Selling the case for increasing the efficiency of water services

In a world where water is becoming increasingly scarce, venture capital (VC) investors are beginning to sit up and take notice. They are putting their money into technologies that promise to increase the efficiency of water services, thereby cutting costs, reducing energy consumption and offering potentially strong returns on their investments.

According to analysts Global Water Intelligence (GWI), around $237m (£146m) of venture capital funding was invested globally in water technology companies between January and August 2012. Levels of investment ranged from £160,000 to £37m – with companies developing membrane filtration to treat waste water at both ends of the scale.

While funding is focused on Europe and North America, there are also signs that Asia is becoming a growing water technology market. GWI notes that industrial corporations such as BASF and ABB are increasingly investing in water technologies. Extractive industries (oil, gas and mining) are also showing an interest in water, says the London Environmental Investment Forum. It estimates that these heavy water users are responsible for more than £246m in funding for water technology companies over the past five years.

Why this upsurge? For a start, investors recognise that, all over the world, water is becoming a scarce resource. At the same time, there is growing publicity surrounding waste from leaking pipes, prompting consumers to question why they should restrict their use and shifting the spotlight to inadequate infrastructure.

Helge Daebel of Switzerland-based Emerald Technology Ventures – a VC that invests in water-industry start-ups – says that more start-ups are coming forward now than when he started taking an interest in water around six years ago. He believes this growth has been largely driven by the availability of know-how and talent from other industries, such as IT. Software developers have realised that automated control systems can be applied to water networks and make even leaky pipelines more efficient.

Many specialist software solutions for managing water networks are spin-offs from IT companies or university research departments. One successful start-up, TaKaDu, was set up by experts in the IT and telecoms sectors who had not previously worked in the water sector.

Investors need to play the long game

But is the flow of money sufficient to fix the problem, and are VCs the best source? Jacob Tompkins, managing director of WaterWise, an independent body that promotes efficiency, affirms that the water market offers great returns for investors. But he feels that with only a few specialist VCs (such as Aqua Resources, Emerald, Ombu, Pictet and Swarraton) pursuing short-term returns, the sector is still a long way from unlocking the full potential of efficiencies and savings that can be made.

Big investment firms have the means to pour a great deal more cash into the sector, says Tompkins, but they won't do this because of their short-termism: "Investment in water supply and other services can make huge amounts of money but the problem is that the big investment funds aren't doing this because it would mean a payback period of 20 to 30 years. But we do need big investments from these funds, for the long term, if new technologies are to make a real difference in delivering significant sustainable innovation."

Tompkins argues that in the UK a government-backed, public-private "water fund" would help to generate the big investment needed to significantly improve water infrastructure; there is no sign of support from the government for such a fund yet.

Nevertheless, VC-backed water start-ups have helped utility companies cut waste and increase the efficiency of their networks, and have now taken their technologies to other continents. Some utilities are also spotting the potential of working alongside start-ups.

For example, Anglian Water has set up the Water Innovation Network (WIN) to spot potential solutions among the newcomers as well as the more established supply chain companies. WIN manager Vaibhav Tyagi says that about 150 submissions from start-ups have been considered to date, with around four or five of these going on to trial or exploitation stage.

One start-up that Anglian is already with working with is i2O Water. Adam Kingdon, its co-founder, believes that water companies are getting better at identifying and responding to innovations from new organisations. He says i2O has doubled its sales figures in each of the past three years, with annual revenues now around £5m.

Given the structure of the utility sector in the UK, water companies can't do all the research and development that a commercial business might undertake. To stay ahead of the game, they need creative partnerships with more nimble companies. WIN is now helping such companies to see their solutions rapidly implemented by utilities, thanks to new fast-track frameworks.

"Anglian Water has an innovation department, which collaborates with other utility companies as well as the supply chain companies, and there are industry-wide initiatives for this," Tyagi explains.

Enough change to herald a new wave of collaborative innovation? Watch this space.

This article also appears in a special Water Works edition of Forum for the Future's Green Futures magazine.

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