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.
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Check out the complete Transcript from this week’s podcast below:
Too Basic to Notice, Too Big to Ignore: Tom Ferguson on the VC Opportunity in Water Tech
Jeff Malec 00:09
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 rcmalts.com to check it out. We were off last week for Fourth of July. I was out in Colorado, unfortunately no skiing, but at my daughter’s softball tournament, 1200 teams, 14,000 girls, overpriced Courtyard by Marriotts, just what the founders had in mind 250 years ago onto this podcast, where we chat with Tom Ferguson of Burnt Island Ventures, which is doing seed investing in VC in the water technology space. What is water tech? I didn’t know either when I met with him at a conference 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 board. Send it all right. Welcome everybody. Welcome, Tom. How are you?
Tom Ferguson 01:16
I’m very well, Jeff. Thank you. Thank you so much for having me.
Jeff Malec 01:18
No worries, I gotta ask right away, what? What the shirt is
Tom Ferguson 01:22
collar. Yes. Sorry, I realized I dressed like a sloven for yours. You dressed
Jeff Malec 01:26
like a podcast host,
Tom Ferguson 01:28
another VC in a T-shirt, which is all very hackneyed. No, this is Cala Systems, who did a blank sheet redesign of the heat 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.
Jeff Malec 01:51
I wore my like aqua colored shirt to talk water,
Tom Ferguson 01:55
very appropriate and much
Jeff Malec 01:58
water. Is this like the inline in the wall water heater, everyone was all up in arms about that a few years ago. Oh, that’s
Tom Ferguson 02:05
in the wall. 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 hour 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.
Jeff Malec 02:54
Little background, so we were just talking offline, you’re both Scottish and British, so if possible, like, the
Tom Ferguson 03:02
hearts from Sean Connery, Scotland, the hearts from Scotland, the accents from London, which means sort of excluded by both, I guess, but our sort of our quadri-apartheid country, yeah. No, we, 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, you know, parents spend most of their time, and where my dad grew up. And then, yeah, I was
Jeff Malec 03:24
literally burnt, or why is.. why is it called the..
Tom Ferguson 03:27
there used to be a fort on it, and kind of 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 1000 years, there was a kind of a fort on there that somehow been set set fire to, and so the name, it was initially in Gaelic, and then it was initially in Gaelic, the Scottish language, and then it was obviously translated into the, the Anglicized version of it, but the burnt of it refers to the fort that had burned, and so, yeah, there’s a little three, 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
Jeff Malec 04:17
nice,
Tom Ferguson 04:19
so we kind of keep that, keep that connection,
Jeff Malec 04:22
but you were happy to see England win last night over Mexico.
Tom Ferguson 04:26
We were, we were in the very, very small sub section of people who were supporting England in the place that we were, 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.
Jeff Malec 04:43
Yeah,
Tom Ferguson 04:44
so this time we had two teams in the, 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.
Jeff Malec 04:53
Yeah, I think the lads off of it got more attention.
Tom Ferguson 04:56
Yeah, it did get a little bit more attention, but yeah, we it’s. No, it’s fun. It’s fun. It’s 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.
Jeff Malec 05:10
I love it. And so, how do you consider yourself a VC guy or a water guy, or both? And how’d you get into that?
Tom Ferguson 05:17
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 water, as 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 nonprofit accelerator with essentially no budget, you’ve got to convince all the best founders in the world to come 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, 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 Ho,
Jeff Malec 06:39
where was that? Sorry, where was that?
Tom Ferguson 06:42
I was in San Francisco. So I moved out to San Francisco after grad school in 2014 with kind of so cliche.
Jeff Malec 06:48
Are there.. there was one accelerator here in Chicago, 1794 ventures or something, but right, like most of the accelerators are in San Francisco.
Tom Ferguson 06:57
Yeah, well, you have actually a fantastic organization based in Chicago, that’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 an amazing kind of living laboratory for all things water. You have a couple of phenomenal utilities that do really great work, but current 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, 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 one very different thing, actually kind of experiencing it, and really understanding and internalizing why that overall ecosystem is so, is so powerful, and actually very hard to replicate. Did you get your answer after eight years? We were done.
Jeff Malec 07:54
What was the answer? What, what’s the why? Just a bunch of smart people in a very tight space,
Tom Ferguson 08:00
a bunch of smart people in a very tight space with essentially unlimited capital. No, that’s that’s obviously the narrative. You know what I really think is at the core of it is that there are two things, and they’re essentially cultural. Firstly, no one cares if you fail, and it’s that 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 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 you, 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, that, and it’s not
Jeff Malec 09:16
tending
Tom Ferguson 09:16
each other, it’s 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, and it obviously helps, it’s very well networked, and all that kind of,
Jeff Malec 09:34
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, I think Midwesterners,
Tom Ferguson 09:42
yeah, it’s interesting. I think it’s one of actually the last vestiges of kind of the classic old world, because it’s now there 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 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 like that, 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, 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 your pretty astonishingly large kind of overall complex around it, which is obviously much more mercenary, but the, but the way in which it stuck culturally, I think are the things that the standard part, and as everyone knows, the most difficult thing to replicate is culture, right? And that still, it’s still, it’s still very much there, and I feel very, very lucky to have lived it for eight years, and were
Jeff Malec 11:00
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%
Tom Ferguson 11:08
I will tell
Jeff Malec 11:11
you, don’t have any virtual anything, that
Tom Ferguson 11:14
is still the case. Yeah, so I mean, when you go there now, and where this was one of the reasons why, I mean, the AI takeover there is pretty extreme, is 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 got an AI starter, which is fine, right? That’s absolutely okay. But yeah, when people, people sort of slightly look at me sideways, for sure, when I say, well, I mean, yeah, I invest in 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’s, 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, this is the substance on which we all all rely, whether you’re building a data center or building a car plant or getting out of bed in the morning wanting to have a bowl of pasta, yeah, like water is water is everywhere, you just don’t see it, because we, I mean, certainly in, certainly in the, 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, and watching those light bulbs come on, it doesn’t happen as often as I would like, but when you are in, you know, when, when you do see the light bulbs come on, it’s, it’s quite, 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. The one
Jeff Malec 12:44
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 1000s of feet of rock over its lifetime, it’s like literally millions of years old, and we’re just taking it for granted. No,
Tom Ferguson 13:04
exactly. It’s like, you know, we live on a way, right, the correct way to conceptualize the earth is that we’re literally in a spaceship, right? We’re in a closed, closed system spaceship, which is a whole bunch of like stardust, essentially, but we shield,
Jeff Malec 13:19
yeah,
Tom Ferguson 13:20
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 2 million years, and I was like, well, for us, for a Scottish person, that’s like Tuesday,
Jeff Malec 13:32
yeah, whatever.
Tom Ferguson 13:33
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, it’s the, 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, is definitely up there. We
Jeff Malec 14:00
can go. What’s the, you know, three minutes without air, three days without water, three weeks without food? I think is the, is the rule of three one.
Jeff Malec 14:07
So, right there, right next to air.
Tom Ferguson 14:10
Yes, exactly. Do you go up or down the chain? Do I
Jeff Malec 14:23
talk to me. Water technology, what does that mean? Like everything, anything that touches water.
Tom Ferguson 14:29
Yeah, so what does it mean? We don’t, 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, though 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, 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 at about five to 8% of the year, so off that size of a denominator, 1.6
Jeff Malec 15:24
trillion a year,
Tom Ferguson 15:25
$1.6 trillion a year in capex, not back
Jeff Malec 15:30
more than AI. What’s the AI expense? Yeah,
Tom Ferguson 15:33
what is the AI expense on? On well, it keeps on changing, because every month, we’ll leave
Jeff Malec 15:38
that as a rhetorical question for the look up, but yeah,
Tom Ferguson 15:42
yeah. Well, the I actually don’t know what the latest numbers are for the 2026 build out, though 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 will 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, but so we really are our space to play a Burns Island is any technical intervention, well, any intervention actually in the entire stack that allows that system to be managed and managed better, because 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 case was the, was the kind of the, the mobile phone, the cell phone,
Jeff Malec 16:39
yeah, the Gordon Gekko,
Tom Ferguson 16:41
yeah, this 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 but there is a sort of specific, specific cycle where the bill has come due. Stop investing in water at the end of the 70s, and everywhere, 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, everybody gets very excited about our Victorian sewer system, but it’s a Victorian sewer system, like 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 on which people need to rely, right, has not actually been built yet, you’ve got seven 50 million people without access to reliable drinking water, but 2.1 billion without access to reliable sanitation, which is the real crime, and so
Jeff Malec 17:48
wastewater is part of this whole thing.
Tom Ferguson 17:50
Yes, yeah, absolutely. Water, wastewater, stormwater, obviously agricultural and agricultural, we do consumer products as well, so it’s really, it’s it’s any intervention, intervention that touches the freshwater overall ecosystem to delete some kind of problem, and there you’ve
Jeff Malec 18:07
mentioned that intervention word a couple times, but yeah, explain that to me, so not a product, not a manufacturing an intervention,
Tom Ferguson 18:15
yeah, so well, because it just sort of, you know, obviously the hardware you’re you’re going to be building is is because products are never just products, right? They’re a medium for a delivery of a value proposition, and, like, it doesn’t, you know, it’s what the thing does rather than the thing itself that’s powerful. I’m sorry, 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 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 poison the world with, with, with these chemicals, don’t now need to be to 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 insulation of home shut-off valves or insurance, or whatever it is, there are so many different products to do with water, both hardware and software, and 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? That just the act of buying a new product is doing something that 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.
Jeff Malec 19:32
I’m thinking I’ve unfortunately had to do a few interventions on behalf of friends and family in my time, so it triggered something for me, it’s like a different intervention,
Tom Ferguson 19:42
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, but you’re just
Jeff Malec 19:51
right, like it’s literally like I need to put this thing in the middle of this system to make it better,
Tom Ferguson 19:57
right, exactly something that didn’t. Make sense. Well, this is the thing, and 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, right, 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. Great example is we’re investors in our growth fund out of a in a company called Aqua Membranes, which is the only the fourth physical intervention in the reverse osmosis module. Now you may have seen the inside of a desalination plant, big long white. I have
Jeff Malec 20:46
not..
Tom Ferguson 20:47
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, or will just wound up, but the you the big fat, the big flat sheets of membrane just sort of wound up, but there’s the fourth physical intervention. Aqua membranes 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 workhorse of all kinds of water treatment, up to and including desalination, which is, I mean, if like 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 the or any really kind of 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 20-first century,
Jeff Malec 21:45
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?
Speaker 1 21:57
There are a number of things. Yeah, I mean, one
Tom Ferguson 22:00
of them, I really, I, a lot of people just sort of blaming utilities for being slow, and it really is, is a phenomenal, ridiculously dedicated professionals who are insanely good at their jobs, like the privilege of being able to ignore water, wastewater, 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 cycle is 62 and 78 days at the moment, you know, if you’re picking the right, if you’re picking the right problem to work on, utilities can can move like lightning in terms of upgrading it. There are a couple of things that it’s kind of worth being 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 of really, really high-quality entrepreneurs, we’d always had brilliant individuals, right, we had my partner Christine and venture partner Wayne Byrne and the venture partner Paul Hoffman, and you know, a bunch of other people who build 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, is to, 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 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 stuff, 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 to people who are responsible for the spec of a project, and this is just in the, in the physical, physical,
Jeff Malec 24:56
it’s like the same as pension consultants, and nobody wants to buy an. A 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,
Tom Ferguson 25:06
exactly. And this is the, this is the story of the intermediary, but there is something, you know, larger. I mean, we work way beyond utilities. Utilities are only responding 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 operator, like the number one thing, is stay out of the
Speaker 1 25:26
news, right?
Tom Ferguson 25:27
It’s to stay off the pages,
Speaker 1 25:29
and
Tom Ferguson 25:29
that’s always that’s been the guiding kind of philosophy. And actually, we’ll, you know, George Hawkins at DC Water was kind of the first person who really, really went into, I mean, the transformation of DC 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 Burns at Hampton Roads, which is also just outside DC, something going on in DC 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,
Jeff Malec 26:34
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, this old infrastructure, it’s not going to be my problem in 30 years,
Tom Ferguson 26:47
yeah, but it’s society’s
Jeff Malec 26:48
problem, like it’s somebody’s problem,
Tom Ferguson 26:50
yeah, yeah, but the so, and the other thing, well, relate 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 national debt, or every year, everything that’s happening in the physical world, etc. etc. 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 sort of 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,
Jeff Malec 27:39
versus like there’s a copper shortage, and my new EV isn’t going to be ready on time, right?
Tom Ferguson 27:44
Yeah, exactly. Yeah, everything, 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.
Jeff Malec 27:58
Do I live in Chicago?
Tom Ferguson 28:01
You suddenly 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 fascinating. We’re working with a bunch of people in Minneapolis for the moment, you know, land of 10,000 lakes in Minnesota, where it’s firstly, it’s maintaining it for 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, I was saying, which is there is there comes a point at 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, 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,
Jeff Malec 29:30
yeah, which is the
Tom Ferguson 29:31
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 be before the screwed line, you still think you’re fine, right? Because, like, stuff breaking is binary, and when you as close, that 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 time, I. That’s where we are, right. That’s where we think you’re
Jeff Malec 30:01
fine in the crashing plane, right before it hits the ground,
Tom Ferguson 30:04
right? Yeah. Well, but it’s ways without it’s as if you’re as if that’s happening, but everything feels completely fine inside the plane. Is this weird? Is this weird? It’s a very, very helpful dynamic. And look, it’s a lot of people started 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, or 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 today it didn’t feel risky in the slightest, in the slightest, it was just, yeah, all of the enabling conditions for this, for 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. Though we don’t participate with the other side of the trade, we want water to stay cheap, we want to invert, 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, we feel very privileged that we’re sitting in this market that is just kind of only going one direction up into the right. Most people test,
Jeff Malec 31:28
and I thought you’re going to say come before you came out 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, right? It’s not that we’re running out of water, is that even physically possible, right? Doesn’t it?
Tom Ferguson 31:47
Well, both of those things are happening at the same time, like it, and the it’s the, it’s the layering of the problem that makes the investing set compelling.
Jeff Malec 31:58
Yeah,
Tom Ferguson 31:59
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, 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 now
Jeff Malec 32:58
away from you, yeah,
Tom Ferguson 33:00
goes downstream to whoever the poor bastard is, who’s who’s who’s left smelling it. This is
Jeff Malec 33:06
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, and are like, and reversed it to go down to St. Louis,
Tom Ferguson 33:22
yeah, yeah, brilliant, poor guys, yeah, no, exactly, for 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. Waters now
Jeff Malec 33:46
can’t you not like matter can’t be created or destroyed? Where does it go
Tom Ferguson 33:52
when it’s over abstracted? 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 Flotion, who just actually, who just had their first scaled water. They’re making 1000 for their first box, they’ve put down there as 1000 liters a day, so subsea desalination, desalination, but from 500 meters underneath the surface of the ocean, which is really cool. I mean, it’s literally like, no, I mean, nobody, nobody’s picked this up 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 a.. an overstatement to say that this is like somebody inventing the solar cell for energy.
Jeff Malec 34:34
Why? Why that far under? What? What does it do different?
Tom Ferguson 34:38
So, legacy desalination.. I don’t know whether you’ve seen it, pick a picture of a desalination plant, but it kind of looks like a natural gas plant. I mean, like a bunch
Jeff Malec 34:46
of pumping and forcing through tubes
Tom Ferguson 34:49
all over the place, it’s just, you know, it’s a, 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 proportionate. Really expensive. Sadly, 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, to like tourist-related jobs all the way to Fisher, 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 over built the physical infrastructure by 2x right? Because you, you built it to suck up 100% of the water, and then you’re throwing 50% of it back into the sea, so theoretically you’re 2x over billed, 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 diesel 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 scene. 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 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, you know, and if
Jeff Malec 36:19
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.
Tom Ferguson 36:26
Yeah, right, exactly. And if something, 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, the, the overall economics of the thing, so it has to be ultra reliable. But this group, they were ex, they were ex subsea 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, a bad place to do business, and I
Jeff Malec 36:52
saw that movie where the guy, like, got his hose cut off, like there’s those guys who go in the pressure tanks and then work on the pipelines, yeah, for, 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
Tom Ferguson 37:08
so wild that those, the dose operators, and they have been, they have the world’s most reliable subsea pump, which is the kind of crucial element, because that’s the thing that always fails, it’s the, it’s the things that move things that move fail first, right. And they decided to stop doing oil and gas, and partially because you know, decline in the overall, overall market in, in, in the North Sea, but also partially because of the direction of the family, who, 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 fresh water back to land? How would that work, anyway? So they built their first world’s first subsea desalination 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
Jeff Malec 38:04
that even possible to replenish that?
Tom Ferguson 38:07
All I mean, yeah, absolutely. I mean, I mean,
Jeff Malec 38:08
there’s there are there is no other option.
Tom Ferguson 38:11
There is no other option, right?
Jeff Malec 38:12
Yeah,
Tom Ferguson 38:13
there is no other option. The only other option is wait for it
Jeff Malec 38:16
to rain a lot, for it
Tom Ferguson 38:17
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 very old industry has been, you know, the Chinese, for example, have been doing this pretty consistently since the since the 60s, viable 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 who 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 unstraightforward. There’s some really interesting technologists going after it, and we’re certainly tracking it pretty closely, but the any meteorologist will say that this is a, it’s a quite, yeah, it’s kind of, it’s a very, very complicated, unpredictable, interdependent 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 there, 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 for that side of things, but in terms of any kind of scale, really, yeah, you’re, you’re, we’re going to need an awful lot of desalination capacity, and it’s a $24 billion market growing at 11% you know, this is this is this is already big, big dollars, you
Jeff Malec 39:46
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 has got to be like, and I’ll shout out my buddy George, who’s always arguing this, of 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? Yeah, I don’t know if there was a question in there, but it’s, it’s like there’s real problems that need solving here. We’re like, literally running out of water,
Tom Ferguson 40:30
yeah. In my more, more kind of like judgy moments, most are, I obviously work on on water, and I feel pretty good about it. Right, this is the bottom of Maslow’s hierarchy of needs, we’re gonna, you know, etc. 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, like, I do think they would be really great if we could turn the time and talent of all of these incredibly smart people, especially who are holed 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 any shade, I just think this is pretty, I think this is there’s an awful lot of work to be done, but then if I once to your point,
Jeff Malec 41:20
we don’t think about it. We don’t know it’s a problem.
Tom Ferguson 41:22
Well, when I, 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 our 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, I dial down the sanctimony, 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 price, the pricing mechanism is going to put those kind of recreational uses, or at least we’ll see what happens with the various structures. I mean, we’ll 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 our 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 existential problem for the AI companies, which they haven’t quite come to deal with yet. We need to put your.. well, I was in a conference in Puerto Rico. They’re talking about putting one on the bottom of the ocean, then it can be all cold. It’s out of everyone’s saying, yeah, about every six months, that’s 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 have got to do this in the Bay Area or whatever.
Jeff Malec 43:18
Yeah, the
Tom Ferguson 43:20
latest one, I think I just saw one last week from, I think it’s a Chinese experiment that’s happening, I can’t remember exactly, exactly where. Yeah, I mean, put them in space, put them on 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 an 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, they’re also kind of easier, easier ways of doing it.
Jeff Malec 43:53
But in your space, it’s, it’s doing the water cooling, it’s
Tom Ferguson 43:58
used for cooling, but when you think, when you think about AI, and sort of Walter in Walter’s interaction with, with AI, it’s if those, 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 double, you know, change depending on the the overall energy mix, but that’s about 50% of the 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, it’s the primary determinant of yield from the from semiconductor product to 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 1/43 of the water that golf courses use.
Jeff Malec 45:00
1/43 and that
Tom Ferguson 45:02
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, is that they just are very, very bad at telling that story, but it’s difficult, right? You know, it’s, it’s very, it’s a really good argument against something to say you’re going to steal all of my water, because people freak out and refute that. I can’t remember exactly what the law is, but you know it takes an order of magnitude more. If you
Jeff Malec 45:31
say we’re not going to steal your water, your first instinct is they’re going to steal my water.
Tom Ferguson 45:35
Yeah,
Jeff Malec 45:35
yeah, or like
Tom Ferguson 45:36
somebody has said, if somebody says they’re going to steal your water, it’s almost too late, right? Yeah, he is getting people comfortable again is really, really difficult, and actually they need kind of a shut that the hyper scalers need, actually a shot, like I’ve no idea why they don’t just go into communities and solve all of their water problems, it really would not be that expensive, it really wouldn’t be that expensive, that’d
Jeff Malec 45:58
be brilliant. Hey, let’s do a little trade here.
Tom Ferguson 46:01
Yeah, absolutely. They should do it for energy, and they should do it for water. Need to go, and you know, all of their 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, 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. You, I mean, it really would be a very, very simple and very, very helpful use of not that much proportionately, right? In order to,
Jeff Malec 46:47
for their budgets of like carve off 5% or something. Yeah,
Tom Ferguson 46:51
solve everybody’s water problem, solve everybody’s sanitation problems. Hookworm is back in the southeastern 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
Jeff Malec 47:04
I think of the problems, I think of like Flint, Michigan, with the lead pipes, yeah, like, but that’s a simplistic. You’re saying, like, hookworm is a result of what computer system or
Tom Ferguson 47:14
home inadequate home sanitation, so essentially fecal matter or urine in people’s yards, essentially. And then kids running around, I mean, this is a, this is a problem in the US today, because
Jeff Malec 47:24
it’s like they’re on like septic or whatever, they’re not on a
Tom Ferguson 47:28
yet or not, so often not even on that, often not even on that, it’s a really, it’s a, it’s a, there’s a, there’s a fantastic book on this called Waste, and then the wonderful author’s name is escaping me for the moment, but the stuff that we all take for granted in, you know, the state of modernity that we find ourselves in in the United States is not accessible to everybody, and it’s certainly well within the wherewithal of the hyper scalers to go and just, you know, materially improve the communities and the Frank 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 work, and it’s great, like you know, they’re replenishing dude projects to replenish the water within a given watershed, but if you take it to, you know, like any person to 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 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 being a stop showing me charts 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 watersheds, 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, I
Jeff Malec 49:29
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, like
Tom Ferguson 49:38
I mean, every once in a while, yeah, when you know you’re in a sort of either high PFAS or high nitrate concentration, or like, well, whatever it might be, all water, all water people are very much kind of like tap water drinkers. It happens rarely, mercifully, but it does, it does, it does happen, but like you’re often sort of out of the frying pan and into. Fire, unless you’ve got really sort of fancy glass bottled water, because the water from the plastic bottle is, you know, it’s traveled a huge amount of it, usually travels 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 micro plastics, they’ve leached off the inside of the plastic bottle, it’s all a huge mess,
Jeff Malec 50:22
so you’re not drinking much plastic bottled water.
Speaker 1 50:25
Well, I’ve ate some partially. I just feel like a charm.
Jeff Malec 50:28
Yeah,
Tom Ferguson 50:29
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 cent 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, $1.50 from the cooler in the, 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.
Jeff Malec 51:01
Yeah,
Tom Ferguson 51:02
cost of water is not a thing, it’s not a thing, it’s just entirely based on convenience.
Tom Ferguson 51:08
Water people would really appreciate, right? There’s that, is that packaging and context matters, right? You said
Jeff Malec 51:15
earlier, sorry, you thought the price is going up.
Tom Ferguson 51:18
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 that people, well, people won’t notice because nobody has any idea what they pay for their water anyway. I mean, you barely anybody is unable to say what their water bill is, including people who walk in the work in the water sector. One of the most things when I turned up was in 2015 I was at kind of, I was in an investment conference, and the question went out to this like amazing set of people, to 250 odd people in San Francisco. Hands up people who know, hands up 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?
Jeff Malec 51:58
Yeah,
Tom Ferguson 51:59
that was for water people. Absolutely extraordinary. People have absolutely no idea what they’re paying, but both on water and, crucially, on sewage, 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 is proportionally expensive, but it’s also easy to overlook, so it’s kind of this stealth tax around the around the water side of things, because everything needs a connection to a sewer line, and so the pricing thing is 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 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’s the first ball 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 rises. We can’t be betting on future, it’s too unpredictable. You can’t do it. Everything else, when
Jeff Malec 53:13
it’s politically
Tom Ferguson 53:15
well, I mean it’s completely pleasant. Yeah, it is anathema. 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.
Jeff Malec 53:35
But if to fix all that’s part of the problem, it’s like a vicious cycle. Like to fix all this stuff, you need to raise the price, so you can pay for
Tom Ferguson 53:41
the absolutely your
Jeff Malec 53:43
companies, I mean,
Tom Ferguson 53:43
partially like partially, 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, not backs. 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.
Jeff Malec 54:08
Yeah,
Tom Ferguson 54:08
this is vastly more important to you than your cell phone, but water has done a very, very bad job of reference pricing.
Jeff Malec 54:15
I think some teenage teenagers would give up water before their cell phone, but point taken.
Tom Ferguson 54:21
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.
Jeff Malec 54:29
Oh, I like that. Just, yeah,
Tom Ferguson 54:31
just turn it cold. It’s great, super fun.
Jeff Malec 54:33
Yeah, they’ll get right out of it. The
Tom Ferguson 54:35
scourger will pay us everywhere.
Jeff Malec 54:38
So, how many companies total are in the portfolio?
Tom Ferguson 54:41
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 one. 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, it’s a wide, wide swath 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, we certainly have, we’ve built a portfolio that we’re proud of, and certainly in this kind of timeline, one of the things that was 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.
Jeff Malec 55:43
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.
Tom Ferguson 55:52
So there are three three real avenues, right? You’ve got the classic strategics, so or incumbents like choose your choose your nomenclature poison, so that would be companies like Xylem, who are our largest investor, for example, deeply highly regarded, and rightly so, water company, and then you know, Veolia and Ferralto, and you know, these cut these kind of majors, Badger has been doing a lot, Iron has been doing a lot, Ecolab have been doing a lot in a lot of acquisitions in the 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 company
Jeff Malec 56:31
that’s so I would thought you would have said I’d never heard from that first group of companies, but they’re very and they’re probably even more focused than than you are, right on like one,
Tom Ferguson 56:40
yeah, they’re very large companies, I mean, Zylon is a 30 odd billion dollar market cap, that’s
Jeff Malec 56:46
part of our whole conversation here. Nobody knows how big this is, or how
Tom Ferguson 56:49
exactly. Yeah, I mean, it’s, it’s really serious. And, vehicle is, you know, obviously enormous. Ecolab as well, for Alto, 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, 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, the, you know, they’re all sorts of things you need to kind of watch out for, just by nature of their business model, but as a, as an exit pathway, this is incredibly important, because again, these markets are absolutely massive, then 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, they’ll be thinking similarly, but with there’s a line out the door, JMI just did a really, really interesting deal. New Mountain did a $2 billion continuation vehicle for their Azuria platform. EQT has been having a very good time with Saw Na House, their list, and they’re
Jeff Malec 58:32
just, they’re just buying the technology like they’re not buying a customer list or anything like on a typical software or something, right? They’re just
Tom Ferguson 58:40
holds on what it is we’ve seen. There have been a couple of groups, M 33 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, XPV Capital. They just sold that on to Oldcastle, which is part of the CRH group for 600 odd million. Great deal, really good platform. So, the platform deals, people are, you know, it’s big, wide open space, there’s a lot of, you know, variegated and disaggregated verticals that there’s some really interesting work that can be done, you know, plumbers, for example, right? Or outdoor, outdoor contractors, you know, this is all stuff that interrelates with the water side of things, 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
Jeff Malec 59:38
think of launching your own private equity firm and like continuing the chain on what’s
Tom Ferguson 59:41
so funny, I was just speaking to a very large Danish company that is 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 like 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, just got put on the table by the AI revolution, right? And so, should we, should we be actually founding our own companies? You know, there’s, there’s such a wide potential playing field, but I think there’s real beauty and actual sense and wisdom in sticking to your, in sticking to your knitting. I mean, we started the seed, we now do early growth at 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? Just happens that 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 magnor
Jeff Malec 1:00:58
stuff,
Tom Ferguson 1:00:59
get distracted by shiny objects, and 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
Jeff Malec 1:01:23
for you to like see your, your children leave the nest, right? Like, you’ve gone early into these guys, you’ve helped them grow, you’ve seen the space, you’re they’re growing with the space, and then they get sold, and you’re like, oh,
Tom Ferguson 1:01:35
you have a bit of a runner while you’re like, you have sell it like every time the world, or
Speaker 1 1:01:40
is it when the champagne
Tom Ferguson 1:01:44
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’ve got to be an RIA, and all the rest of it to follow it 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 the 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.
Jeff Malec 1:02:43
Yeah,
Tom Ferguson 1:02:44
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, a we form. I’m so proud of the relationships that we’ve formed with the founders. Hopefully, they would say the same we think we do, that we think that they, 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 for VCs is, let me know if I can be helpful, and the best, the most helpful VC is one who keeps their mouth shut through as long as possible.
Jeff Malec 1:03:21
Keep pocketbook open, mouth
Tom Ferguson 1:03:23
pocket open in the mouth shut, exactly.
Jeff Malec 1:03:27
And it’s, it’s odd to me that all the money in VC and, 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 want to make sure they’re aligned and they’re not just looking to burn through money and fail fast.
Tom Ferguson 1:03:47
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 we’re with the basic, because a lot of the received 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 blowout successes in every fund. I mean, Fred Wilson says a third, a third, a third, right? You make your money on a 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,
Jeff Malec 1:04:26
we went right beyond unicorn, yeah,
Tom Ferguson 1:04:28
yeah, right, just, you know, sorry,
Jeff Malec 1:04:30
you’re, you don’t foresee any of your companies could become unicorns, right, it’s like not the same scale, or there are a
Tom Ferguson 1:04:35
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, we’re 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 VCs job is 3x net mid 20s IRR, 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 we, 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?
Jeff Malec 1:05:27
But you said only one bank, like, isn’t that the opposite of most venture models? Is PD bankruptcies and design,
Tom Ferguson 1:05:33
right? I mean, I like, I every time I sort of say something that sounds like I’m patting myself on the back, I need to sort of stop myself and knock on all of the available wood right, because the, again, this is this is entirely predicated on the on the school and hard work and resilience of the 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 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 that 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 the thing in general, it seems, anyway, it happens to not make any sense, the times that people, non-specialists, have come marching in, right, 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
Jeff Malec 1:07:13
think the space wasn’t ready yet, or whatever.
Tom Ferguson 1:07:16
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, that
Jeff Malec 1:07:36
true, yeah,
Tom Ferguson 1:07:37
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 water
Jeff Malec 1:08:32
tourists,
Tom Ferguson 1:08:32
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,
Jeff Malec 1:08:40
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 a fuel is that a good, so people buy the thesis, okay, water is is important, it’s under invested in
Tom Ferguson 1:08:56
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 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 all war, or overall water use, so it’s not, you know, super extreme, but actually I think that the beta should be a lot, 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. Like, what happens to public market prices when they take on new technology? It’s actually something that we should be, 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 mid cap stuff, and there’s certainly very little in the micro cap, and we’re really the reason we started our growth fund is that we think we’re in the inflection point of the S curve, where we’re just starting to get the 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.
Jeff Malec 1:10:54
Digital water, I’m going to have to make you explain what that
Tom Ferguson 1:10:56
is. Oh, I mean, so anything that allows water to be managed better by software,
Jeff Malec 1:11:00
got it, and so that could
Tom Ferguson 1:11:01
be everything from a SCADA 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 that really is the information that allows you to manage the system better, that’s what we refer to as digital alternator.
Jeff Malec 1:11:27
What you, what other thoughts you got for us? Anything we missed?
Speaker 1 1:11:33
No, I think it’s pretty, pretty far, far-reaching side, far-reaching like telecom conversation. It’s really, really fun,
Jeff Malec 1:11:42
definitely.
Tom Ferguson 1:11:42
I think the one thing I always want people to take away is that it’s we would love people to take this era, 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.
Jeff Malec 1:12:36
We’ll put it in the show notes.
Tom Ferguson 1:12:38
Totally, I’m totally up to for speaking to anybody who’d like to, you know, have a, have a chat, but that’s the, that to me is the thing that is, is really compelling, that there are huge returns to be made here. I’m a private markets person, I can’t speak to the, you know, the public markets, though. I, when I look at a lot of these companies, I think they’re, there’s that, there’s certainly a huge amount of value there to be taken in the, in the public markets, but also those ETFs are finally going to have some new, new tickers within them. It’s been relatively steady, but there are new tickers 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,
Jeff Malec 1:13:31
but that’s your, that’s the cherry on top, right? Like, the main mode of his profit,
Tom Ferguson 1:13:36
absolutely.
Jeff Malec 1:13:37
Yeah,
Tom Ferguson 1:13:37
about 20% of our LPs, we have 164 at last count, so about 20% of our LPs are strictly impact LPs, but we are, we are 100% a, we want to be the best performing asset in your whole portfolio. We’re looking at,
Jeff Malec 1:13:52
we didn’t even get into green, greenwashing, and all that. I think you talked to me in Miami, how big of a weird scam that is, but yeah,
Tom Ferguson 1:14:00
yeah, yeah, there’s, there’s, yeah, there’s certainly a lot going on. There’s certainly a lot going on, but no, we are, you know, that it’s like we’re looking at mid 20s IRR, that’s our, that’s our target. We want to be the best performing position in your portfolio, and, and honestly, with our, yeah, 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 I’ll 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 word. This is the VCs’ reason for being is all of the swag.
Jeff Malec 1:14:34
Let’s leave it here. I didn’t prep you for this or anything, but especially this, the your favorite water movie, which is there such a thing? I had a couple popped into my head. Water World,
Tom Ferguson 1:14:47
Erin Brockovich. We just rewatched it.
Jeff Malec 1:14:49
Water Boy,
Speaker 1 1:14:50
it is so cold. It is Water Boy. Is not a bad, not Water Boy, is not bad. I was
Jeff Malec 1:14:57
going with just movies that have water in the title, but I like Aaron Brock. Which is for sure a mismanaged water story, right?
Tom Ferguson 1:15:04
What I.. this is a little bit off to the left, I guess, but I was a really big fan of A River Runs Through It. Oh, do you remember that movie?
Jeff Malec 1:15:12
Of course, yeah, yeah, fantastic, right? Yeah,
Tom Ferguson 1:15:15
but we’re like
Jeff Malec 1:15:16
that’s the fresh water in everyone’s mind of like pure unadulterated, I know,
Tom Ferguson 1:15:20
just like, and then, like, Brad Pitt, looking dish, if,
Jeff Malec 1:15:23
yeah, love it. I’m gonna go with Water Boy, maybe Water World, yeah, do
Tom Ferguson 1:15:27
it. Yes, well, Costner, gotta love a bit of Costner, Greger. I already, I already referenced Field of Dreams earlier, and actually, that’s great. I’m gonna, I’m gonna, I think that’s going to be one of the next ports and call with my son. Great,
Jeff Malec 1:15:42
how was your son? Nine nine, that was a good mine’s now 17, but we went through that period of like, you got to watch this, you got to watch this.
Tom Ferguson 1:15:49
Oh, that was like, Dad. And then, yeah,
Jeff Malec 1:15:51
and you’re like, this will build your personality and your character. Trust, yeah,
Tom Ferguson 1:15:54
I need to get, you need to get old enough for me to show him things like The Rock,
Jeff Malec 1:15:59
yes,
Tom Ferguson 1:15:59
you know, The Real Class. Hey,
Jeff Malec 1:16:01
it’s another water movie. Yes, yeah, exactly. It’s everywhere,
Tom Ferguson 1:16:06
San Francisco Collection. No, Jeff, this was a pleasure. Thanks so much for having me.
Jeff Malec 1:16:10
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.
Tom Ferguson 1:16:17
Perfect. Cheers, sir.
Jeff Malec 1:16:20
Okay, that’s it for the pod. Thanks to Tom for the great conversation. Thanks to RCM for sponsoring. Thanks to Jeff Burger for producing. We’ll be back next week with a guest to help answer the thought. So, you want to start an ETF? Peace.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
