2/5/2013. Thank you David

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1 2/5/2013 Thank you David Good morning. I would like to start by thanking the California Irrigation Institute for inviting me to speak this morning. I am excited to participate today. David Miller and the CII board have done a great job in putting this conference together. This year, the CII is attempting something exciting. This conference focuses upon innovation. I am going to open the conference with a view of the emerging role of innovation and advanced water technology in agriculture. Experience over the last decade shows that developments in ag drive developments in urban landscaping. Water is a promising new wave of high technology. Like software and communications before it, water provides a great opportunity for intellectual property to have massive impact and provide massive benefit. Around the world, people are facing a tremendous challenge with water. This is no longer just a challenge for farmers in Africa or city dwellers in Mumbai. Water scarcity is affecting us here in California. But agriculture continues to surprise and bewilder entrepreneurs. The last 40 years record countless water management innovations in agriculture that have not succeeded in gaining wide scale adoption. 1

2 First, let s look at the drivers of innovation. 2

3 History will regard this as the dawning of the age of water. Once, they will say, water was plentiful and free. Then, water scarcity and environmental breakdown emerged as a major force between water rich and water poor countries, between cities and states, between neighbors. These were the years when a new wave of high tech emerged water tech. The might of biology, chemistry, physics, material science and engineering showed new ways of managing water. Rather than the water itself, the way in which water was managed determined the wealth of its citizens. In the future, we will be asking our leaders what are they going to do to build efficient and resilient water strategies. Water scarcity is being compounded by extreme weather events to make precise water management essential was the warmest year on record in the US. Worldwide, it was the eighth warmest since global record keeping began in America's 3

4 heartland lurched from one extreme to the other without stopping at "normal." The historic flooding in 2011 gave way to devastating drought in Extreme weather will wreak havoc on food production, by changing production levels, but also by wiping out entire harvests. The average price of staple foods such as corn could more than double in the next 20 years with up to half of the increase due not to water scarcity, but to changes in average temperatures and rainfall patterns. Also, as climate change gains attention, the role of agriculture in greenhouse gas emissions will also draw scrutiny. Approximately 13 percent of all global CO2 emissions come from agricultural practices. 3

5 If one sees the importance of agriculture in water use, it seems like the obvious place for technology to have its most valuable impact. Agriculture accounts for over 80 percent of the nation s consumptive water use and over 90 percent in many Western States. Nearly half of the value of all crops sold comes from the16 percent of harvested cropland that is irrigated. In California, agriculture accounts for 4 percent of our economy but takes over 80% of our water, 20% of the State s land area, and 8 percent of its energy use. 4

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7 Now, for a view from the trenches. Since 2005, Artemis has supported the emergence of high tech in water. It looks at advanced water tech innovation as the next tech wave. We focus upon IP-intensive technology that recast water management, rather than services, Water is a promising investment theme for investors willing to take risks on technology. But finding the specific investment opportunities has proven more difficult than it has been in renewable energy and other green tech areas. The most promising water tech start ups have found it exceedingly difficult to raise capital in order to build large companies and realize the potential of their innovation. I have consulted for some of the most promising water tech companies, as well as the most visionary corporations that are applying water tech to their operations, from Wal Mart to Intel. Also, water equipment companies have started to recognize the role of innovation in driving their business growth over the last years, What we are seeing in the water industry is a repeat of what investors saw in the emergence of the Internet. This quotation here describes our view from the 2012 Artemis Top 50, but its actually comes from a history of the Internet. Proven technology that can provide dramatic improvements in water management abound. Skilled and persistent entrepreneurs are needed to get customers to adopt new technologies. This is the same situation as when internet start ups brought together text search with internet navigation 6

8 technologies to create the revolution that molds our lives today. 6

9 The Artemis Water Tech Review was established in Each year, it reaches out to an international network of water industry experts to collect their recommendations for the most promising water start ups. We apply a rigorous evaluation process that simulates that of an early stage investor, looking at technology as well as business viability. This year, Intel, Archer Daniels Midland, Syngenta, IBM, McKinsey, CH2M Hill and Nalco served on the jury. For the last four years, the review has identified all of the companies that have emerged as leaders in the water high tech wave. 7

10 Through the Water Tech Review, Artemis sees a wide, detailed picture of what s going on in water. We can see which industries are moving fastest to adopt water tech solutions. 8

11 The jury deliberation brings together leading minds in the water industry. Through the closed door jury review, we gain insight into market opportunities that are just emerging. We can see where great business opportunities are emerging, where competition and regulation are coming together to pull the best water solutions forward. Needless to say, agriculture isn t up there on the list. 9

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13 Great start ups don t succeed solely on the value of their technology, or even the strength of the team behind it. For a company to grow fast and change the way business is done, market forces need to align to support that change. To see the first signs of advanced technology in agriculture, let s go back to our view of the challenges. 11

14 When one looks at how other industries are handling water scarcity, we are seeing water reuse provide a new source of supply. We are seeing remediation technologies reclaim historic water sources that have been fouled by man made chemicals, such as pesticides and also by materials like fertilizer. In California alone, there are over a thousand of these wells, which could replace water that costs $1200 per acre foot using tech solutions that exist today. Automated irrigation is at the heart of the monitoring and control revolution in agriculture and landscaping. Monitoring solutions are bringing precision that is helping farmers produce more, and respond better to unpredictable weather. New solutions provide information on the big picture from GPS satellites, as well as on the ground, at the base of each tree and plant. Today, Peter Williams from IBM and others will provide details on what is happening in this area. Farmers and ranchers are now irrigating 55 million acres of farmland across the US and 16M acres in California. More than half of the land farmed is irrigated with sprinklers or drip systems. This represents a total available market (TAM) of $6B in hardware sales and over $1B/year in software/service revenues. Agriculture can achieve new bounty, and new profitability, by making products out of the materials that it throws away today. Some of the most valuable nutrition in crops is in the shells and skins of fruits and vegetables. Drying technologies that work in the fields or nearby are producing new foods and powders. Other solutions are producing energy or 12

15 valuable products for production. 12

16 Here s a snapshot of some of the activity by start ups in agriculture. ClimateMinder is a wireless irrigation monitoring solution which tracks temperature, humidity, and soil nutrients. The company's clients include Monsanto, Driscoll, and Bolthouse Farms. They succeeded in raising capital and working with partners to close their first few installations. In December, they were purchased by RainBird. Three other Artemis Top 50 companies working in agriculture are Hydropoint, Marrone BioInnovations and Desalitech. Hydropoint provides Marrone provides biological pesticides to take the place of harsh chemicals. Desalitech provides energyefficient desalination in remote operations. Some additional examples from outside the Top 50 are Aerofarms and Kaiima. Aerofarms designs urban farming systems, which use no soil and little fertilizer or water. They are built to be stacked in tight spaces. Kaiima develops seeds for NON GMO crops that are dramatically more productive, land and water efficient. These two companies have managed to violate the laws of physics by bringing in elite investors at a very early stage Kleiner Perkins and the Quercus Trust. 13

17 Some of the most important new entrants into the agricultural market will be solutions proven in other industries. Artemis is seeing that the best companies are discovering that they can provide dramatic benefits in adjacent industries that they had never considered. For example: Atlantis is working in greenhouses in Ontario to remove pesticides and fertilizer from their waste water. Cambrian Innovations is converting waste water to energy in wineries New Sky Energy is harvesting sodium bicarbonate from food processing run off. 14

18 If agriculture and irrigation are at the forefront of the water problem worldwide, why isn t it at the forefront of adopting the most effective innovation? What does it take to bring the existing, proven solutions to agriculture at larger scale? First, the structure of the ag industry makes it one of the most stable, conservative industries, with enormous barriers to entry for the young companies that are bringing game changing technology. Let s look at the market from the farmer s perspective. First, farmers contend with significant barriers that are unique to agriculture. In addition to the risks that all businesses have financial, market and product risks, farmers must contend with the weather. Weather has become a brutal risk. There is a strong ceiling for food prices at the grocery store, so any additional inputs to farm production reduce profit. The industry is dominated by giants that manufacture inputs like seeds, fertilizer and pesticides, as well as heavy equipment, and the companies that distribute ag products to the market. The Monsantos, the Duponts, the John Deere s and the Cargills of the industry have bought out relevant innovations before they mature to become a start up. While there have been important technologies developed over the past twenty years, we have seen only a few tech companies emerge as leaders in their own right. In most cases, these companies are acquired before they start generating tens of millions in revenue, and often when they have just piloted the product solution. Why does this matter to you? It matters when the future of ag must look so different than its past or its present. Start ups working in numbers, drive dramatic changes in a market. Start ups must be smart quickly understanding which customers will buy product from them and why. Start ups must be agile to provide strong solutions to pull customers away from existing, proven solutions. For example, the likes of Microsoft and Google have changed the face of information management and commerce in order to succeed. 15

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20 Experiences of high tech start ups in communications and software, as well as those of the first pioneering water tech start ups in other industries provide indications for the growth path that the first leaders in water tech will take. Capital, partnerships, or initial projects aren t sufficient alone to bring a start-up into revenue-generating phase and give it an opportunity to start scaling installations and generating profit. The start-ups that we are seeing climb from initial successes to market presence are bringing together all of these forces in a quadrinity. In a nascent market such as water tech, putting together this quadrinity is essential. Each of these forces pulls the others forward. Our research has shown that there are five milestones that companies must meet before they emerge from start-up to emerging growth stage: Validation Revenues Team Business Model Vision 17

21 Our analysis shows that water tech solutions take longer, and require more capital and partnerships to validate in the field. One pilot at full scale isn t sufficient. We are completing a report on the emerging leaders from our Artemis Top 50 listings. We have found that the best companies work from the first successful pilot, to a series of 4 7 projects, and then to a blue chip customer that launches the company into more accelerated product deployment and revenue flow. Its only when a water tech start up reaches a million dollars in profit that most investors will even evaluate them. The key issues in the long term success of the company are the ratio of a product sales to services, and their profitability. After having invested hundreds of thousands, and often millions to develop a product, water tech companies can sell hundreds of units at a time. 18

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23 The great tech start up successes have all been made by people, not technologies. The teams behind them have been their decisive factor. Just as important are their champions the experienced practitioners who see the potential of a new tech product and help a company iron out the problems and focus upon the most important issues. Each of you can be one of those champions. It is exciting to see innovation change the face of the way we work with water. Throughout the next two days, you will hear about some of the most exciting new approaches appearing in irrigation. I look forward to speaking with each of you to hear your thoughts. Also, I want to hear your recommendations for the start ups that will blaze the trail for high tech leaders in irrigation. 20