understands the way in which water works. And so saying, like, well, we've done this project 50 miles that way, which actually is

totally fine in terms of your available water. People are going to be like, that's 50 miles. Stop, stop showing me chart. Like, this is nowhere near immediate enough for me to care. And they're sort of still doing it, which is great. Like, from a, from a water person's point of view, they're doing exactly what they should, which is maintaining volumes within watershed. But in terms of winning that argument, it's just, I just feel like they're,

they're sort of inching their ways towards what is going to happen in the end anyway, which is you kind of got to throw money at the problem and improve the communities. Why don't you just get to the end? Yeah. Do you ever feel like you know too much? Like you're at a restaurant and they give you the glass of water

and you're kind of, I'm in this town and I know this. I mean, every once in a while. Yeah, when you know you're in a sort of either high PFS or high nitrate concentration or like or whatever it might be. All water people are very much kind of like tap water drinkers.

It happens rarely, mercifully, but it does, it does happen. But like, you're often sort of out of the frying pan and into the fire unless you've got really sort of fancy glass bottled water because the water from the plastic bottle is, you know, it's a traveled a huge amount of, it usually traveled a very large distance, usually on a plane, so it's been pressurized and depressurized. It's probably got really hot,

so you've got a whole bunch of stuff leaching in there from the plastics. You've got the microplastics that were leached off the inside of the plastic bottle. it's all a huge mess. So you're not drinking much plastic bottle water? Well, it's partially, I just feel like a charm. Yeah. It's so unbelievably expensive. People always talk about the cost of water.

One of the really interesting things I find about it is the water's cost is totally fungible, right? It's kind of a fraction of a scent if it's coming out of the faucet. It's, you know, $2 if it's in the lemonade of the kid down the street that's selling it to you in the summertime. It's going to be whatever, a dollar of it. 50 from the cooler in the deli it's going to be $2.50 from the cooler in the lobby of the hotel and it's going to be $7.50 if you get it out of the minibar minibar yeah cost of water is not a thing

it's not a thing it's just entirely based on convenience water people would really appreciate right is that is that packaging and context matters right but you said earlier sorry you thought the price is going up well the price is going up And it will go up in terms of municipal water. It has to, but the denominator is so low. People, well, people won't notice because nobody has any idea what they pay for their water anyway. I mean, barely anybody is unable to say what their water bill is, including people who work in the water sector. One of the most things when I turned up was in 2015.

I was at kind of a, I was in an investment conference. And the question went out to this, like, amazing set of people, 200 or people in San Francisco. Hands up people who know, hands of people who know how much they pay for their water. And maybe 20% of the room put their hands up. And that was for water people, right? Yeah. That was for water people, absolutely extraordinary. People have absolutely no idea what they're paying.

But both on water and crucially on sewerage. Sewerage is actually going up faster than drinking water prices. At the household and at the business level, that's the really big one because wastewater is proportionally expensive, but it's also easy to overlook. So it's kind of this stealth tax around the water side of things because everything needs a connection to a sewer line. And so the pricing thing is obviously really important, but we're really serious when we say we don't want the price of water to go up. It'll be helpful to our business models. That's fine. But actually on a kind of an impact perspective, because it's the first thing that people have to pay, you can't turn off the water into people's houses.

They've got it. It's the first all they pay. it's basically precludes you from doing kind of everything else. It's a regressive tax because the least able to pay are the people who obviously are disproportionately, disproportionately hit. But we also factor it into our investment decision making is that everything that we invest in has to make sense in the absence of water price prices. We can't be betting on future. It's too unpredictable. You can't do it.

Everything is politically unstable. Well, I mean, it's completely political. Yeah, it is an asthma. It is an asthma. It's very, very unpopular. It's very difficult to get water rate cases through, partially because they are ratified by the water board who are elected. And a really good way of not getting elected next time around is presiding over a water rate increase.

But to fix all, that's part of the problem, right? It's like a vicious cycle. Like to fix all this stuff, you need to raise the price so you can pay for them. No, absolutely. Pay your companies. I mean, partially, like partially, but it's plenty big enough. already. You know, a lot of people, a lot of investors are sort of worried about this because water's so cheap. Water's fine. It really is $1.6 trillion a year in CapEx and Arpex. This is a monster,

absolute monster market. And it can only get more expensive. It is absurdly cheap at the moment where you think about a kind of a cell phone bill coming in at $80 a month. Yeah. This is vastly more important to you than your cell phone, but water has done a very, very bad job of reference pricing. I think some teenage teenagers would give up water before their cell phone, but point taken. Yeah, excellent.

Hello has got a really fun feature. It's the teenage feature where you can actually turn the hot water off if your teenager is having too long a shower. Oh, I like that. Yeah. Just turn it cold. It's great. Super fun.

Yeah, they'll get right out of it. The scourge of new payers everywhere. So how many companies total are in the portfolio? We've done 34 investments. We've had one go out of business. We just processed our third exit and returned our first capital to LPs out of Fund 1. So we're looking after 30 at the moment, but we're about to do numbers 35 and 36 out of our seed fund. And then it looks like number 37 in our growth fund is going to be happening.

So yeah, yeah, it's a wide sway of technology. We are by some distance, the most active water investor in the world. But we're lonely, but we're not alone. we have some fantastic peers who do really top quality work in water investment as well. But we certainly have, we've built portfolio that we're proud of. And certainly in this kind of timeline, one of the things that were sort of thrown at us is that you won't be, you know, you won't find enough target. Our nose now are just unbelievably hard and difficult and put them in our anti-portfolio and watch them through gritted teeth as they do amazing. And it's really tough, right?

And that's the way it should be. That's the sign of a healthy, healthy market. But yeah, we're soon going to be at 37 deals done. And who do the exits look like? Like government contracts or whatnot? Or no, they're getting bought up by, like, who's the big players that are buying them up? So there are three real avenues, right? You've got the classic strategics.

So, or incumbents, choose your nomenclature of poison. So that would be companies like Zylam, who are our largest investor, for example, or deeply highly regarded and rightly so, a water company. And then, you know, Veolia and Ferralto and, you know, these kind of majors. Badger has been doing a lot.

Itron has been doing a lot. EcoLab have been doing a lot in a lot of acquisitions in the water sector. There's a lot of interesting stuff going on with the strategics. But then you've got a really interesting class of companies who are kind of getting into this. So Siemens, Schneider Electric, Autodesk has made a couple of...

That's who I would thought you would have said. I'd have never heard from that first group of companies. companies, but they're very, and they're probably even more focused than you are right on like one. Yeah, they're very large companies. I mean, Zion is a 30-odd billion dollar market care. That's part of our old conversation here. Nobody knows how big this is or how important. Yeah, exactly. Yeah, yeah, yeah. I mean, it's really serious. In Vio is, you know, obviously enormous. EcoLab as well, Verato, very large. So yeah, the very, very deep pockets for the, for the right, for the right companies. We share a couple of cap tables with Pentair and who are doing some really

interesting stuff in this in this space but the emerging strategics are really important because they're trying to get footholds in the markets and the more that you can build build them those footholds and give them a place to land especially with something that is fundamentally competitive and unlikely to get less competitive just because of the nature of the technological jump that kind of you know it's the kind of healthy tension that you're looking to kind of build into but then obviously really important in this is private equity and private equity has been doing a lot of really interesting stuff so the number of extra deals is up seven times since 2020. Live deals is up three and a half times since 2020. The private equity crew have really got the memo on this because critical infrastructure is a

really good place to be. Now, look, it's not like private equity, you know, there are all sorts of things you need to kind of watch out for just by nature of their business model. But as an exit pathway, this is incredibly important because again, these markets are absolutely massive. They're big enough to support multiple changeovers of control, which is at the core of the private equity decision making. Can I sell it is predicated on the next person being able to sell it. So you're actually about two turns, right, unless you put it into the public markets, but they'll be thinking similarly. But there's a line out the door. JMI just did a really, really interesting deal. New Mountain did a two billion dollar continuation vehicle for their Azuria. Platform EQT has been

having a very good time with Saw. Nehouse. And they're just buying the technology. Like they're not buying a customer list or anything like on a typical software or something. It tells on what it is. We've seen there have been a couple of groups, M33, Edison, JMI as well, who are investing in companies that they want to be at the center of platforms. KKR did a really interesting roll up of nutrient-related treatment companies alongside the great crew at XPV Capital.

they just sold that on to Oldcastle, which is part of the CRH group for 600 or a million. Great deal, really good platform. So the platform deals, people pull out, you know, it's a big wide open space. There's a lot of, you know, variegated and disaggregated verticals. There's some really interesting work that can be done, you know. Plumbers, for example, right? Or outdoor contractors.

You know, this is all stuff that interrelates with the water side of thing. And there's a whole bunch more work to be done. So that's how we, that's how we see it. But we are, yeah, I mean, we've had 10. You ever think of launching your own private equity firm and like continuing the chain on? It's so funny. I was just speaking to a very large Danish company that is the foundation of a very large and popular product in the healthcare world. And I was just saying that sometimes I wake up and I sort of start thinking about like maybe there's so much opportunity.

everything from the private equity to, you know, private debt, all the stuff that you can do if you have a, you know, completely differentiated view of a market like we do. I mean, literally everything, hardware and software, I just got put on the table by the AI revolution, right? And so should we be actually founding our own companies? You know, there's such a wide potential playing field. But I think there's real beauty and actual sense. in sticking to your knitting. I mean, we started at seed. We now do early growth that the series B. It makes sense for us to be a kind of an early stage financing platform and we want to go as early as we possibly can. But you've just seen a lot of people getting kind of distracted by shiny objects. I mean, I'm a founder like anyone else, right? It just happens

that our product is a venture fund or just a provision of capital. And the classic way for a for a founder to trip over their shoelaces is to get distracted. We call it Mac. Do more stuff. Get distracted by shiny objects. So we, there is, there is wisdom in the maintenance of focus. But sometimes I do just think, God, how the hell has no one noticed? It's so crazy.

Is it hard for you to like see your, look, your children leave the nest, right? Like you've gone early into these guys, you've helped them grow, you've seen the space, they're growing with the space and then they get sold and you're like, oh. You have a bit of a runner while you're like, you have, like, you have, sell it like every time the world or is it when the chop comes in you're like god that like i feel like that that company is going to be great like we should you know maintenance of participation but then you've got to go and be a you know you're going to be an ria and all the rest of it to follow it through through through or through the whole of the life cycle and this is this is i think this is the fun bit right

but you also have a run up to that you do like you have enough time to get used to the idea i think one of the things that I, what I feel is profound gratitude, you know, a lot of, there are so many VCs out there who are just sort of taking victory laps and the whole thing is so ugly because they don't, they don't do any of the work. Like, a VC's job is unbelievably easy compared to the knife fight in a phone box that is starting a company and dragging it into the world against the forces of entropy. I mean, it's just so unbelievably difficult. So when it gets done, I'm just like, well, thank you very much for working insanely hard on behalf of my investors. Yeah.

Let me think of an incredibly, ideally incredibly thoughtful gift. I'd leave it up to them as to whether or not it lands. And then, you know, a handwritten letter to say, really, just like, thank you. This is an extraordinary thing that you were able to do. But it does, you know, we form, I'm so proud of the relationships that we formed with the founders. Hopefully they would say the same. we think we do, that we think that they do. But it's a great relationship, right?

Because we don't want to be hands off. We want to be helpful. And obviously the old adage of VCs is, let me know if I can be helpful. And the best, the most helpful VC is one who keeps their mouth shut for as long as possible. Keep pocketbook open, mouth shut. Keep pocketbook open and the mouth shut, exactly.

And it's odd to me that all the money in VC and in like San Francisco, we're talking about everyone's nice, but also like other people's money and I'm going to start this thing and fail and I just lost those people's money. But you're saying like you're tapping into maybe and that's part of your process of like I want to make sure they're aligned and they're not just looking to burn through money and fail fast. Well, this we would not work if we pursued that.

One of our strengths, I think, is that we really built this. We've built our version of venture capital from the ground up where with the basic goes a lot of the receive wisdom in VC is just to do with the power law, right? The way in which we make the economics work is by having a couple of blowouts. successes in every fund. I mean, Fred Wilson says a third, a third, right? You make your money on the third, you get your money back on a third and you lose all, you lose a third. But in general, people are now really addicted to this idea that it's actually much more extreme than that, right? Because of the, you know, the trillicorn, I guess we're talking. Yeah, we went right beyond

unicorn. Yeah, right? Just, you know, but are you, you don't foresee any of your companies could become unicorns, right? It's like not the same scale. Oh, there are a couple where they're absolutely on the table. Yeah. No, no question. No question. I mean, we just, we just transacted one company for over a, you know, for a well on the way to that, basically. But our financial model isn't predicated on it and that's really important. So we, we see VC's job is 3x net, mid-20s IRA. That's the job of the VC and it's like the mathematical pathway to that is all on the table, however you can make it work. And what works for us is that we can, we get in that very reasonable entry pricing,

which means that our multiples can be provided by companies that don't have to go and sell for $140 billion or even a billion dollars, right? We can do very, very well with companies. In some cases, transact at 90 million. And we'd still do great, right? But you said only one bankrupt. Like, isn't that the opposite of most venture models? Yeah.

Eighty bankruptcies and ten success. My design, right? I mean, every time I sort of say something that sounds like I'm patted myself on the back, I need to sort of stop myself and knock on all of the available wood, right? Because again, this is this is entirely predicated on the school and hard work and and in resilience of the founders. But we really do select businesses that we think have the bones to go and be A slash the solution in their vertical.

And all of them should work out. The other thing is that like, what I really hate about the mainstream BC model is that all of these things are going to go out of business. There is a material dead weight loss to kind of overall society. All of these things in water, if we've selected them, they need to exist. They need to be built. And so what you have, just because, like, you know, if something's gone out of business, okay, fine, you've got somebody who can turn around and take that experience off into something else.

But you do have, there are negative externalities to it. One, the solution itself doesn't become a thing in the market, which if it needs to exist, that's sad, right? that's a thing to happen. Secondly, their seed investors and their friends and family, no one ever blames that process, right? If something goes wrong, no one ever blames their process. They blame the thing.

And so we've seen so many examples of this where people kind of come marching into the water sector and they write some big check at some extraordinary valuation. And then the thing that, and the thing in general, it seems anyway, it happens to not make any sense. The times that people, non-specialists have come marching in writing big checks, it tends to not have worked out.

And in the end, what they do is blame water. They don't blame their own shonky underwriting. They blame water. And I think the space wasn't ready yet or whatever. All that it's, yes, I've already told me it was too hard because everything's too hard. And actually, they don't look at the thing and say, well, actually, what you were doing was kind of falling for field of dream syndrome. And you heard that like 49% of water that is treated in Italy falls out of a hole in the

pipe before it gets to the consumer. And then you go and march off. Is that true? Yeah. That is actually true. Yeah. And then you go and like march into some leak detection company without knowing that there are 141 leak detection companies at last count. The actual unit economics of this are genuinely quite bad. And that the economically rational thing for a utility to do in those circumstances is not replace pipe at like $1.8 million a mile. It's to push more water through a broken system. Right. It's Like people don't get that far.

They get, there are great stories that abound in water, everything from atmospheric water generation to, you know, desalination in a backpack, all of this stuff that is very attractive from an idea. But if you've spent time in this world, the stuff that is intuitive tends to not be a great investment for a whole bunch of different reasons. But if you're a tourist and you come in because you decided that this is going to be like water, it's, I'm a tourist go, you know. It's going to be, it's water time, let's go, because the market's $1.6 trillion and this seems fun. And let's talk, because I had invested way back when in an ETF. So there's a water ETF, I believe, still.

Like, why is that a good? So people buy the thesis, okay, water is important. It's underinvested in. The global water, so global water intelligence has a, has its own. I don't know whether it's. actually an ETF, but it's a, it's, I believe it is, but it just dipped back on, the 20 year record just dipped back under the S&P, only just really in the last three months. And that's because there's been a big rewriting of industrials. And in public markets, water is treated as

an industrial, which I think is actually slightly unfair. It's not totally accurate just because the cash flows are much more reliable because people pay their water bills first. I mean, there is obviously some correlation between industrial activity and overall or overall water use. So it's not super extreme. But actually, I think that the beta should be a lot lower than it is. But for you, you're like that's less sexy, essentially. Like it's in bigger players and whatnot? It's in the bigger players.

And they will be eventually, we haven't seen a ton of it yet. Or at least we haven't run the historical analysis of what happens to pug, to pug, what happens to public market prices when they take on new technology. It's actually something that we should be doing. But in general, there's a huge barbell in water, right? You have the kind of the mega companies and then there's not really much in what you would call kind of like the small to midcap stuff. And there's certainly very little in the microcap. And we're really, the reason we started our growth fund is that we think we're at the inflection point of the S curve,

where we're just starting to get a steep bit of the curve in terms of the production of really the first. generation of like scaled, like scaled startups that are going to be going for, you know, going to be taken on for a really significant sum of money. So it will, the public markets will absolutely be waking up to the technological potential, especially in things like, you know, membranes or in all sorts of actually water services, digital water as well is going to be a really important one. Digital water. I'm going to have to make you explain what that is. Oh, I mean, So anything that allows water to be managed better by software. And so that could be everything from a skater system to monitoring and sensing within lines

to the information that goes into sewer maintenance to, you know, it's all of the stuff that really is the information that allows you to manage the system better. That's what we refer to as digital water. What other thoughts you got for us? Anything we missed? No. I think it's pretty far-reaching, far-reaching, like, cellar-con, associate really, really fun.

I think the one thing I always want people to take away is that it's, we would love people to take this area, this part of the world seriously as a business, but also recognize kind of the truth, which is that this is a serious business that can give you the warm and fuzzies, that this is a real area of the economy where you can invest just as a hard-nosed investor. And as a result of your capital allocation, you get to feel better because the way in which the world, way in which the money is used is to improve the fundamental substrate of all human and commercial and frankly natural life and activity. Right. This is a really good way to spend your time and treasure. And if people are interested in it, I'm embarrassingly easy to find, you know.

We'll put it in the show notes. I'm totally up to for speaking to anybody who'd like to have a chat. But that's the, that to me is the thing that is really compelling, that there are huge returns to be made here. I'm a private market person. I can't speak to the public markets. Though when I look at a lot of these companies, I think there's certainly a huge amount of value there to be taken in the public markets. But also those ETS are finally going to have some new, new tickers within them. relatively stead. But there are new tickets coming for sure. But you can have your cake and eat it.

That this is a place where your capital can be put to work to fundamentally either reinforce or really make people's lives better and to keep us safe in the context of climate change because this water is the so what of what we're all experiencing at the moment in terms of heat and rain and tornadoes and all the rest of the stuff that's going on. But that's your that's the cherry on top, Right? Like the main motive is profit. Absolutely. Yeah. Yeah. About 20% of our LPs, we have 164 at last count. So about 20% of our LPs are strictly impact LPs, but we are 100% a,

we want to be the best performing asset in your whole portfolio. We're looking at- We didn't even get into green washing and all that. I think you talked to me in Miami, how big of a weird scam that is, but yeah. Yeah, yeah, there's, there's, yeah, there's, yeah, there's, Yeah, there's certainly a lot going on. There's certainly a lot going on. But no, we are, you know, it's like we're looking at mid-20s IRA.

That's our target. We want to be the best performing position in your portfolio. And honestly, with our, you know, after five and a half years, with our results, so far, so good. So obviously, long may it continue. I just said something self-grandizing, so knock on all the wood again. Knock on the wood. And maybe you get a nice t-shirt out of it, too. Maybe I get, yeah, exactly.

The way, this is the VC's reason for being is all of the swag. Let's leave it here. I didn't prep you for this or anything, but especially this. Your favorite water movie, which is there such a thing? I had a couple popped into my head. Water World. Aaron Brockovich, we just rewatched it. Water boy.

It is so cold. It is so. Water boy is not bad. Water boy is not bad. I was going with just movies that have water in the title. But I like Aaron Brockovich is for sure a mismanaged. water story, right? This is a little bit off to the left, I guess,

but I was a really big fan of a river runs through it. Do you remember that movie? Of course, yeah. Yeah, fantastic. It's great. But we're like big. Like that's the fresh water and everyone's in mind of like pure, unadulterated. I know, just like, and then like Brad Pitt looking dishy.

Yeah. Love it. I'm going to go with Waterboy. Maybe Waterworld. Yeah. Yes. Well, Costner. Got to love a bit of Costner.

Greg, I already referenced Field of Dreams earlier and actually that's great I'm going to I think that's going to be one of the next Ports and call with my son. Great. How old's your son? Nine. Nine. That was our good. Mine's now 17 but we went through that

period of like, you got to watch this, you got to watch this. And I always go, Dad! And then you're like, this will build your personality in your character. I need to get old enough for me to show him things like the rock. Yes. You know, the real classic. Hey, it's another one.

water movie. Yes, yeah, yeah, exactly. It's everywhere. San Francisco collection. Now, Jeff, this was a pleasure. Thanks so much for having me. Thank you, Tom. We'll put all your info in the show notes.

So reach out with any water questions. And we'll leave it there. Perfect. Cheers, sir. Okay, that's it for the pod. Thanks to Tom, for the great conversation. Thanks to RCEM for sponsoring. Thanks to Jeff Berger for producing.

We'll be back next week with a guest to help answer the thought. So you want to start an ETS. Peace. You've been listening to The Derivive. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCMaltz and visit our website to read our blog or subscribe to our newsletter at RCMaltz.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments.

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