Water utilities have struggled to dip their toe into corporate venturing as most companies are state-owned, but as parts of the water treatment and deliver networks are privatised there is growing interest in using technology to help improve services.
Even as recently as three years ago, however, venture capital firms and utilities were struggling to find ways to help each other.
Stephan Dolezalek, managing director at US-based venture capital firm VantagePoint Venture Partners, in a 2007 Earth2Tech news article said: "We certainly have come to a perspective, which I have heard echoed time and time again, that says ‘we keep looking at water deals, we keep getting closer to pulling the trigger, but we have not yet made that first water investment’. There has not been a particularly elegant solution to some of these very tricky problems."
However, VantagePoint subsequently found a deal – Canada-based Ostara Nutrient Recovery Technologies, in which it co-invested with UK-based VC peer Frog Capital as part of a $10.5m round in September 2008, and a way for it to work with water utilities.
Last year, following on from two implementations of its technology at water treatment plants in North America, Ostara signed its first European demostration deals. UK-based Severn Trent Water’s Derby sewage treatment works and Thames Water installed a pilot of its technology that recovers phosphorus and other nutrients from wastewater and recycles them into an environmentally- friendly, premium-quality, commercial fertiliser, without the use of chemicals.
Each year, more than 100 million tons of phosphate rock are mined and processed into fertiliser. Over time, a significant amount of this fertiliser enters the ecosystem as waste and agricultural run-off, leading to excessive nutrient levels, or a condition known as eutrophication.
A US-based plant, operated by Clean Water Services in Oregon, is already producing an annual 500 tons of the fertiliser, Crystal Green, for use on golf courses. For a typical wastewater treatment plant serving a million people, net cost savings of incorporating the process can exceed $1m a year, Ostara said.
However, the VCs waited until Ostara was near commercial success before investing. Phillip Abrary, executive president of Ostara, said its founder and angel investors had funded the company for two and a half to three years before this point.
He said it was a challenge for VCs to invest in water-focused businesses as "there are technology risks, long lead times in water treatment and challenging customers that are regulated and so answer to politicians and as a result are a lot less likely to take chances".
He added: "Unlike healthcare, there are no commercial gates for investors to exit at different stages and so investment can stretch to five to 10 years easily. The public is aware of the health implications of innovation – they live longer or better – but water and energy utilities are forgotten unless something goes wrong.
"This means the only pressure comes from regulators to improve the environment, so that is where there is innovation. Regulators, however, need three or four years to discuss and then five to 10 years to require full adoption of a change because of the cost of changing infrastructure."
He said Ostara was formed out of research and a pilot at the University of British Columbia and it then engaged a customer in Edmonton to scale it up by 100 times to commercial size. This then provided the case study for other water treatment plants to use but Abrary said "the only way to get a customer is to be extremely flexible and work hard as you have to jump through a lot of hoops".
For Severn, VantagePoint already had a connection through one of its venture partners, Bernard Bulkin, who until this year was a non-executive director on the UK water company’s board.
Severn’s spokesman said it did not have an in-house VC division and generally avoided taking minority stakes in third parties, although there were some joint ventures, mainly as part of its international Severn Trent Services business (a separate part of the group to the regulated water utility).
There is one joint venture within Severn Trent Water surrounding the generation of renewable energy from crops such as maize, and from onshore wind, he added.