Water deals still few and far between

Water is still a tough place for venture capital and private equity firms to make money in, according to investors at the Blue Tech Innovation Forum last week in San Francisco, although the natural resource is increasingly in short supply.

There are already areas of severe water stress worldwide and those will worsen by 2020, according to Matthew Nordan, vice president at Venrock and the founder and former president of green consulting firm Lux Research. Water that is available is also inefficiently used, with 50% of the water nationwide used to create energy, for example.

Still, obstacles to invest in water remain. Historically, just 1% or 2% of the dollars invested in cleantech have gone to water companies, according to the Cleantech Group. Institutions and endowments don’t have dedicated water people, so information on water companies is hard to find, Nordan said. Even though the nation’s water infrastructure is aging, customers for new technology are conservative, Nordan said.

Also, regulations vary from state to state and sometimes conflict, and it’s rare still for water technology companies to grow fast.

“The proportion that ramp up to $10 million in revenue and stay there is frighteningly high, and it’s unlike other fields we invest in,” said Avtar Vasu, senior vice president for natural resources at Harvard Management Co.

Most importantly, water isn’t priced to reflect its value, although energy, water rights and disposal of industrial by-products are getting more expensive, and that will make water more expensive, too, according to Peter Williams, CTO IBM’s Big Green Innovation Unit.

“The price of water itself is rising faster than the price of energy in many countries,” he said.

So far, the obstacles have forced investors to find creative ways to get into the market, such as buying real estate assets, like orchards in California’s Central Valley, to obtain water rights; invest in water treatment or desalination plants; and invest in new technologies, such as sensors to monitor water use.

However, “the interest level in water has completely changed in the last four to five years, as we realize we’re running out of water,” said Bill Brennan, founder of Brennan Investment Partners, who cited several factors that he thinks will push water investments forward.

More water use will be metered, both for use and quality, he said, and municipal bond issues, aided by new legislation, will increase, which will make it easier for private investors to invest.

Meanwhile, corporations, such as Intel Corp., SAP and Coca-Cola have started monitoring their water use, partly because they’re concerned about regulations and partly for corporate responsibility.

They’re also interested in new technology. Intel, for instance, needs “ultra-pure” water for its manufacturing plants, some of which are located in arid regions, such as New Mexico.

“Particles are the enemy for making transistors, and now the technology we have to manage that is pushing the boundaries, for monitoring and metering,” said Carrie Freeman, Intel’s corporate sustainability manager. “We know exactly what’s happening with our water, and the rest of the world doesn’t know what’s happening with theirs.”

Freeman said that 75% of the water Intel uses is treated and discharged.

Water technologies that investors cited as being especially promising—in addition to sensors—include membranes to control water quality and software to help control water processing.

Corporate strategists from Coca-Cola, Nalco and Trojan UV also want to acquire water companies or water technologies, although they warned technology entrepreneurs in particular to be realistic about what big companies can do.

“We don’t have vast resources, and we have to figure out a commercialization plan, which is very expensive for Coca-Cola,” said Shellie Davis, manager for Coke’s mergers and acquisitions. “There has to be a significant return to us, and people [from a small company who are] coming in might not even recognize that.”