Updated: Water, Water Everywhere, But What Do VCs Think?

There is a water crisis in developing nations and in some not-so-developing nations. Additionally, there is a looming water crisis for everyone else on the globe as populations rise, as pollution increases and as climate and weather patterns change.

But VC lore has it that there’s not much opportunity for an early stage investor in the water market.

Yet opportunities in the water market seem obvious. The water market is:

• Huge and expanding

• In a crisis that cries out for innovation and efficiency

• Not experiencing a bubble

• Deeply enmeshed with energy usage

• Needing a variety of new technology approaches

Peter Nieh, a partner at VC investment firm Lightspeed Venture Partners said via email, �Water is an alluring market because the need is clearly there and the opportunity is large.  [There is] some great technology out there. The issue for us is that economically attractive distribution is hard to achieve because the market is so fragmented.�

“[I] definitely agree that water is a challenging sector... and as such, it's sort of the Rodney Dangerfield of cleantech investments,� observed Steve Vassallo of Foundation Capital.�

“That said, we have invested in this area (PurFresh was one of Foundation’s first cleantech investments) and are actively looking for opportunities to invest in capital efficient businesses that address the needs of commercial, industrial, and agricultural users of water.�

Water technology firm, Energy Recovery Inc is growing vertically and remains one of the few recent cleantech IPOs actually trading at or around its IPO price.

Will Coleman of VC firm Mohr Davidow Ventures is also looking carefully at water deals and states. “As for water, yes, we have had an interest in water for quite a while, but it has always been hard to identity venture opportunities in the space.  The market is huge. The "water" market in the US alone is over $100 billion annually, but a significant portion of that is in earthworks and pipes. When you slice it a little finer you find that a third of the market is driven by residential, where the cost of water to the end customer is really not a driver.�

Rachel Sheinbein was a water expert at Intel, dealing with the flood of waste-water produced in the fabrication of Intel’s semiconductor products. Today she’s an associate at CMEA Ventures and part of the investment firm's Energy & Materials team. She vets the VC firm’s cleantech deals but has a particular thirst for water start-ups and states, “I believe there’s an opportunity in water but I haven’t found the investment yet.�

Sheinbein added, “We’re good at materials and membranes,� and, “We would look to get to market through the commercial and industrial space first, as opposed to the conservative municipal water channel.�

Coleman of MDV agrees, “We do look at POU (Point of Use) filtration and production systems. On the agricultural and industrial side scarcity is becoming an increasing problem. We are very interested in technologies that address industrial process water or industrial waste-water cleanup, particularly technologies that can be applied to multiple sectors. The challenge is to identify the beachhead applications that can be leveraged into the largest market segments quickly because many of the industrial markets are not significant alone. In agriculture, water management and treatment are both interesting areas as we anticipate droughts to be increasing problems. Monitoring and controls are also interesting, particularly where they can be sold into non-muni customers.�

“The Munis can be big centralized customers, but they are all pretty unique beasts in their decision making. As they say, never negotiate with a king,� added Coleman

There are a “scary number� of pollutants in our water supply, said Gayle Pergamit, the CEO and founder of Agua Via, an early stage membrane developer. These pollutants include “natural� poisons like boron and arsenic, nitrogenous wastes from humans and farm animals, and “other goodies� like hydrocodone and estrogen disruptors. “There can be any of 500,000 different interesting and entertaining chemicals in the water supply,� she said.

“Nanotechnology-based water �ltration could deliver completely pure water from any source at vastly reduced energy usage and lower total costs,� added Pergamit.

Others working on membranes for water applications include the industrial plumbing giant Danfoss, while Novozymes and a startup called Aquaporin are doing similar work. These companies have produced samples and hope to be in the market by 2010 or 2011. The challenge, said Aquaporin CEO Peter Jensen to Greentech Media, isn’t so much in creating artificial proteins. It is making the membrane durable.

�The discouraging thing about this is that [VCs] really don’t understand that we (the U.S.) are entering an era of water scarcity (as opposed to large chunks of the rest of the world who are already in the midst of water scarcity),� said Pergamit of AguaVia in an email. “Maybe they don’t buy the concept of climate change – anthropogenic or otherwise. But it also means that they don’t understand aquifer exhaustion and the fact that even if there wasn’t one whit of climate change, we are still going to run out of water.�

For more on water start-ups and water technology – check out the first in a series of articles on water from Michael “King� Kanellos.