Investments in water technology have historically been as low as the current snow pack in the Sierra Nevada mountains. But with increasing talks of drought and fears about feeding a rapidly growing world population, that’s starting to change — albeit slowly.
That’s why a San Francisco-based startup and nonprofit, Imagine H2O, has begun to help organize and encourage emerging water innovations in recent years. Founded in 2007, Imagine H2O runs an annual water technology startup competition and accelerator program and offers the winners not only cash but also opportunities to run pilot projects — and prove that their technology works — with water utilities, growers and food processors. Imagine H2O recently chose 12 finalists for its competition and plans to announce the winners this upcoming March.
Though, venture capitalists, many of which were recently burned by cleantech investing, might not be flooding to back these startups just yet. “Water historically hasn’t fit the traditional venture capital model,” Scott Bryan, chief operating officer of Imagine H2O, told us in an interview. “That said, you are seeing more activities from corporations acting as strategic investors and family offices.”
Part of the reason building a water business is tough is that water remains a cheap commodity, despite that water rates are rising in parts of the country. Another reason is that water utilities don’t make easy customers because their procurement process can be complex, and they don’t have much money to spare. Water utilities also may not be willing to test out new technologies that don’t have a lot of hard operating data just yet.
But the worry over a lack of ample rains throughout California and other parts of the western United States have certainly prompted water utilities to promote conservation. The country’s largest seawater desalination plant is under construction in Southern California because a drought in the 1990s and supply concerns from its main water seller prompted the San Diego Water Authority to look for alternative sources.
Couple that with growing interest by big corporate and industrial water users, such as Coca-Cola, who want to protect their water supplies, and new water technologies start to look like a better business.
Much of water technology out there is focused on equipment for purifying and recycling water, treating wastewater more efficiently and turning byproducts of the wastewater treatment process into compounds for making fertilizers or other products. In this sector, obstacles that other cleantech hardware technologies face, also applies to water tech. The time to develop and commercialize these technologies can take far longer than the traditional technology timelines that venture capitalists prefer.
There is little hard data showing how long it would typically take for a water startup to bring its technology from concept to market. But anecdotal evidence shows that it could very well take 10 years, Bryan said. Around 1 percent of venture capital investments go into water companies, he noted.
Corporate investors and family offices don’t face the same pressure to raise funds and generate big returns, and that makes them perhaps a more ideal source of capital for water startups. That’s true for True North Venture Partners, which was founded by former long-time First Solar CEO, Michael Ahearn, and involves four families as investors.
“We are trying to form large companies over time — find disruptive innovation, stick with them and help them reach their full potential,” said Steven Kloos, a partner at True North and a judge at this year’s Imagine H2O competition. “We are not in the game of raising funds. We don’t have to exit.”
Imagine H2O itself relies on support from private foundations and corporate sponsorships to operate. One of its main supporters is the California Water Foundation, which involves five families, including the Bechtel and the Fisher families. Imagine H2O operates as a nonprofit to make it easier for it to line up support from government agencies and utilities, Bryan said. As a result, it doesn’t take an equity stake in startups in its accelerator program.
Imagine H2O was born as a project at the Harvard Business School. The two founders, Tamin Pechet and Matt Evans, saw how difficult it was to launch water startups and bring their ideas to commercialization because key resources were lacking. For example, there isn’t a federal agency for water like there is for energy that helps to focus public funding and research efforts. There are roughly 50,000 water utilities in the country with autonomy that can make it challenging for startups to wade through the often complex utility regulations.
Aside from True North, Imagine H2O has also recruited Google Ventures for judging this year’s competition, which sports a “food and agriculture” theme. The water sector is so broad that narrowing down the focus is important for business plan judging. Themes from the competition in previous years included water efficiency, wastewater and consumer-oriented technologies. It announced its inaugural class of winners in spring 2010.
The intersection of water and agriculture is an interesting space because agriculture makes up 70 percent of the world’s fresh water use. Imagine H2O lined up BlueTechValley, a group of growers and food processors in California’s Central Valley, as part of its accelerator program to provide the startups a chance to do field testing of their technologies.
The competition drew 70 startups from 11 countries, and 12 of them have been chosen as finalists. The finalists are divided into early-stage and growth-stage categories. A winner in each category will receive $15,000 in cash while two runner ups from each category will each get $5,000. All six winners will also have access to about $150,000 in in-kind legal service from Cooley, marketing service from Weber Shandwick and software from Autodesk.
“We believe that this sector is willing to pay for innovation. Whether it’s China or California, you will have issues of scarcity and quality that is becoming legitimate financial risks for corporations,” Bryan said. By the time the world hits a 9 billion and 10 billion population in the next few decades, no doubt water tech will have become a crucial part of the equation.