What’s ailing water?

Contributions from: Nikhila Krishnan, Summer Analyst 

While other clean technology sectors including energy, transportation, and agriculture experience stable or growing investment, it appears investors are not as bullish on disrupting or improving water markets with new technology as they once were (note that, for purposes of this analysis we’ve included smart irrigation technologies in our water category).

Five years ago, water innovation accounted for 9-10% of the annual deal volume in clean technology venture capital, and 5-6% of invested dollars, as tracked on our i3 platform. Today, the water segment struggles to break 5% of the thousand or so annual deals, and does not even account for 1% of the nearly $10 billion total investment we’re dissecting each year.

This is certainly not for lack of innovation. Incubator and accelerator programs pumping out water innovators include ImagineH2O, BlueTechValley and Fresno State’s WET Center, AccelerateH2O, Austin Technology Incubator’s water track in collaboration with Pecan Street consortium, The Water Council, Climate Ventures 2.0, Kinrot Ventures, and Thrive Accelerator.

Nor is it necessarily for lack of market pull. While exits in the space could certainly be stronger, the first half of 2017 alone has seen several positive acquisitions. In February, India’s Jain Irrigation announced its acquisition of 14-year-old Australian smart irrigation company Observant for an undisclosed amount. In April, Badger Meter acquired Swedish ultrasonic flow measurement company D-Flow Technology for $23 million in cash, or a roughly 10x multiple on its annual revenue. And in May, Monsanto’s Climate Corporation division agreed to acquire Colorado-based HydroBio, another smart irrigation company in which Monsanto’s corporate venturing unit had been an early investor. Reaching back to October of last year, water-as-a-service company AquaVenture Holdings gave its investors – including Element Partners, Elevation Partners, TPG Growth Fund, Virgin Green Fund and others – a solid exit path via a $100 million IPO that valued the company at nearly $460 million. The company provides services related to desalination, wastewater treatment, and bottle-less drinking water.

So, what’s behind this retreat in investment? Experienced water investors and industry experts in our network have often highlighted common challenges for start-ups in the sector, including selling into naturally conservative industries, and the idea that low water prices not fully correlated to the true cost to treat and deliver water fail to attract profit-driven investment. These are nothing new, however. So, have venture investors simply grown tired of these market dynamics and decided the sector is not for them? Should this merely be viewed as a market correction leaving a more appropriate number of domain-specific investors relative to the number of start-ups being formed? And is there a diverse enough set of new technologies being developed to attract stakeholders from across industry? Recent investments like smart water company APANA’s $3.5 million Series A round led by Kurita Water, and Saudi Aramco Energy Venture’s joining of membrane water treatment company OxyMem’s growth round certainly suggest so.

The above questions, however, will be one focus in the August issue of CTG Insights, our bi-monthly publication covering key innovation themes in cleantech. Be in touch with us if you’re interested to gain access to that publication and other benefits of our Monitor subscription, and if you have thoughts on or reactions to any of the above, please let us know in the comments.