Global economic activities are at a standstill as the world takes an aggressive stance to slow the spread of the COVID-19 virus. The shelter-in-place order has not only limited physical activities but also put investment activities on hold. Although COVID may have caused startups to suffer from order delay, cancellation, and cash flow difficulties as a result, we view it as a great opportunity for them to reassess the competitive advantage and adjust the strategic outlook.
Likewise, while the uncertainty around COVID has drastically increased the risk of investment for investors, we view it as an opportunity to differentiate the prospects that are truly unique and resilient. We did an interview with our director of investments, Maarten ter Keurst, who thoroughly explained the COVID impact on the water investment community.
What is the short term impact of COVID on water startups?
Maarten: Due to the travel restrictions, many companies we’ve talked to have experienced order delay and cancellation to various extent. Cash balance is running low for many startups while fundraising doesn’t become any easier in the current environment. However, we believe that COVID has also brought a valuable opportunity for startups to reassess their product-market fit and growth strategy. It now boils down to the necessary pillars that support core competency and strategic channels that maintain the top line. Such exercises will help startups control the burn rate and get business models and unit economics right, the benefits of which will long outlive the crisis.
What about water investors?
Maarten: Although investors are no longer able to travel and meet the prospective in person, it doesn’t mean that we are sitting back and waiting for the storm to pass. Certainly not at PureTerra Ventures. In contrast, we are viewing COVID as an opportunity for us to tell which companies have a superior management team that can keep the team momentum high even at stressful times. Companies that are resilient and well-budgeted are now very easily differentiated from the ones that are not. Furthermore, we believe that investors in the current situation may emerge in a stronger position to negotiate transactions, although it comes at the cost of an unprecedently uncertain macro-environment.
What is the long term impact you perceive on water startups and investors?
Maarten: Water has been a relatively conservative industry that is reluctant to adopt new technologies, but COVID has pushed digitalization much further in the past months than in years. We are optimistic that COVID only marks the beginning of an upward trend of new technology adoption that enables remote monitoring and control, automation and digitalization, etc. Reciprocally, more startups will be focusing on IoT and smart monitoring and decision-making tools to minimize human intervention and improve plant visibility even when operators can’t be there physically.
Not only will digitalization-focused startups experience a steadily increasing demand, investors will also see an accelerated inflow of impact investment post-COVID, with far more attention on building resilience and ensuring smooth operation of infrastructure plants, sufficient supply of public health products, sound financial status of lower-income populations and small businesses, etc. Multiple investment managers have announced impact-focused funds that align with such principles. Impact investing may become the norm after lockdown as more investors consider the ESG impact of their investments and commit to investing with purpose.
What are you telling your portfolio companies besides controlling burn rate?
Maarten: We are helping our portfolio companies achieve long-term sustainability by telling them to revisit their financial projection and assumptions, adjust timeline expectations for order delivery and access to new capital, take full advantage of the subsidies and grants available in the market (e.g. debt finance, employment support, deferred tax payment, etc), communicate to board of advisors and team members on business strategy and outlook, consult senior business leaders in our network who have handled multiple economic cycles, etc.
Have valuations changed?
Maarten: We are seeing lower valuations in cases where companies have to raise capital imminently and the medium-term impact of COVID on valuations is still unclear. It also depends on the product-market fit. If the company has a digitalization focus that most likely has experienced stronger demand from the market, the outlook is still positive and we don’t think the valuation will be as negatively impacted compared to other offline incumbent technologies. This remains a good time to be partnering with strong companies, at realistic valuations, with a long-term time frame in mind.
Are you looking for new deals?
Maarten: Yes. In addition to providing support to our portfolio companies, we continue to evaluate new deals and reach out to promising technologies. We view COVID as a funnel that only companies with a clear value proposition, unique product-market fit, attractive business model, and extraordinary leadership will make through, so entrepreneurs who meet the criteria will still have access to capital.
