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Turning Water Problems Into Business Opportunities

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California Governor Jerry Brown recently imposed mandatory water restrictions to combat severe drought that “demands unprecedented action.” Many investors have grown familiar with the global trends changing in the way water is supplied, transported, treated and used. Those mega-trends, however, have not translated into much action from the venture community.

The current drought in California has renewed focus on the Silicon Valley’s role in providing new solutions. The good news is that the commercial market for water solutions is bigger than you might think, and that venture-stage companies in water perform better than many investors and entrepreneurs realize.

Where Is The Silicon Valley For Water?

Just a few hours drive from Sand Hill Road, California’s major agricultural production areas require heavy water use to sustain production. Water wells serving hundreds of families in the Central Valley have run dry, leaving people without water flowing from their taps.

Yet the Silicon Valley for water remains in formation. Water and wastewater companies receive only a few hundred million dollars of investment annually — about 1 percent of angel and venture capital. That percentage has remained relatively constant in recent years, despite increasing attention to water needs.

An ongoing debate simmers over whether water represents an attractive investment area for the Silicon Valley. Proponents say water is the next oil. Naysayers cite challenges to hyper sales growth for innovative water products and services. A recent New York Times article noted that “the water crisis simply may be a poor match for the Valley’s skill set.”

Water startups have performed better than many tech startup peers.

This article won’t settle the debate. There has been no Facebook or Google of Water, and perhaps there never will be. On the other hand, water industry segments differ wildly. It might prove hard for a water startup to achieve hockey stick growth if it sells, say engineering construction services for dams. The hockey stick might be realistic, however, for a startup selling data analytics on water to oil and gas customers.

In a large and changing market, water startups have performed better than many tech startup peers. Let’s take a look at some surprising data and some promising companies.

The Big Business Of Water

You might think of water as a public service. Although your town may still supply your water and sewer service, the business of water is big industry. The annual revenues for water industry products and services exceed $600 billion.

Moreover, increasing pressure on our water systems means the products, services and methods on which we have relied for decades now will not suffice. Demand for innovation has arisen from dwindling supply and increasing demand, flooding, rising costs of infrastructure, energy and chemicals, the sustainability movement and more.

The Surprising Performance Of Water Startups

How do water startups fare versus startups in other industries? It turns out water startups have been high performers. Lux Research (disclosure: I am a board member) provides intelligence on a range of emerging technologies and companies in science-based markets, and offers a unique comparison data set.

Lux’s research team compared the time to profitability for water startups against a set of 3,700 startups that they have analyzed closely across electronics, energy, agriculture, nutrition, life sciences and infrastructure. Those 3,700 startups offer a range of solutions, from materials to devices, IT and services.

At five years, 14 percent of water startups reached profitability, slightly lagging the 17 percent overall average. But at the 10-year check-in, 31 percent of water startups were profitable compared to a 26 percent average. By year 15, 50 percent of water startups were profitable, beating the 42 percent average.

Another cut at the data suggests strong performance over the past five years. Lux provides an overall rating for each of the companies it analyzes. Twenty-two water startups earned a positive rating in 2009 (a start year that allows a five-year look back). Those 22 companies yielded one failure, two acquisitions and eight startups that reached profitability. The remaining 11 companies have averaged more than 300 percent growth since 2009.

What does that data really mean? At a minimum, it suggests there are plenty of good businesses among water startups.

What Water Entrepreneurs Are Saying

CEOs of water startups believe not only in their own prospects, but in the prospects of their industry peers. Imagine H2O is an accelerator program for water businesses and has accepted 60 companies out of more than 450 applicants. More than 20 of our CEOs answered a survey for this article. They would, almost universally, invest in water startups other than their own.

There are many investment opportunities in the water innovation sector. Imagine H2O’s portfolio accounts for more than $1 in $10 of angel and venture investment in water. And most of our portfolio companies plan to raise capital within the next six months. There are plenty of opportunities for strategic investors and venture firms to put money in the water sector.

There is little competition to finance water startups compared to other industries. There are only a handful of investment firms that specialize solely in water. Most Silicon Valley investors do not focus on the industry. And Imagine H2O’s companies report that over the past few years, they have felt little change in competition among venture and angel investors to get into water deals.

Water startups have performed well despite minimal regulatory support. Now, regulatory trends are in their favor. The low price of water creates a common concern among would-be water investors. Interestingly, water and wastewater rates are rising across America, generally faster than any other utilities.

From drought to flood, pipes to pumps, agriculture to industry, the water market needs innovation more than ever.

In some customer applications, water is far more expensive than energy. Nevertheless, water is generally cheap. Federal, state and local governments within the U.S. have offered minimal support or incentives to encourage the adoption of new water innovations. That also means that water startups have achieved strong performance by navigating a historically unsupportive regulatory environment.

Companies that address water scarcity, not surprisingly, believe that the current California drought has made selling and financing much easier. If you believe regulation and trends will support water startups, then their performance should only improve.

Companies With Recent Venture Financing And Promising Solutions

Let’s take a look at a few venture-financed companies unleashing solutions with potential to address the world’s increasing water needs.

Software and Analytics

Smart solutions to the drought require helping major urban customers, since about half of a city water system lies on private property. Most large water users lack the data to manage their use and protect their properties against leaks, which cause roughly $10 billion a year in private property damage. Banyan Water serves enterprise customers across the country, such as Blackstone’s real estate portfolio, with cloud-based software to perform analytics on water and sewer bills, identifying savings opportunities.

The company’s software then syncs with meters and controllers on customer’s property to remotely control outdoor irrigation use and monitor flow through pipes into a building. The impact has been more than 50 percent water savings, and ongoing, real-time leak detection. Investors include Cue Ball Capital and Catamount Ventures.

Have you looked at your home water bill lately? Did it make sense to you? If so, your local utility might use WaterSmart Software, an oPower for water that helps peer-benchmark residential water use to encourage conservation, and helps utilities like East Bay Municipal Utility District, which serves Oakland and the surrounding area, better engage with their residential customers. WaterSmart recently raised $7 million at a $21 million pre-money valuation.

In a drought, water utilities face pressure to encourage conservation from their customers. But most utilities’ revenues equal the price of water service times the volume of water sold. Predicting the impact of conservation and rate changes turns out to be a tricky data problem. Valor Water Analytics sells software to help utilities make better financial decisions, has landed multiple utility contracts (including Sonoma County) in its first months as a live commercial entity and is Y Combinator backed.

In any discussion about urban water management, the utility is the elephant in the room. Fathom sells a managed service to help water utilities, including the city of Menlo Park, link meters, billing systems and other data sources to intelligently run the water utility grid. Originally a spin-out of an investor-owned utility company, the solution was developed by a utility for a utility. Fathom’s investors include XPV Capital and Silver Lake Kraftwerk, and the company notes a 10 percent water conservation impact among its client benefits.

Water Treatment

Kurion provides a fascinating example of Silicon Valley innovation helping to address a major water crisis. The company’s technologies, which include removal of hazards from wastewater streams, were deployed at Fukushima after the nuclear disaster. Kurion’s solutions removed more than 70 percent of the radioactivity from the water. Kurion’s investors include Lux Capital and Firelake Capital, and the company has generated hundreds of millions of dollars in revenue since its founding in 2008.

Desalitech has also attracted venture investment with novel water treatment technology. The company innovated on the widely used reverse osmosis treatment methodology. Its proprietary closed-circuit process design and engineering cuts the water wasted in reverse osmosis treatment by half or more, and reduces energy used in treatment by about one-third.

It offers customers a typical payback within a year, and sells mostly to large industrials, including Coca Cola. Desalitech raised $11 million in December, 2014, led by Spring Creek and Liberation Capital.

Reuse and Recycling

Countries that have learned to cope with water scarcity, like Israel, reuse the majority of their water. In America, just a tiny fraction of our water is recycled. In fact, we use water that is treated to drinking quality standards for almost every application.

Nexus eWater, born in Australia’s drought-stricken environment, provides an onsite treatment solution for homes to reuse wastewater for outdoor irrigation and flushing toilets. Nexus eWater has played a major role in influencing California water policy to enable onsite residential reuse. The company recently closed a $2.1 million Series A, and was featured in KB Homes’ annual report as a solutions partner.

Energy

Research from the California Energy Commission found that about 20 percent of the state’s electricity is used to transport and treat water and wastewater. Natel Energy’s solutions allow hydropower generation in small water conduits using novel turbine technology. Historically, hydropower systems have required a high vertical drop in water flow to generate power efficiently. Natel’s solutions open a range of new installation opportunities by working with lower vertical drops.

The company’s customers include Apple, which recently partnered with Natel to develop hydropower in an existing irrigation canal in Oregon. Natel recently closed a $7 million Series B.

Agriculture

Agriculture uses about 80 percent of California’s water. Over the past decade, a wave of venture-backed companies developed sensors and software to improve farm irrigation. That group of companies, including venture-backed Puresense and Aquaspy, developed novel soil-moisture monitoring technology, helping farmers increase crop yield per drop of water used.

Yet, despite generating good results for farmers, results for investors seeking big returns have been mixed thus far. The struggle to achieve hockey-stick growth stemmed, in part, from the difficulty of penetrating a fragmented agricultural customer base.

The recent success of a new group of companies offering business intelligence to farms might just lead to a rising tide for water innovation in agriculture. One example, Farmlogs, a Y Combinator alum that recently raised a $10 million Series B. The company includes data related to water for farms in its business intelligence software, but its software focuses on a broader set of farm decisions that include water use.

The promise, from a water perspective, comes from the recent ability demonstrated by Farmlogs and other farm data startups to penetrate the market.

The company, just a few years old, claims 15 percent of America’s 2.1 million farms use its service. A data dashboard to so many customers offers the potential to better manage water. It also offers a signal that other Silicon Valley water startups can achieve rapid penetration of the agricultural market, either independently or in partnership with companies like Farmlogs.

From drought to flood, pipes to pumps, agriculture to industry, the water market needs innovation more than ever. These companies represent a new wave of water startups that show the promise of commercial success and a safer water future.

Author’s note: Several of Imagine H2O’s portfolio companies are mentioned in this post: WaterSmart Software, Valor Water Analytics, Nexus eWater and Natel Energy.
Featured Image: Meryll/Shutterstock