Water – essence of and for life!
Time for a focused financing event!
2nd Edition: Zurich, 12th of april, 2011

Is water technology investing strictly for insiders?
Published 2nd December 2010

I have been putting together a list of all the water technology investment deals that have taken place over the past two years for our new Water Market USA report (published later this month). It is interesting to see how the reality of water technology investment matches up to expectations.

From where we are sitting, technology investment seems to be one of the fastest growing areas of interest in the water sector at the moment. A host of conferences promising to introduce investors to new water technologies have sprung up around the world – many of them well attended. It looks like the sector has momentum – but from the evidence of the actual deals done, it seems that the spectators outnumber the participants twenty to one. This is nice news for conference organisers, but it does raise questions about the longevity of the sector.

What seems to have happened is that 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.

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 Jurvetson 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.

Source: Global Water Intelligence

Five things I learned at the Global Water Summit
Published 29th April 2010

1. There is no such thing as economic water scarcity, only political water scarcity. Ek Sonn Chan told the story of how the Phnom Penh Water Supply Authority had been transformed between 1993 and 2009. The number of connections increased seven-fold, non-revenue water fell from 73% to 6%, collection efficiency rose from 48% to 99.9%, and total revenues increased from $300,000 to $25 million, with an $8 million operating surplus. After receiving initial grants and soft loans from international financial institutions, the utility is now self-financing. Tariffs increased steeply in the early years, but they have been held constant at around $0.24/m3 since 2001, because the combination of service expansion, reduced water losses and high collection rates has guaranteed a sufficient cashflow for debt repayment as well as capital expenditure. It is a great story that should be reproduced across the developing world – if politicians allow it to happen.

2. The oil companies are waking up to water. Joppe Cramwinckel of Shell explained that his company is one of the largest producers of water in the world. The ratio of water to oil produced in wellfields has nearly doubled from around 3:2 in 2000 to around 3:1 in 2007. It could reach 5:1 by 2025. Currently most of this water is reinjected into the ground, but Shell is pioneering the purification of produced water so that it can be used to grow crops for biomass production. It is a new paradigm which should be an opportunity for the water industry. There was some debate, however, about whether water services companies can get past the oilfield service companies to make the change happen.

3. Three slides are responsible for billions of dollars of losses in the water industry. Underground Solutions boss Andy Seidel gave a presentation summarising 20 years of mergers and acquisitions activity in the water sector. Each wave of acquisition seemed to begin with a group of executives sitting in a conference room deciding what market to target next, and watching consultants present the case to enter the water industry. The presentation always includes the same three slides: one talking about the supply and demand balances, another illustrating the global market drivers, and a third showing how water stocks have out-performed. The executives agree to buy their way into this great market, only to discover that the market is a lot more difficult than they thought. Despite spectacular “flameouts” such as Waterlink, Azurix and US Liquids, the three slides still have the power to enchant executives as they sit in the conference room with the blinds down.

4. Meeting the Millennium Development Goal for water can be easy. Cristino Panlilio described how his company, Balibago Waterworks Systems, serves around 70,000 customers in a rural area of the Philippines. He grows the business by going out to adjacent towns and villages and asking whether they would like a piped water supply. They are shown the regulator’s schedule of tariffs, and then if they want piped water and are prepared to pay for it, they get it. It is an attractive proposition for communities which might previously have relied on hand pumps and wells, and it makes good money for Balibago’s investors. If the rest of the world allowed water companies to work like this, there wouldn’t still be 3 billion people waiting for a piped connection.

5. The campaign against private water is losing clarity, as the private water sector becomes more diverse. We invited one of the leading campaigners against private water, Maude Barlow, to join a debate on whether water should be run as a business. Her arguments seemed to lack the immediacy they enjoyed ten years ago, when Aguas del Tunari was forced out of its contract in Cochabamba, Bolivia. In those days, private water meant big foreign companies taking long-term concessions to run water services in developing countries, with a view to earning a return directly from customer tariff income. Today, private water means a whole range of things, from small-scale systems operators laying pipe to connect up villages in Uganda or the Philippines, to the big independent water and power projects of the Middle East. As it has become a more complex and variegated sector, it has become more difficult to come up with a one-size-fits-all argument against private water.

Source: Global Water Intelligence, The weekly briefing from Global Water Intelligence Issue 25, 29 April 2010

The issue of water and environmental technologies is gaining an increasingly central place in the world’s consciousness and economy. About 2 billion people around the world either lack access to sufficient quantities of water, or are supplied with water unfit for drinking. This shortage is going to worsen in the near future due to the rise of world’s population and to the redistribution of water resources among the world’s regions, which in turn stems from global warming.

The growing environmental awareness has resulted in an impressive boost in the development of new technologies for alleviating ecological problems, particularly for water purification and treatment, and in the corresponding increase of these technologies’ worldwide implementation and marketing.

A few facts highlighting the problem:

• The world water market stands today at approximately $504 billion, while other environmental technologies account for a further $200 billion.
• Two thirds of the Earth surface is covered with water, of which only 0.74% is sweet water fit for drinking.
• In 95% of the developing countries, almost 70% of sweet water is used for agriculture - to produce food.
• According to UN, 1.1 billion people around the world lack access to a minimum amount of sweet water for daily consumption.

Source & Quote: Watec Israel 2009