Welcome to the 80th edition of Deep Tech Catalyst, the channel by The Scenarionist, where science meets venture!
If you’re building in water tech—and working to translate technical validation into market traction—this episode is for you.
Today, we sit down with Peter Yolles, Managing Partner at Echo River Capital!
Water touches everything—agriculture, energy, semiconductors—but remains one of the most complex and underinvested areas in deep tech. In this conversation, we explore how founders can navigate the journey from lab to market in the water space, where real-world pilots, capital-efficient scaling, and customer-backed agreements are the keys to traction.
We cover:
Why water isn’t the end product—it’s the enabler
How early-stage companies can de-risk hardware innovation with smart financing
What VCs actually look for in pilots, validation, and product-market fit
Why profitability is a prerequisite for acquisition in water tech
And how data centers, agriculture, and industrial users are reshaping global demand
If you're working at the edge of science and infrastructure, and wondering how to move from validation to velocity, this episode will help you chart the next step.
Let’s get into it. 💧
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BEYOND THE CONVERSATION — REFLECTIONS & STRATEGIC INSIGHTS FROM THE EPISODE
Understanding the Water Space and Its Global Demand
Water is essential to nearly every system underpinning modern civilization, yet it remains one of the most underappreciated arenas for innovation. While energy, mobility, and digital infrastructure attract broad attention and investment, the water space often operates in the background—quietly critical, but structurally complex and fragmented. For entrepreneurs working to turn advanced research into viable products, this space presents a distinct set of challenges that blend deep technical demands with commercial and regulatory complexity.
Water as an Input to Human Endeavor
One of the most important conceptual shifts for anyone entering this space is understanding that water is not the final product—it's a foundational input.
Its value lies in what it enables.
We don’t consume water for its own sake; we use it to produce food, generate electricity, cool data centers, maintain ecosystems, and manufacture goods. This perspective reframes how we think about water management and technology. The focus isn't just on the supply or treatment of water itself, but on delivering the outcomes that water makes possible, while minimizing environmental disruption.
That functional framing is crucial for designing interventions that are both effective and scalable.
Agriculture, Industry, and AI Data Centers
Demand for water varies dramatically by sector and is shifting over time. Agriculture, historically the largest user of water, offers clear opportunities for efficiency. While water is irreplaceable in this context, the way it’s used can be optimized.
Farmers are increasingly moving toward more resilient practices, including crop selection that aligns with local climates, dry farming techniques, and precision irrigation systems.
These approaches can help maintain or even boost yields while reducing the strain on water ecosystems.
In the industrial sector, new sources of demand are emerging, and one of the most significant is artificial intelligence. The expansion of AI infrastructure—especially the data centers required to train and run large-scale models—is now forecasted to drive the largest global increase in water demand through 2050.
This is primarily due to cooling needs.
While companies are actively exploring more efficient or alternative cooling technologies, the current infrastructure remains heavily water-intensive. As AI scales, so does the urgency of finding more sustainable water strategies for compute operations.
The Right Water for the Right Application
Not all water needs to be treated to drinking standards. In fact, doing so is often wasteful and energy-intensive. A more rational approach is to match water quality to the intended use.
For instance, industrial processes and irrigation often don’t require potable water. By aligning quality levels with specific applications, systems can be made more efficient and less costly to operate.
Closely tied to this idea is the question of embedded energy—the energy required to extract, treat, move, and dispose of water. Treatment can be centralized or decentralized, but in either case, energy consumption is a core concern. Optimizing this embedded energy is not just a sustainability issue—it’s an economic one. Any meaningful progress in water infrastructure must take into account how water and energy are intertwined.
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Turning Water Tech into a Product
For many scientific founders, the journey begins with a technical breakthrough—an idea, a process, or a material that shows promise in the lab. But moving from that point to a market-ready product is neither automatic nor fast. One of the most common missteps is underestimating the distance between research and commercialization.
As Peter Yolles explains, institutional investors—especially at early stages—rarely fund raw technology risk. What they are prepared to support is the transition from validated technology to a scalable business. This is especially true in the water space, where solutions are often embedded in light, capital-efficient hardware such as IoT devices.
Founders approaching their first financing round must be able to demonstrate that the core innovation works—not just under ideal lab conditions, but in real-world settings, with real constraints.
Why Non-Dilutive Funding Comes First
The path to commercialization is often long and technically intensive. In the water sector, many of the most promising innovations are supported early on through non-dilutive capital. Grants from government agencies, academic institutions, and public-sector programs often provide critical early-stage funding.
According to the guest, founders may spend three, five, or even seven years refining a product before seeking their first equity round. This extended timeline is not a weakness—it reflects a disciplined approach. Especially in hardware and materials-based innovation, this kind of patient development lays a more credible foundation for commercial growth.
By the time a team enters conversations with investors, they should already have resolved core functionality. Grants and institutional R&D support are not just financial bridges—they’re what give deep tech companies a chance to mature before capital enters the equation.
What VCs Expect Before the First Equity Round
Validation means more than internal confidence. For both investors and customers, third-party confirmation is a key milestone. That might come in the form of peer-reviewed research, pilot results validated by a trusted partner, or a testimonial from a paying customer.
Even more powerful is when a pilot project converts into a long-term commercial relationship. This kind of shift—from proof of concept to operational deployment—demonstrates both technical feasibility and market relevance. External confirmation helps build the trust that makes institutional investment viable.
The Role of Pilots
When hardware is relatively low in capital intensity, as with IoT or sensor-based solutions, investors expect clear signals of market traction before committing capital. That usually means more than just a prototype.
Startups should show that their solution has been deployed in the field, and that at least two customers are paying for it, even if only as part of a pilot.
But not all pilots are created equal. Free trials or unpaid collaborations may be useful for technical feedback, but they don’t prove willingness to pay. Strong pilots are structured with clear metrics and forward-looking commitments. Ideally, they lay the groundwork for multi-year relationships. A pilot that transitions into a commercial contract is among the strongest signals a startup can offer.
Proving Product-Market Fit with Real Metrics
To raise a seed round after pre-seed, founders must go beyond pilot success. They must prove product-market fit: that a well-defined segment of customers consistently derives value from the solution.
This proof typically includes multiple paying customers in the same category, recurring revenue or service agreements, and clear feedback that the solution solves a real, high-priority problem. Importantly, it also means that the market is large or expandable enough to sustain growth.
Founders must be able to define their target market precisely, estimate its potential credibly, and demonstrate that their approach can scale. For investors, these are the clearest indicators that a deep tech company is not just a good idea—it’s a viable business.
Preparing for Exit: Profitability as a Prerequisite for Acquisition
In the water sector, exits most often take the form of acquisitions rather than public offerings. While innovation is essential, it's not enough on its own. Companies hoping to be acquired must show a clear path to profitability. Acquirers are typically established firms seeking solutions they can integrate into their existing offerings.
They’re looking for technologies that can strengthen their bottom line. This means that profitability, or at least a credible roadmap to it, is not optional.
Startups that require continued financial support to reach break-even are less attractive. Buyers want to see financial metrics that will improve their own performance, not burden it. Founders should plan early for this, and ask not just how they will grow revenue, but how and when they will become self-sustaining.
Scaling Revenue to Attract the Right Acquirers
Revenue level significantly influences the type and size of potential acquirers. A company generating $5 million annually will appeal to a very different buyer than one generating $50 million. These are not just different in scale, but also in strategic intent—some acquirers may be looking for product extensions, others for full business integrations.
Understanding where your company sits on that spectrum helps define what kind of exit is realistic. Founders should be aware that higher revenue not only improves valuation but also widens the pool of interested buyers. As companies grow, they open new tiers of potential exit opportunities. That’s why growth needs to be both steady and strategically aligned with the market’s structure.
Balancing Tech Ambition with Capital Efficiency
Startups working in water often face an inherent tension: their work is deeply technical, often hardware-based, and yet they operate in capital-constrained markets. This makes capital efficiency a strategic priority.
Solutions that are too expensive to deploy at scale—particularly those that require millions in infrastructure investment for each installation—are difficult to finance and harder to grow.
Capital-light models, or at least modular and scalable approaches, tend to align better with investor and market expectations. Founders should ask themselves early on:
How many units need to be deployed before we break even?
What is the cost of scaling production?
Can the business generate value before large capital outlays are required?
Answering these questions is crucial not just for raising money but for building a business that’s attractive to partners, acquirers, and end-users alike.
Structuring Pilots and Contracts
One of the earliest and most accessible ways to formalize interest from potential customers is through a letter of intent (LOI). While not legally binding, an LOI outlines what a customer is willing to buy, under what conditions, and at what indicative price.
For an early-stage company, it’s a crucial signal—not only for internal confidence but also for demonstrating early demand to investors and grant agencies.
"A company might ask for a conditional approval that if the pilot is able to reach certain metrics or achieve certain outcomes during the pilot, that the customer would automatically convert their agreement from a pilot to a full-size or a longer-term contract. So, having some conditions that identify what success looks like early on is instrumental."
These early agreements are not just bureaucratic steps—they’re strategic instruments that can unlock funding, motivate teams, and build momentum.
Agreements for Manufacturing
One of the most acute challenges for startups, particularly those producing hardware, is financing the first production run. Even with a working prototype and confirmed demand, many companies face a capital bottleneck when it’s time to scale manufacturing. This is where customer relationships become more than just commercial—they can become financial assets.
In some cases, customers may agree to pay up front or co-fund the manufacturing process. In others, a startup can negotiate a binding purchase agreement—essentially a contractual commitment from the customer to buy a certain volume once the product is available. While these commitments don’t put cash directly in hand, they provide a basis for accessing working capital from third-party financiers.
A growing number of financial institutions and specialized lenders are now willing to offer short-term financing based on strong purchase agreements. This type of financing transforms a signed contract into operating capital, allowing production to begin.
Creative Approaches to Financing Early Production Runs
To bridge the gap between validation and scale, startups need to be creative.
The key is to demonstrate reliability: a validated product, a credible manufacturing plan, and customers who are ready to buy. When those elements are in place, financial partners can step in—not necessarily to fund innovation, but to fund delivery.
For startups in the water space, this is often the most difficult but most decisive step: turning proven demand into fulfilled orders. Founders who can manage this transition with thoughtful agreements and flexible financing give themselves a real chance not just to survive, but to scale.
