Water: Ripe for Innovation

By the end of 2011, 10 million Pacific Gas & Electric (PG&E) “smart meters” will be deployed across the State of California. The meters will help consumers conserve energy and contain utility costs by providing real-time information on their gas and electricity use. The multi-phase meter roll-out began in 2006 and created new market opportunities for inventive hardware and software technologies. Today, approximately 300 million meters are deployed across the US.

But when it comes to water, we’re way behind. With just 70 million meters monitoring and measuring this vital resource, a similar “smart-grid for water” initiative is in its infancy. Yet there are virtually no investment dollars going into this sector. In fact, according to investors at SDForum’s recent Green and Clean event in Menlo Park, only 1% of VC dollars are being applied to start-ups with inventive water-related technologies and services.

Seems like a very low figure for a $400 billion industry.

It’s not like we don’t need to modernize the water industry. 36% of the world’s population lacks access to sanitation. That’s a crisis. In California, we’re fortunate to have access to clean water. So, according to the classic definition of a water crisis [i.e. withdrawal exceeds replenishment], we’re not in trouble. Yet. But few realize that the State’s water supply depends on an antiquated infrastructure with century-old pipes transporting water from north to south. Not surprisingly, with minimal upgrades in the last 100 years, this creaky system is at breaking point. Not only that, it hogs nearly 19% of California’s electricity, according to Bill Kocher from the City of Santa Cruz Water Department who spoke at the SDForum event.

This exposes myriad opportunities for entrepreneurs and technologies - not just for IT products like those that are enabling PG&E’s smart-grid initiative, but for purification, filtration and other often non-capital-intensive technologies that have long proven successful in sectors like life sciences and semiconductors.

But it will take courageous investors to look beyond today’s discouraging credit and exit markets and back an idea that promises to bring greater efficiencies to water treatment and management. Virgin Green Fund’s Anup Jacob sees technology risk as the primary turn-off for investors, not market or execution risks. Kocher’s comments support this sentiment. In his lengthy tenure with the Santa Cruz Water Department, he has never used an unproven technology. In deference to county rate payers, he feels duty bound to stick with field-proven products. An understandable position for sure, but hardly conducive to innovation.

Savvy entrepreneurs are finding ways to circumvent the status quo. They're commercializing technology by teaming with engineering firms that offer one-stop-shop solutions to water companies. But the bigger problem remains: water is not getting the attention it deserves. And innovative water treatment and management technologies are not considered attractive investment opportunities. The US spends less on R&D in this sector than Canada. And the pace of R&D investment has been in decline since the 1970s.

According to Kocher, the most prevalent myth concerning water is that it’s plentiful and free. We continue to believe this at our peril.