Water Sector Innovations: A Transitioning Market for VC Firms and Technology Companies
In cleantech arena, the water sector has been the VC investment and financing stepchild, garnering only 3 percent of the overall $400 billion in annual spend. As innovators confront sector challenges with new technologies that address regulation requirements, rising operating costs, and aging infrastructure, the balance for the sector is shifting to “capital hungry.”
GP Bullhound, a research-centric investment banking firm in the technology sector, reports in its November Water Sector Report that the sector is progressively evolving to an “exciting time of change” for innovators, operators and investors. The report details the growing demands of the industry, enumerates the significant realignments causing the change, and makes the case for an increase in large investment opportunities.
Changes Driving Innovation
What is forcing this innovation? “These change drivers are colliding with an industry that is seen as immune to change, politicized in its decision making, with high capital costs, even higher operating costs, and a civil engineer mindset. Add to the mix a dwindling supply of fresh and clean water, increased energy costs and the entry of managers with a new way of thinking as well as new and large corporates and we have an ecosystem where new technologies can thrive,” the report says.
Waste to Energy Technologies
Experts interviewed for the report included Paul O’Callaghan, CEO of O2 Environmental and founder of the BlueTech Forum, an annual industry event that features thought leaders addressing market insights, opportunities and research. O’Callaghan explained that recovering energy and water from waste is needed.
“Each year and in the US alone, there are 36.5 Million MW hours of energy lost down in wastewater and 25 million MW hours of this ends up in sludge. Up until now, we have been throwing away our two most critical resources: energy and water,” he says.
For this problem, promising technologies exist and others are near commercialization. These include gasification, conversion into fertilizer, and the production of power through electrochemical processes, supercritical water oxidation processes, sludge conversion and recapture of scarce minerals.
Perceptions of Desalination Changing
In the desalination area, perceptions are changing. No longer is the process seen as being too prohibitively expensive or only the domain of the oil-rich Gulf States. O’Callaghan notes that desalination costs at the new Carlsbad desalination project in San Diego are now equivalent on a cubic meter basis to the cost of pumping water in from Northern California. Increased performance is also expected in this arena.
Outlook for Emerging Tech Companies
While the industry is exhibiting strong signs of a shift, the outlook for emerging tech companies may not be as rosy. With few “well-beaten paths to success” and time-tested role models, young companies face an industry with a fragmented structure, and one that expects proven and sound technologies (e.g., biological processes require testing that allows for the effects of seasons).
The capital-management-customer equation is also fraught with inequalities. The industry may be capital hungry, but if there is no proof of enough customer orders to create a positive margin, the capital will go elsewhere.
Additionally, utilities and municipalities adopt technologies from trusted players. Building trust and market adoption and penetration takes time and are critical for setting the stage for true commercial traction. Capital decision-making and hesitation to commit further complicates, and oftentimes, stalls the process.
Framework Agreements Limit Innovation
Capital and maintenance agreements with large engineering firms have the potential to strangle innovation. If large firms have no incentive to innovate or experiment, commercialization will gain little traction. Evaluating a new technology is one thing. Implementing it is another.
Long investment cycles for refurbishments and slow buying cycles further complicate the adoption of new technologies.
Concurrent Changes Needed
At present, there’s little evidence of return-generating exits for financial investors. To post more successes in the sector, qualified and entrepreneurial management teams are needed. Investors and emerging companies must have the patience and willingness to commit to a long-haul journey. Customer relationships are still king as is not betting on the wrong technology and not taking into account the conservative nature of the industry.
Communication, A Strong Sector Complement
Most importantly, one mustn’t overlook the role of communication – especially from awareness, public accountability, and risk communication perspectives. Water main breaks posted on YouTube, for example, create negative publicity. Images of these spectacular explosions do not bode well for community relations and public confidence in a utility’s ability to deliver on the safety and public health front.
Despite the barriers to entry and sector demands, these significant realignments taking place are creating a more VC and investor ready environment. Strategic communication – a necessary sector complement – can help to usher in a new way of thinking for large utilities, create awareness about the value of water amongst the general public, ensure regulatory compliance, and raise the profile of the water-energy nexus.
To read the full GP Bullhound Research Report click here.
Written by Donna Vincent Roa, water sector communication expert and Managing Partner & Chief Strategist of Vincent Roa Group, a strategic business and science communication firm that provides executives with world-class communication, brand management, and on-call premium editing and writing services.
