Water technology is destined to be one of the great tech investment opportunities of the next decade. With a limited amount of water on earth, the population continues to grow while businesses develop. Investing in water is emerging as one of the most promising real assets for investment.
But early-stage investments in water technology start-ups to date have not reflected that promise. Recent analysis by Bessemer Venture Partners showed that of 183 firms that had invested in water, all but 31 did not make an additional investment, and only seven made more than two investments. Historically, water has accounted for only 2-5% of overall cleantech investments. The few water tech investments that have been made have yet to yield venture quality returns.
The best venture investments were made when technology markets have looked as water does today. Water services are highly regulated. The business of water is dominated by a few behemoths. Major customers choose the most well proven solutions and work with the same service firms that they have worked with for decades.
Similarly, twenty years ago telephony meant a landline, not a diverse industry of wide-ranging options, from cellular and Voice Over IP to satellite. Before the communications revolution, “messaging” was done by fax or the US Postal Service.
The trick for early-stage investors is to identify the moment in which technology can bring about a new era of water management.
In five years, venture capital history will tell of a few visionary investors who identified the right technology at the right time in the market. The best investors are asking two questions to define whether now is the time for the future water tech leaders to emerge, and where the critical opportunities lie to drive start-up success.
1) What recent scientific or engineering breakthroughs have redefined how well a technology solution can tackle critical problems?
Some examples are new polymers for selective absorption of pathogens, hydro fracturing, which has made significant domestic shale gas reserves economical for drilling, new chemical/pathogen detection capabilities that are driving to new regulation.
2) What market forces are changing to raise the value of a tech solution?
In the past few months, water scarcity, pollution and infrastructure breakdown have been forcing the most conservative water users to seek out innovative approaches.
Even Texas is limiting the amount of water for drilling for oil, or “Texas Tea” so that it provide water for its citizens.