Water’s Scarcity Spells Opportunity for Entrepreneurs

3/31/2011

By ERICA GIES

 

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SAN FRANCISCO — Hydrovolts, a start-up company in Seattle, has developed a portable turbine that generates energy from water flowing in irrigation canals. BlackGold Biofuels, based in Philadelphia, takes fats, oils and grease out of wastewater to create biodiesel.

Last week, Hydrovolts won the 2010 Imagine H2O prize, an annual competition established in 2007 to encourage innovation in water technology. BlackGold was one of two runners-up. Both are poster children for the flourishing “blue tech” economy that is drawing innovators, entrepreneurs and investors into the water industry.

“Water is mission critical in everything that we produce, eat, need, and underpins pretty well all economic development,” said David Henderson, a partner at XPV Capital in Toronto, a venture capital firm that focuses on water technology.

According to a World Health Organization report last year, about 884 million people worldwide lack access to improved drinking water supplies and 2.6 billion lack access to basic sanitation. Developed countries, too, have water problems: Infrastructure is aging, causing leaks and pollution.

Meanwhile, micropollutants are a growing hazard to health and the environment, the global population is rising and climate change is making water supplies increasingly unpredictable.

Historically, water’s definition as a common good, publicly owned and closely regulated, has made entrepreneurs and venture capitalists reluctant to get involved.

But that is changing with the growing awareness of the challenges of climate change and energy supply.

Water and energy are closely linked. The nuclear plant crisis in Japan is a stark example: Nuclear plants require huge amounts of cooling water, and the cooling systems require large inputs of power.

Hydraulic fracturing to extract U.S. shale gas and oil-sand mining in Canada are opening up huge new hydrocarbon reservoirs, but both techniques use a lot of water and cause pollution.

Climate-change science and policies are pushing companies to measure and reduce their carbon footprints. As they take stock of their environmental effects, many companies are measuring their water footprints as well, recognizing that saving water saves energy and money.

Bill Wescott, vice president for innovation at the North America operations of Veolia Environnement, said water footprinting programs, which aim to quantify direct and indirect water use, “allow us to have a language and metrics around water that I think was missing to some degree in the past.”

There are security issues around water, just as there are around energy, Mr. Wescott noted.

In addition, population growth and urbanization are expected to drive demand for water up 40 percent within 20 years, according to a 2009 report from the 2030 Water Resources Group, an association of the World Bank, major industrial water users and the consulting firm McKinsey.

Industrialization lifts people out of poverty, Mr. Henderson said, but “the Achilles’ heel of that process is people move to a protein diet, which is very water intensive, and they start consuming things like jeans, shoes, cars, and smartphones that have huge underlying water footprints to produce.”

To entrepreneurs and investors, all of this is starting to signal opportunity. Mr. Wescott said the resources group report showed that “in many cases, there’s a fair amount of money to be made in addressing some of these water issues.”

Tamin Pechet, who founded the Imagine H2O competition in 2007, said he did so because at that time “most entrepreneurs weren’t aware of how big a human and environmental issue water problems were and also a potentially commercially attractive market opportunity.”

In 2009, the contest focused on water-efficiency solutions. In 2010, the focus was how water and energy were linked. The cash prizes are relatively modest, but the main benefit to entrepreneurs is Imagine H2O’s incubator program.

Rob Steiner and Peter Yolles co-founded WaterSmart Software, which was the runner-up in the competition in 2009. Their software helps residential users track their consumption to save water and money.

“The process of applying for the prize helped us define our business strategy and refine our concept,” Mr. Yolles said.

When they were chosen as finalists, they had to develop a business plan and a presentation for investors. To assist them, they were assigned a mentor, the chief financial officer of a solar company.

The process, and the exposure to investors, paid off. “We’ve gotten commitments for funding for at least half of our seed round that have come directly or indirectly from the Imagine H20 competition,” Mr. Steiner said.

Burton Hamner, chief executive of Hydrovolts, said the company had raised nearly $1.3 million, in part by entering contests like Imagine H2O, focused on clean technology, innovation and venture capital. The amount raised was probably enough, he said, to take this “all the way into commercial production of turbines.”

Mr. Henderson, the venture capitalist, said initiatives like Imagine H2O and the Artemis Project, a specialist consulting practice based in San Francisco, had alerted a broad audience, including biologists, physicists and software engineers, to water challenges. Unencumbered by vested interests or traditional industry attitudes, these people “think differently,” he said. “That is critical if you want to drive new innovative approaches, business models, policies, thinking.”

Contests and consulting firms are not the only channels for water innovation. Multinational companies are also getting involved. Veolia started its Innovation Accelerator program in 2010 to “tap the creative energy of clean-tech innovators.” General Electric has its Ecomagination venture arm, and Siemens has a venture capital division. Still, these are not water specific; they encompass all environmental technologies, especially renewable energy.

BlackGold Biofuels, the Imagine H20 runner-up, has a pilot project with the San Francisco Public Utilities Commission. Emily Landsburg, its chief executive, is also in talks with Veolia and General Electric.

Multinationals like Veolia and General Electric, she said, offered “a strategic partnership, where Veolia is getting access to emerging state-of-the-art technologies, and the company is getting access to Veolia’s distribution network and vendor relationships.”

In the first year of the Veolia Accelerator program, 200 companies applied for evaluation, and 35 percent of them were in the water sector, said Michel Morvan, vice president of strategic intelligence and innovation at Veolia Environnement.

Veolia can also help start-ups reach the fragmented water marketplace, Mr. Morvan said. “We are present in 74 countries,” he said. “We are very used to dealing with municipalities, with cities, with territories.”

Mr. Wescott added that a utility company like Veolia also offered wide access to other markets, like energy or waste, to which technologies designed for water may also be applicable.

It can function, too, as a proving ground for new companies to overcome the water industry’s sensitivity to the risks, he said. “We’re helping them manage different types of risk: technology risk, operations risk and commercialization risk,” he said. Putting a technology through its paces in such an environment paves the way for broader market adoption.

Risk aversion means that the water industry operates on a long sales cycle.

“That can be a frustrating part of the industry,” said Amol Deshpande, a partner at Kleiner Perkins Caufield & Byers, a venture capital firm that invests in water technologies. “But it’s perfectly appropriate for the water industry to be cautious about selection of the equipment that they use,” he added, pointing to the life-and-death consequences of a bad decision.

New technologies, moreover, may have unintended consequences. Desalination, for example, uses far more energy than traditional water sources and can hurt the local ocean environment.

The Imagine H2O competition requires entrants to highlight the potential negative social and environmental effects of their ideas as part of an informal screening process. Still, “we do not judge the companies based on their social or environmental impact. They are judged on their commercial promise and viability,” said Mr. Pechet, the founder of the contest.

Venture capitalists sometimes argue that the drive to save money and energy favors environmentally friendly solutions. Still, Mr. Deshpande, for one, said he took environmental criteria specifically into account when considering companies to finance: “Is it environmentally benign, in terms of not creating a bigger problem with the treatment than the problem itself?” he said.

Increasingly, he also looks for companies that have the potential for global reach. “It’s important for anybody investing in the water sector to have the approach and attitude that they want to be a global solution,” he said.

These standards are pushing innovation in some interesting directions. “The ways we solved water issues in the 20th century are not going to work in the 21st century,” Mr. Henderson said.

For example, he predicts that centralized water treatment will give way to a decentralized approach.

“The cost of replacing the infrastructure is just enormous. So I think we’re going to have to find innovative ways to deal with that,” Mr. Henderson said. “The closer you treat water to its use, the more cost effective, the more efficient it is. You’re not pumping it, you’re not using the energy.”

Mr. Deshpande agreed, saying that onsite reuse of water was gaining traction among industry experts.

Another trend is to treat wastewater as a resource that can produce financial assets, rather than environmental and financial liabilities, as Ms. Landsburg is doing with BlackGold Biofuels.

“Wastewater is a very bad name because there’s a lot of value in wastewater,” Mr. Henderson said, citing the potential for the recycling of nutrients, chemicals, and minerals. Technology is now advanced enough to do this cost-effectively, he said.

In places like Singapore, “the word ‘wastewater’ doesn’t exist,” he said. “They call it ‘new water.’ They call their wastewater plants ‘water reclamation plants.’ And I think that’s an interesting shift in mentality.”