Finance Innovation Archives - Artemis Water Strategy

Jun 01 2017

Is Agriculture IoT a Ripe Target for Softbank’s Next Big Windfall?

In his career finale, a pioneering investor aims to lead a massive shift in communications.

Last week, Japanese investment giant SoftBank announced that it had closed $93 billion in committed capital for its massive Vision Fund, putting it within striking distance of the $100 billion target it announced last year. The Vision Fund dwarfs even the world’s biggest private equity vehicles, including the $22.5B mega fund that Apollo Global Management announced last month set to have been the largest in recent history. The Vision Fund would exceed the size of the five biggest private equity funds combined, according to investment research firm Pitchbook.

ARM acquisition provides a launchpad into IoT

Since the Internet boom of the late ‘90s, Softbank has set the pace for tech investing, betting huge sums to chase the rapid growth of the Internet, then retail distribution via online portals. It has made tens of billions in returns from investments in companies from Alibaba, to Yahoo and Supercell Oy. The first closing of the Vision Fund comes just three months after Softbank’s founder, Chairman and CEO Masayoshi Son made the biggest bet of his career with the $32 billion acquisition of chipmaker ARM Holdings Plc. ARM provides technology for 95% of all smartphones and seems poised to play a central role in the emerging “Internet of Things” (IoT) market that will network devices, vehicles, and buildings via remote sensors and processors. “ARM will be the center of the Internet of Things, in which everything will be connected,” he told reporters. “IoT is going to be the biggest paradigm shift in human history (and) we have always invested at the beginning of every paradigm shift.”

Ambitious vision set to shake up the investment community

Softbank’s Vision Fund is rumbling the investment community because of its size, but also because of its ambitions. It is the cornerstone for Softbank’s founder, Chairman and CEO Masayoshi Son’s final mission for Softbank to bring Japan’s third largest company to a new level of global leadership. Last year, Son decided to postpone his retirement to “work on a few more crazy ideas.” “I feel my work is not done,” he stated. Mr. Son said. “This will require me to be C.E.O. for at least another five to 10 years.” According to Bloomberg, Son has laid out a 300-year plan to make the company the most valuable in the world.

Historically, SoftBank invests in a range of businesses, from established players to tiny start-ups. Recent examples include a $130 million in the biotech startup Zymergen, $5 billion to Chinese Uber competitor Didi Chuxing as well as big bets on co-working space provider WeWork and India’s Paytm, a mobile payments company.

Venture capital vehicles, known for making the types of tech investments the Vision Fund is targeting, are typically even smaller than the giant private equity funds. For example, Technology Crossover Ventures’ 2007 fund VII was one of the biggest in history at only $3 billion. Only a small group of the hundreds of venture funds have established vehicles that total more than $1 billion.

Which markets will bloom with Vision Fund investment?

Industry observers wonder whether a behemoth investor of this size with considerable technology synergies will hit the ecosystem of venture investment like an asteroid landing on a desert island. According to analyst Kyle Stanford, the specter of price inflation for early-stage investments is already haunting the investment meetings at venture firms. “The fear is all rooted in the 2014, 2015 investment environment, where there were tourist investors and valuations were getting out of control, and when valuations get too high it limits exit opportunities,” Stanford explains. “When you see a fund of $100 billion coming in already making big headliner deals, I think that fear is going to come back.”

Those headliner deals depend on a healthy crop of well-financed growth stage deals, which have been on the decline even as overall investment activity has picked up, with first financing activity falling for seven consecutive quarters.

First financing activity has fallen for seventh consecutive quarters

Source: Pitchbook

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Source: Pitchbook

Over the short term, competition for top tier deals will heat up startup valuations, but the Vision Fund is also bound to have a profound impact on the kinds of technologies that get to market and their pace of development. $100 B in ambitious capital will drive investors to expand their investment activity to new technologies and markets.

Riding, and driving the food tech wave

Telecom giants like Softbank are diversifying beyond their core industries through acquisitions in areas that lead to synergies. BT launched a sports TV channels venture and Norway’s Telenor opened an e-bank. From its base in Japan and with domain expertise in telecommunications and hardware, Softbank will be looking for technologies that are riding dramatic market trends.

One candidate is precision ag. With its ambition, its vision and it’s unique perspective as a Japanese company, Softbank seems set to play in the next chapter of the telecommunications revolution– beyond the internet, beyond urban networks to address the big challenge of feeding a population of 9 billion.

By 2050, 14 of the world’s 20 biggest metropolises will be in Asia and Africa, including Jakarta, Manila, Karachi, Kinshasa and Lagos as well as Tokyo, Shanghai. and Mumbai, according to a projection by Demographia. It takes about 1 acre to feed the average U.S. consumer. China only has about 0.2 acres of arable land per citizen, and an estimated 20% of that land is contaminated with toxic pollution. As a result, Chinese have been investing aggressively outside of China to produce food for their home market. High profile purchases include Australia’s biggest dairy operation and US-based Smithfield Foods.

Precision agriculture is a “must win” market for IoT leadership

As the world’s population grows, outright purchase of existing food production facilities will not suffice. Technology will be essential to feed burgeoning populations. Precision agriculture will be more than enabling technology, it will be essential for survival; to feed an increasingly crowded planet. This will be a “must win” flagship market for major technology and communications companies, from Intel and Softbank’s ARM to communications companies like Softbank’s Sprint, Verizon, BT and Telstra.

Nov 15 2016

Can a Drought Make California Rich?

Water engineers fashioned California into an agricultural giant and built some of the world’s greatest cities through monumental infrastructure projects, from the Hoover Dam to the LA Aqueduct and the State Water Project.

Today, that centralized water system has caught the West in a Gordian knot of huge sunk investments and behemoth government agencies. Untying that knot will be a defining challenge for the West in the next decade. As California grows and water supplies dwindle, the West has no choice but to pioneer new approaches to water management. Water built the West, and how we deploy water innovation will define our future.

Men stand in a 45 ton steel pipe over the Hoover Dam, 1935 Image: US Bureau of Reclamation

More than 50% of U.S. municipal water and wastewater infrastructure is nearing the end of its useful life, with over 240,000 water main breaks per year. Federal funding for water utilities has fallen from $16 billion in 1976 to $4.3 billion in 2014, passing the burden of maintaining water infrastructure onto states, municipalities, and ultimately to ratepayers. Residential water prices have risen by 6%, and sewer bills have increased 20% annually since 2000, but they’ve failed to cover the costs.

Market analysts are predicting a $532 billion boom in US infrastructure investment over the next decade to address deteriorating piping networks, combined sewer overflows, and rising population demands for new water supplies. However, it’s unclear where our cities will find the money for those investments.

To survive, California must do more than stretch the limits of engineering and science; it needs to deploy new financial models, new policy and integrate water with energy infrastructure.

We need to decide what parts of the Western tradition of monumental water engineering we’re going to tap into, and what parts we leave behind. Even with an arsenal of proven technology solutions, we need a new vanguard of leadership to redefine water in the West.

Is there an upside to California’s water crisis?

There is a big, exciting upside to California’s water challenge. Our woes present an unprecedented technology investment opportunity. The world’s largest investment funds– sovereign wealth funds, endowments, pension funds– are struggling to find technology-driven water investments. These funds look to preserving wealth over decades and centuries, and they see water scarcity looming as a major risk to their investments. Many blue chip stocks, like Intel and Coke, rely on water-intensive manufacturing. For every dollar invested in semiconductors or food, investors are more vulnerable to the risk of water scarcity. Norway’s $877B sovereign wealth fund, which holds an average of 1% of every publicly quoted company in the world, has identified water supply as a risk to 11% of its portfolio companies. According to the Carbon Disclosure Project, two-thirds of the world’s largest companies are reporting exposure to water risks that could generate a substantive change in their business.

How do we untie the knot?

With such urgent problems and looming economic risks, why has it been so difficult for advanced technologies to gain momentum? Simply put, water is too cheap to pay for itself today, and in the US, it’s not ever going to get very expensive. In the US, providing clean, healthy, affordable water to communities and to businesses is a basic responsibility of government. With water so cheap, most property owners and cities can’t justify the upfront capital investment to retrofit their onsite water systems, even when they can see a trail of long-term savings.

Even more, distributed infrastructure needs more than finance, people in the US want the same kind of utility oversight that they have enjoyed with centralized water systems. CA water utilities need to evolve with the systems to ensure that they provide healthy water and sanitation.

Financial innovation to deploy proven water tech

Where our existing municipal finance structures have funded centralized water over the last century, a new breed of investments is unlocking the market for distributed water. Among the most promising of these are third-party finance vehicles adapted from rooftop solar.

Finance vehicles group a series of smaller distributed projects into single investments of $20M or $100M. These distributed projects partner with utilities to offer water infrastructure as a turnkey service to property owners. Many of the most promising opportunities for “Infrastructure as a Service” pay for themselves based on energy savings or even energy generation.

A proposed series of wastewater thermal energy projects in Washington DC provide one early example of how finance vehicles could bridge the gap between centralized water infrastructure and tech-driven distributed water projects. Wastewater thermal energy generates a source of resilient renewable energy, and earlier this year, the District of Columbia has recognized WWTE within its Renewable Energy Portfolio Standard. A series of onsite projects would provide wastewater geothermal energy to replace conventional heating and cooling. Using third-party finance vehicles, DC Water would be able to charge for the use of the thermal capabilities of its system, generating revenues to supplement its operating budget. Property owners, such as DC elementary schools, would acquire this low-carbon HVAC as a service for no money down, paying as they saved energy and water as compared with conventional HVAC. DC Water projects that it can generate 200 MW of power through the existing sanitary sewer system to replace energy and water-hungry heating and cooling, in schools, hospitals, offices and commercial sites.

Distributed water can do more than help us survive in a drier, more crowded future; it can fuel growth, create jobs and build new global leadership.

Distributed water will create jobs where they’re needed most

Distributed water projects require project developers– skilled hands-on workers. By leading the US in implementing distributed water solutions, California can nurture water tech companies, just as it drove the solar industry in the state. Over the past decade, California’s climate policies have driven nearly $48 billion in investments in renewable energy, energy efficiency, transportation and other climate projects. Those policies have helped create more than 500,000 jobs, according to 2016 California Advanced Energy Employment Survey conducted by Advanced Energy Economy. Advanced energy employs three times as many Californians as the motion picture, TV, and radio industry (145,000); more than agriculture, forestry, and fishing (475,000); and approaching construction (750,000). This new wave of water jobs and businesses will favor smaller towns with more supportive local leaders. For places like California’s Central Valley, where unemployment has been consistently 3% – 5% higher than the rest of California, local support for water project developers could help them build a business that grows to export those services to larger cities.

Aug 24 2016

California water utilities stake out new role in energy programs to finance their future

Howard Brewen, SanLuis Obispo Wastewater Plant Superintendent, Image: PG&E

California thrust its water utilities front and center during the recent drought. Water utility managers, who had been accustomed to working behind the scenes, became the face of water conservation at city council debates. In response to the 2014 executive order from the Governor of California, water utilities lobbied with commercial and industrial water users to conserve water, and even designed marketing campaigns to drive water conservation. Over the last two years, California’s water utilities achieved ambitious conservation goals, cutting water use by 25% and even 36%. With those dramatic conservation wins, water utilities cut into already dwindling revenues.

The budget challenges in California reflect the dimensions of a national crisis for water in the US. “Municipalities are approaching a breaking point as utility assets reach the end of their useful lives,” notes Keith Hays, Vice President of Bluefield Research. More than 50% of US municipal water & wastewater infrastructure is nearing the end of its useful life with over 240,000 water main breaks per year. In the next decade, Bluefield estimates that US municipal water utilities face an overwhelming US$532 billion in capital improvements to address deteriorating piping networks, combined sewer overflows, and rising population demands for new water supplies. Federal funding for municipal water has declined steadily in the past 40 years to barely 4%, leaving municipalities to finance infrastructure projects locally,” adds Hays.

To fill funding gaps, some pioneering California utilities are turning to long-ignored energy efficiency funds. San Luis Obispo’s (SLO) has built the state’s first partnership between an energy and a water utility to fund the development, design and implementation of energy efficient equipment at its wastewater treatment plant. “We’re leading the way in California to pursue the first public-private partnership of this kind with PG&E that will help improve energy efficiency at a major municipal facility,” SLO Utilities Director Carrie Mattingly stated. SLO faced a consent decree to upgrade its wastewater treatment plants at the same time that it was ordered to reduce water consumption by 25%. “Our facility is over 50 years old and some of the equipment dates back to the ‘60s,” notes Mattingly.

“We are the biggest energy user of power in the city of San Luis Obispo,” said Howard Brewen, supervisor of the plant. San Luis Obispo’s wastewater treatment plant’s energy bill has a price tag of $400-$500,000 a year. The improvements will reduce energy use by 20%. The project includes new control systems and a Combined Heat and Power (CHP) system that generates electricity for the facility using the natural biogas.

“PG&E welcomes the opportunity to support the City of San Luis Obispo in achieving its energy efficiency, financial and sustainability goals,” said Pat Mullen, customer service director for the utility. “Through this innovative partnership, the City will save money, decrease its energy use and reduce its carbon footprint. The result is real economic and environmental benefits for this community and our customers who reside in the area.” The improvements to the plant will help the environment by reducing the amount of greenhouse gasses that are released into the atmosphere. The upgrades will reduce carbon dioxide emissions by one million pounds annually. That’s the equivalent of planting 378 acres of forest, taking 96 cars off the road or powering 69 homes. At a total cost of approximately $9.5 million, SLO projects that this project could save up to $8 million over 25 years.

What is the role of water utilities in distributed energy grids?

Partners like SLO WWTP can provide critical resources to energy utilities like PG&E. More advanced wastewater equipment can time operation to coincide with off-peak energy use periods for demand response programs. Distributed water infrastructure can integrate within district energy plans and even within electricity microgrids to extend their ability to operate without electricity from the energy grid.

For more information on the San Luis Obispo Water Resource Recovery Project, see http://slowrrfproject.org/.

Mar 19 2014

What water can learn from the transformation of waste disposal?

Cleantech continues to be a catalyst for water technologies. While water didn’t make the agenda at the latest Cleantech Forum last week, the panels on “Financing the Distributed Economy” and “A Consumer-Centric Approach to Waste” hit many of the key challenges that water is facing. How are leading CEOs of solar companies and wind companies scaling their companies to mass scale? “To grow a startup, innovation and adaptation is required across the board.” Cleantech Group Europe MD Richard Youngman notes. “Technology is just a part of the challenge; how you go about financing yourself through the early stages is a critical success factor that certainly requires being and thinking differently.”

Scaling smart distributed solar, like water tech, requires financing that is a hybrid between infrastructure financing, equipment financing an real estate finance. Stephan Dolesalek, from VantagePoint, Michael Eckert and Gerd Goette from Siemens Venture Capital see financing solar as a model for green technologies.

The giants in waste management see consumers driving next generation waste management. As capacity for waste disposal shrinks, governments from the London to San Francisco are doing more than just raising the price of waste removal. They are innovating onsite solutions for consumers, such as compost and recycling. Waste Management has brought consumer marketing expertise from Recyclebank. Jean-Marc Boursier of Suez sees significant finance opportunities for established waste disposal services in expanding resource recovery. Water waste is a small proportion of the overall waste picture, but one of the most expensive. Harvesting valuable products from water-based waste offers some of the opportunities that will be decisive.