the venture capital sector had to reinvent itself in the wake of the dot.com bust of the early 2000s, and many funds took up the greentech theme. There was a rush to invest in renewable energy start-ups, which quickly became over-valued. Green tech funds then started to look at water, but few have actually invested. The most important investors in the sector remain the old hands: XPV Capital from Toronto, FourWinds Capital Management in London, Emerald Technology Ventures in Zurich (which recently invested in leakage software specialist TaKaDu), Arison and Israel Cleantech Ventures based in Tel Aviv, and Kinrot Ventures based in northern Israel.... and I hope that it does NOT go on.
There are two main reasons why there are a lot more greentech funds looking at the water sector than actually investing. The first is that the fragmentation of the water business means that the scope of individual technologies appears limited. For example the biggest water technology of the past 50 years is probably the reverse osmosis membrane – but RO membranes are not even a $1 billion market. Compare that to renewable energy companies which have their eyes on a market currently valued in the trillions of dollars a year, and you can understand why water is less exciting close up.
The second problem is the long adoption cycle in the water sector: most water technology start ups take at least five years to go from proof-of-concept to first commercial reference. This is because the end-user customers – typically public water utilities – have no competitive or profit-seeking incentive to take risks on new technologies. Even if they want to take the risks, few of them have the money to spend. The established venture capital investors – the XPVs and the like – know their way around these problems, and can make good returns on smart investments. Most of the newcomers don’t have the confidence to take up the challenge.
Fortunately there are some exceptions. Three of Silicon Valley’s aristocrats have taken positions in water technology. Khosla Ventures has invested in NanoH2O and Calera; Kleiner Perkins has invested in APT (along with XPV and others), and Draper Fisher Jurvestson has invested in Oasys. They have a much bolder style of investment than the established water technology investors. They are prepared to take bigger risks up front in order to accelerate the rollout of new technologies. They need to succeed. If NanoH20, Oasys and APT can force through a route to market in less than five years, they will have established a way through water’s tortuous procurement process that others can follow.
Water is a $500 billion a year industry but it is only attracting around $120 million a year in venture capital funding. With the challenges we face, this cannot go on.
02 December 2010
Investing in Water
GWI has an excellent lead today: