It’s not priced appropriately; regulation is fierce; it’s so fragmented (by geography, technology, and industry); channels are difficult; investment is scarce; water utilities and their engineering firms don’t want innovation … I’ve heard it before: All the reasons why it’s so hard to build a successful water startup.
However, I believe something has changed, and water is now poised to become a top cleantech theme and investment sector over the next few years. Why?
- Water pricing will (and has already) improved to more realistic levels;
- Hidden costs (e.g. from energy costs to move water or property damage associated with water) will start to become more visible – especially to corporations;
- Businesses will sweat the risks to reputation, product quality, up-time, and supply chain. Can a beverage factory operate without access to clean water? Can a mining company move forward with a project without the community’s trust that precious water resources will be protected?
- Corporates are investing in water. Exhibit A is Ecolab’s recent acquisition of NALCO or ABB’s recent investment in Takadu;
- Entrepreneurial talent is starting to pay attention to water, and we shall see some outstanding repeat entrepreneurs venture into the space.
Those of you who know the water business better than me will be quick to point out that the “water market” is not one market but in fact a series of sub-sectors. I completely agree. The numerous sub-sectors that make up what we callously call the water market are in various stages of development and each represents a unique investment opportunity. For example:
- Desalination has been a difficult and declining market where siting and permitting issues, high energy costs, and tough comparative economics (vs. efficiency measures and reuse) have created a challenging environment for desalination startups
- Demand side management represents a more attractive opportunity. The “smart water” space still lags behind the smart grid but utilities are now appreciate the opportunity and are starting to invest in smart meters, software and services to bring basic analytics to their water networks. This represents a massive opportunity that’s largely in front of us.
- More broadly, significant water efficiency opportunities exist across agricultural, industrial, commercial and residential sectors. There are many ways we can make better use of water across the system as well as the energy and nutrient content in our wastewaters. I believe the biggest challenge is to figure out the business and pricing models to create value to customers who don’t necessarily prioritize water as their #1 issue of the day
- Advanced water treatment technologies are displacing conventional and chemical alternatives in many parts of the drinking water and wastewater value chains. This is driven by a broad public desire to move away from chemicals as well as industry’s need for advanced water treatment. For example, the revolution in unconventional oil and gas exploration has created booming demand for products and services to treat “produced water”
- While investors often complain about government’s role in water markets, regulation can actually create new markets. For example we believe pending regulation across the globe will create a new market for “ballast water” treatment technologies and services. Ships currently move invasive species from port to port through the pumping and discharge of dirty ballast water, creating significant ecologic and economic damage across the world. Government agencies including the International Maritime Organization (“IMO”), a specialized agency of the United Nations, have been developing guidelines and regulations which will dramatically alter what ship builders, owners and operators can do going forward.
While it’s important to acknowledge the differences between water sectors, there are many commonalities across the water business. For example we believe there are financing challenges that cuts across many water technology markets. Regardless of the substantial challenges, I’m bullish that we are entering an exciting new investment and growth period. We are launching an annual event focused on water innovation. Our recent data show investments in water rising steadily over the past eight quarters, and investor and corporate interest in water seems to be at an all-time high. Do you think we have hit an inflection point or am I just being too optimistic?
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