How Not to Drown Investing in the Water Sector

Even though the recent scuttlebutt about water has been negative, small, under-the-radar startups stand to profit hugely from the growing $600 billion water industry.

Brent Giles, a senior analyst with Lux Research who leads the firm’s water intelligence and exploration and production practices, said recently that there are three areas that have emerged with serious potential: sensors, wastewater treatment and metals recovery. According to Giles, these three areas have spawned fast growth in related new technologies and a series of interesting startups.

“It’s clearly possible to make money in this sector, but it’s also possible to lose your shirt if you focus on the older industries,” said Giles during a recent Lux Research web conference based on a report, “Making Money in the Water Industry.”

And for many companies the recent water news hasn’t been good. For example, in 2013 Siemens sold its water technologies unit to AEA Investors. Chemical maker Ashland in February agreed to sell its water treatment business to Clayton, Dubilier & Rice. And Veolia, the French environmental services company, has undergone a slow erosion, the most recent of which is the departure from the board of its second biggest shareholder, Groupe Industrial Marcel Dassault.

The problem, says Giles, is that companies looking to enter the water industry typically underestimate the complexities of the market. Water seems simple, he says, but it’s a universal solvent and there’s a lot that can go wrong trying to treat it, for example. And oftentimes, if something unexpected comes up during the commercialization phase, it can take years to fix. VCs are typically interested in seeing profits in five to seven years, which means many companies have seen the money “dry up,” quipped Giles during the webinar.

1,200 VC Funding Opportunities in Water Tech 

But despite the challenges and complexities of water, the industry is potentially lucrative with the right formula. Giles said there are about 1,200 different startup companies aiming at the water industry, which is about ten times more than there were 20 years ago.

Indeed, at the recent Cleantech Innovation Summit in Newport Beach, Calif., water was said to be the biggest focus of corporate investors, particularly in the oil and gas industry. According to oil and gas executives that spoke on a panel, the industry’s biggest challenge is becoming more water efficient in thier operations and recycling wastewater in fracking, which uses vast amounts of water.

According to Giles, water is used in almost all aspects of oil and gas, including development, extraction, transportation, beneficiation and remediation. And within all those aspects, there are “lots of different opportunities to improve” the efficiency with which water is used, he said. Plus, the mining industry spans the globe, including the U.S., China, Australia and parts of South America and Africa – which are all places that are facing the risk of potential water scarcity.

One company Giles highlighted is Magpie Polymers, which is an early-stage company based in France that offers filtration technology for the “selective removal of transition metals from industrial waste or process water,” such as platinum, palladium, rhodium and gold, the company’s website states. Magpie is a spinoff from the French Institute Ecole Polytechnique and is one of many companies that are currently focused on trying to recover nutrients and metals from water.

Startups in Wastewater Treatment, Sensors

In addition to oil and gas, wastewater treatment is a potential moneymaker. Small-scale, early stage companies with new technologies are likely to transform the wastewater treatment sector, said Giles, with low-cost, low-energy and low-sludge solutions. The market is also global, and includes the U.S., China, Japan, Brazil and East Asia.

Another company Giles highlighted is Biogill, which is based in Australia. The company provides bioreactors that accommodate microbes using “nano-ceramic membranes” in the bioreactors that create a hospitable environment for the microbes, the company says on its website.

The BioGill membranes “effectively [operate] as both a ‘stomach’ and a ‘lung,’ the company says. “Bacteria and other microorganisms ‘eat’ waste out of the water and ‘breathe’ air to grow and multiply.”

Finally, Giles said technology around sensors has also undergone a transformation due to advancements in the telecommunications industry and because of scientific advancements such as the human genome project. For example, sensors can now track industrial and municipal water systems, and what happens in the systems.

“There has been an enormous amount of innovation in sensors,” said Giles. “There have been dramatic changes in the types of sensors that are out there and what they’re capable of.”

Giles pointed to OptiEnz Sensors as a particularly interesting company in the water sensors industry. The company is a spinoff from Colorado State University and develops biosensors for monitoring organic chemicals in food and beverage processing, water supplies and oil and gas companies, according to OptiEnz’s website.

OptiEnz sensors allow for continuous tracking to detect pollutants or contaminants in ground water, for example, or tracking sugar during fermentation without the need for collecting samples, which allows users to immediately adjust their processes.

According to LUX’s water report, there’s currently a concentration of startup activity in both areas of wastewater treatment and monitoring that is creating a major opportunity for investors.

Ultimately, Giles says investors stand to gain provided they don’t enter the water market without understanding some of the complexities.

“Don’t underestimate water,” Giles said. “It’s a very complicated beast.”

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