Investing in water

While investment in water technologies is still perceived as risky, venture capitalists are increasingly drawn to the sector, according to analysts and experts speaking at the three-day Cleantech Forum in Amsterdam on May 9-11.

“Investment in water remains low – there is still a long way to go, but there is an upward trend which will continue in the coming years,” Mia Javier, a research analyst at the Cleantech Group, told REVOLVE.

She added that interest in water markets has skyrocketed over the past few years, even if venture capital investors remain cautious. “Investors are not dismissing water markets, but it remains a challenge.”

Only 3 percent of clean tech venture capital now goes into water technology. According to a Cleantech Group report on the state of water innovation in 2009, total investment dropped by 41 percent compared to 2008, deal activity “hit a record high”. “Water companies raised $149 million in venture investments across 50 deals, claiming a 2.6 percent share of the 2009 total of $5.7 billion.”

Javier ascribed this low share to the uncertain return on investment due to the low price of water. The venture capital model in which investors expect high returns within five to eight years, she argued, is not suited to water markets, where technologies develop comparatively slowly.

Analysis and Efficiency

 One of the areas attracting particular attention within the water technology market is the water analytics segment that focuses on new methods of data tracking and analysis.

“You can’t manage what you don’t know,” Javier said. “Both government institutions and industries are increasingly looking for real-time quality control and smart solutions to increase efficiency.”

The California-based Hara Environmental and Energy Management is an example of such a smart technology innovator. In 2009, it attracted one of the largest deals in the water technology sector, raising $14 million in follow-up funding for its Software-as-a-Service technology, which allows enterprises to holistically monitor and manage their natural resource consumption and environmental impact.

Another area of interest is the development of energy efficient treatment technologies that improve productivity of water treatment and distribution.

The Israeli company Emefcy, for example, has developed a technology that eliminates energy consumption in wastewater treatment by applying the principle of microbial fuel cells (MFC) for the direct production of electricity or hydrogen from wastewater.

In general, Javier said, technologies that can increase efficiency of water use and limit wastage had great potential. “Mismanagement of water resources is the greatest challenge we face,” she said. “We use water as if we live in a world of abundance, whereas high population growth and rising living standards mean that we in fact have less and less water.”

Water Innovator

Despite venture capitalists’ caution, Assaf Barnea, CEO of Israeli water incubator and VC Kinrot Ventures, is confident that investment in water technologies will increase, particularly in Israel, where encouragement of water innovation is part of government policy.

However, Barnea, who in 2004 established a special water technology research centre (WaTech) within Israel’s water utility Mekorot, stressed that developing water technologies is both time and cost intensive.

“It is not like internet applications,” he commented. “A lot of time and capital is needed to test and validate water technologies, even though they are of crucial importance to society. Small start-ups can fail, simply because they don’t have the capital to sustain their research.”

This is where Kinrot Ventures comes in, one of the world’s leading seed investors in water and cleantech-related technologies with a portfolio of 13 companies, according to Barnea.

Kinrot supports small companies who are pioneering new water technologies, backing them with a sum of up to $1 million over a period of several years. Additional funding for these new ventures comes from the country’s Ministry of Industry, Trade and Labour.

Barnea is also constantly seeking strategic partnerships with global companies and water utilities such as GE Water, the Israeli water utility Mekorot and the Milwaulkee Water Council.

“I am building an ecosystem around Kinrot Ventures, so that small companies can test and validate their technologies in various contexts and settings,” he explained. “We are trying build a network of relationships and cooperation not just in Israel, but worldwide.”

Looking at the broader VC market, Barnea said the shift towards clean tech investment that has taken place over the past four years will in the longer term benefit water markets too.

“While clean tech is still mainly associated with solar energy, the VC community is more familiar with the water sector,” he said.

Over the coming decade, growing problems of water scarcity combined with rising fuel prices will boost demand for new energy- and water-efficient technologies. Water markets are sure to follow as the importance of innovation and new technologies is highlighted.