Welcome back to Owner to Owner, a newsletter for 1,200+ small business owners and operators who want to become better leaders and design the next chapter of their companies.

This month, we sat down with Rodney Herrington, the founder of Aqua Research and Aqua Membranes, both Albuquerque-headquartered companies that build water treatment technologies. Aqua Research manufactures mixed-oxidant disinfection equipment for industrial applications such as cooling towers, aquatics, poultry, and drinking water, with a focus on the developing world and a strong e-commerce business. Aqua Membranes has developed a new technology for reverse osmosis membrane elements used in industrial water and seawater desalination applications. 

Rodney is an engineer. In 1994, he was part of the team that invested personal assets and started an electrolytic water disinfection treatment company that developed and deployed the technology in all 50 states and 30 foreign countries. In 2005, they sold control to a venture capital group. Over the next five years the new management raised $50 million in preferred equity but never grew the business to match—the runway was getting short. As a common shareholder, it was obvious to Rodney that he needed to pursue other options.

So, at 60, Rodney started over. His kids were mostly out of the house. His old company wouldn’t pay a $10,000 license fee to a university that held an important patent for the membrane technology since the membrane technology was not in its wheelhouse. Rodney left the company and obtained the license to keep working on an idea he believed in. His family and friends were willing to back him. He started two companies of his own, Aqua Research (disinfection) and Aqua Membranes (filtration). As he put it, you get to 60 and think, “I’m a long way from checking out.”

Rodney says that the engineering was never the hard part. The money was. How he kept dollars flowing for 16 years, and why he handed the CEO jobs at both companies to outside hires, is what we wanted to talk with him about.

I started out as an engineer at Texas Instruments. Then a buddy and I started a construction company, and we got into the oil field from there. When the oil field declined in 1983, I moved to Los Alamos, New Mexico, and went to work for a consulting firm working for the Department of Energy. In ’94, we started a company around an electrolytic technology we had been working on, and in 10 years we had systems in all 50 states and 30 foreign countries. But we were cash-strapped, so in 2005, we sold control to a venture group. They didn’t know anything about water. By 2010 they’d raised $50 million, but sales didn’t materialize to a significant degree. As a common shareholder, I was never going to see anything out of it.

A DARPA contract from 2000 to 2005 taught us a lot about membranes and disinfection technology. I saw the value in it, but management said, “Membranes are not in our wheelhouse.” In 2010, we had a $10,000 license fee due on a patent we needed, and management said, “We’re not paying it.” I said, “Well, I’m going to leave and go get that license and start my own business.” Family and friends backed me, and in 2011, I started Aqua Membranes and Aqua Research. I was 60. You get to 60 and you think, “I’m a long way from checking out.”

Bringing on CEOs in both companies. For Aqua Membranes, Craig Beckman came on as CEO. Craig was a membrane guy from GE. I met Craig when he was recruited to my old company two years after I left, to turn it around. When he took over my old company, he was looking up to see the bottom, and in two or three years he had it to where he could see light. I got to know him as a shareholder, and after the board of directors told him to sell the company, I asked him to come run Aqua Membranes. He came aboard in 2018. I basically had to go through the transition in my mind of letting go of my baby, and that’s not a trivial exercise. You’ve done all the work, all the PowerPoints and spreadsheets, and kept the company funded via angel and family investors. In 2022, Gene Rabent was introduced to me by one of our shareholders at Aqua Membranes. Gene had an extensive background in industrial chemicals, and he subsequently joined Aqua Research as CEO.

As an engineer, I never doubted I could solve the engineering problems. Money—and not running out of it—was the big issue. Fundraising was an eye-opener, because you cannot stop fundraising until you break even. If you run out of money, the party is over. You’ll look back at your sales forecasts five years later and laugh at how optimistic they were. Most investors know that. What they’re looking at is the individual. Has he got the moxie to go do this? That’s what you’ve got to sell to investors.

The mistake I’d fix is the LLC. I really wish I had done a corporation from the start on both companies. With 40 people on a cap table, everybody’s looking at a partnership LLC K-1 at the end of the year, and they don’t want K-1s. They just want to hold the stock so they don’t have to have the additional tax work at the end of the year, and they can get the capital gains when the stock sells. When I converted to a C Corp, all the draws I’d taken for compensation under an LLC caught up with me, and I had a huge tax burden. If you’re thinking about starting a company, talk to an accountant about what happens to your draws when you convert from an LLC to a C Corp.

This is New Mexico. There’s a limited amount of money. But if you’ve got a good story, you’ll find people. One of my investors ran an incubator in Albuquerque, and one day he introduced me to a Los Alamos scientist named Catherine. I talked to her for an hour, and she said, “I like what you’re doing. And I like you. So just treat me as your ATM machine. When you need 50 grand, call me.” Just like that! You keep people like that informed, and you’re honest with them when you’re having a hard quarter. A lot of my money came from family too; you definitely don’t want to let your family down, which is another motivation for success.

We get business the same way. One of the best-known experts in cooling towers tells his customers, “Go buy Aqua Research technology. These are the guys who will do what they say they’ll do.” We don’t pay him a commission. He doesn’t want one, because his customers would see him as biased. You’ll find great relationships and supporters along the way.

Investors are not so much concerned about the technology as they are about management. Real estate is location, location, location. In business startups, it’s management, management, management. Be good to people and do what you say you’re going to do. People will stand aside for somebody who knows where they’re going. Cash flow is number one, because if you run out of cash, you’re dead. And pay yourself. Some investors will tell you not to take a salary because you’ve got equity. I told myself in the beginning, “If I can’t pay my salary as a first point, I’m not doing this.” And equity gets diluted along the way as you take on new investors.

It takes longer than you think, so you need patient capital. Strategic partners are a lot better than financial partners. You’ll make mistakes. That’s how you learn. If it didn’t work, change it. Don’t get thin-skinned and decide it has to be done one way. You better change if it isn’t working. The money will come. Just grow your business.

If something here sparked a thought, a question, or a story of your own, just reply—we read every note. And if you’d like to be a part of a future issue, let us know through the button below.

Until next month, wishing you a strong week ahead. We’ll see you soon.

— Victor & Brian

P.S. Hit reply and tell us anything on your mind about life or business.

This is a private email for owners of B2B businesses in the US. Hosted by two longtime business owners, Brian O'Connor and Victor Saad of NextGen Growth Partners, we share personal interviews, honest lessons, and draw connections back to your work and life. Glad you're here.