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May 2, 2016

5 Reasons Why Investments in Water Fail – and How Process Modeling Can Help Identify Winning Technologies

The water & wastewater industry has generated a lot of investment interest and activity over the last decade. It is estimated that in the 4 year period from 2010 to 2014, venture firms invested $1.4 billion in about 400 water technology companies.

The investment interest in water is not surprising. Water is without a doubt the most undervalued and under appreciated critical resource available to human kind.  It is plentiful – 70% of the earth's surface is covered in water. But fresh water – the type that is in rivers, stream lakes, and in groundwater reserves – which is what we typically use as a source for drinking water, makes up only 1% of all the water available on earth.

The other 97% of water on earth is brackish, salt laden water. If sufficiently treated to remove the salt, it is also fit for human consumption, but the cost of treatment is high – about 10-20 times higher than the treatment costs for freshwater. As the ancient mariner once said, there is "water, water everywhere, but not a drop to drink." Freshwater is what is in demand and there is an awfully small amount of that available.

The water crisis is made worse by rising population, extended droughts, increasing urbanization, climate change and other factors are affecting the availability and access to fresh water reserves. It has been projected that the conflicts of the future will likely be driven by geopolitical interests that are centered on access to fresh water reserves.

Investment Opportunities in Water & Wastewater

The opportunity for investments in water lies in five key areas – minimizing losses in the water distribution system, reducing the overall cost of treatment for water & wastewater, enhancing safe (waste)water reuse, promoting conservation & sustainability and utility operations.

Utility operations has been an area of extensive investment activity in water for decades. The activity of startups and new technology development efforts has been in the other 4 opportunity areas.

Another way to think about water sector technologies is to think of them as demand or supply side applications. Demand side tech are focused on the end user. They include APPs, software, or metering systems that help consumers track their water usage, compare their consumption to others', monitor usage costs and benchmark their carbon footprint. Supply side applications are focused on the treatment and delivery systems that are used for treating drinking, process or wastewater. They include enhanced separation, aeration, disinfection and collections systems technologies. They are intended primarily to increase revenue opportunities for utilities and/or reduce the cost of water treatment.

Enter the Technology Gate Keepers and Enablers

Over the last decade, a number of "gate keeper" tech evaluation and Accelerator programs have emerged in the industry, with the stated aim of working to streamline the massive deluge of startups and technology development activity in the industry. These efforts such as the Artemis Top50, Imagine H2O challenge, etc. have allowed investors to identify startups that are bringing cutting edge technology solutions to the water sector.

The primary mode of operation for these Accelerator initiatives has been the staging of challenges and the provision of access to venture funds and growth supporting resources for promising firms. ImagineH2O for instance claims that its accelerator participants represent 1 in 10 dollars of early stage investment in the water industry since 2009.

While there is no shortage of information on how much money these accelerator and innovation tech competition programs have allowed their participating firms to access, what is not as readily available is the success rate of these firms.

The Five Pitfalls that Investors and Innovators Should Watch Out For

As the largest developer of process modeling & design software in the water & wastewater industry, we have a front row seat to all of the cutting edge action taking place in the water space. After all is said and done, any successful supply side technology must become integrated into a process modeling & design platform. The consulting engineers who implement the technologies and the operators who run them want to know what the implications of these techs will be for their overall operations. Firstly, they want to be sure that their ability to meet their permit requirements will not be compromised by the new tech. Secondly, they want to ensure that their operators are able to operate the new technology systems or processes. And finally, they want to understand how the technologies will be impacted by rare, but typical occurrences such as storm events, equipment failures and shutdowns, etc.

In addition to serving as a final integration point for innovative technologies that break into the mainstream, our principals have over 30 patented water technologies and decades of water tech commercialization experience – so we know how innovative technology works in the real world of water & wastewater treatment.  We are one of a handful of firms that get the call from the utility that wants to know how a tech that has been proposed to them will fit in their plant; or from the technology provider that finally realizes that without developing a process design model that lays out the fundamental mechanisms of how their technology works, they will be not make headway with the engineering community that utilities turn to for support when adopting new tech.

These are the five major pitfalls that we see standing in the way of companies and technologies that struggle to gain traction in the water industry:

PITFALL 1: Lack of Knowledge of Fundamentals

It is hard to believe but there are firms out there that simply do not seem to grasp the fundamentals of how their tech operates. Without understanding the underlying mechanism of what makes your technology work, field trials become a crap shoot. Too many technologies sound like voodoo.

Water is pretty straightforward. Yes, there might be a heck of a lot of different organic or inorganic contaminants that need to be treated, and maybe a ton of microorganisms that facilitate the process. But the science that underlies the treatment process is pretty robust. Here's a simple guide. If the underlying reason for why your tech works cannot be explained and grasped by a fairly technically literate person in the field then you have a problem. If you cannot predictably understand how your technology will scale across flow and organic loading conditions, then you have a really big problem.

Finally, if you cannot predict whether you will succeed or fail in a pilot based on your knowledge of the fundamentals of your process then you certainly do not have a technology that will inspire confidence in a regulated environment like the water industry.

PITFALL 2: Adopt the Right Model for a Cautious Industry

In the water industry, you don't get a prize for being the most innovative water or wastewater utility. You get brownie points for being consistently on point - meeting your regulatory permit limits and providing a safe product to your rate payers. You can have the greenest and lowest carbon footprint facility, but if you have lead or Microcystin (algae toxins) in the water, or excessive organic matter in your wastewater discharge, you have failed.

This implies that the water sector has few analogies to the consumer goods markets where early adopters are ready to pay more for an innovative product – even if it has some quirks and rough edges. The idea of disruptive innovation also has a different threshold of acceptance in the utility business. A disruptive innovation can have one very promising feature but some "not so great" features when compared to the alternative. Think about digital cameras. The first ones off the shelf had poor picture quality and long shutter lag. But they offered the convenience of not requiring development, and being able to hold lots of images on a portable drive. In the utility industry, the innovation can lag in any other area (cost, operator oversight) except one – it must never, ever compromise water quality. Also, unlike other business where the bottom line comes down to profitability alone (reduce cost, increase revenues, or both) the winners in the public utility industry are those who can consistently meet their limits - all else is extra.  

What are the implications of this compliance focused outlook? It implies that an innovative tech must be rock solid. You have to know its strengths and its failings. You must have some pretty good sense for what it will do in the field. If it is a filtration based technology, you will need to understand how different constituents in the water might impact fouling rates or membrane life. If it is a disinfection product, you must have a firm grasp for how variables like flowrate and organic loading affect performance.

The utility industry is a cautious one that expects you to pay in most cases to trial your innovation. And by the way, the trials should be at a scale that counts. Knowing your sweet spot in terms of utility size can help you select the right trials. Organizations like Water Environment Research Federation (WERF) and Water Research Foundation (WRF) have programs that match innovative tech provider with utilities that are willing to provide their facilities for pilots and trials in the wastewater and drinking water treatment industry respectively. On the industrial side, organizations like Petroleum Environmental Research Forum (PERF) offer similar trialing opportunities.

In the United States where much of water & wastewater treatment is still public, there is significant scrutiny of investments. It is hard for utilities to raise money for new and "untested" technologies. Also, there is a culture within the industry of only trusting data that comes from one's own plant. With each pilot test taking from a few months to years, and with the skills shortage at many utilities – the bar is quite high. Innovators should seek opportunities to participate in these multi-facility, industry supported trials wherever possible. It saves time, resources and effort. Because these trials also involve engineering firms and consultants, a major hurdle to adoption is also addressed at the same time as the onsite validation.

If you are really sure about your technology, and your innovation is not regulation critical (e.g., a new aeration technology, a novel dewatering technology or smart control and monitoring system) then you might want to attempt a bold strategy to finance the adoption of your own tech. If it works, the utility adopts. If it fails, you take it out at your own cost. Few utilities that have a real need ever turn such an offer down. But doing this requires really knowing what your odds for success will be.

PITFALL 3: Be Aware that There is a Poor Track Record of New Technologies

In almost every utility where my colleagues and I have trialed new technologies, there is no end to stories of failed trials that they had embarked on before. The industry's legendary caution with new tech will be better understood when viewed from this context.

Again think about it – we have had record sums of money being invested in water startups over the last decade, but where are those winning technologies? How many have found adoption in the utility sector beyond ta handful of trial sites? On the supply side, we are certainly not seeing as much growth in uptake of new tech commensurate with the activity on the investment side.

I have never seen any assessment of the fate of the companies that were past recipients of the Artemis Top50 or the Imagine H2O awards. We know many of these awards recipients have been successful in raising funds – the award hype helps -  but how well have they fared in successfully deploying their technologies and rolling out commercially? What is the real track record of the accelerator programs? How have water startups fared compared to those on the social media and enterprise solutions side?  

Raising funds and attracting investors is only the first step in the journey to success in the water and wastewater sector. The next and most important step is to get one's technology adopted – and to go commercial. That is where the failures rack up. Many of these technologies make sense in the lab, but fall short in the field.

It should be obvious by now that taking care of PITFALL 1 reduces the risk of seeing failures during field pilots. Success requires that you know the fundamentals, and develop robust models for how your tech will perform in the field.

PITFALL 4: Know your Competitors

I am often amazed by how little innovators and technology developers know of competing technologies. Water and Wastewater industry is global. Chances are that whatever brilliant technology you have come up with addresses problems that are already being solved in the industry, in some way. This has to be the case because it is a regulated industry and whatever that problem is that the facility needs to meet in their permits – they are more than likely already in compliance. 

A new technology might provide value through a cost reduction angle, enhance revenues (e.g., by alerting to non-revenue water lost through leaks, etc.), or provide a sustainability advantage such as lower carbon footprint. Or better still, combine elements of enhanced profitability and sustainability. Too many tech providers cannot tell you what the competing alternatives are for their innovation. They know their own costs pretty well, but make all kinds of assumptions – and you can guess, non-flattering ones – about how the competing alternatives work.

They cannot tell you what plant wide effects their technologies will have, what the impact on plant operations will be, or what specific differences in treatment efficiency can be expected by adopting their tech vs others. This is always a recipe for disaster. A field trial shouldn't be the place to learn these details. The tools already exist for assessing competing costs and operational impacts. Tools like CapdetWorks^TM, provide plant designs as well as capital and operating cost information, to within ±15% accuracy while process modeling and design software allow the robust determination of plant wide operational effects.

PITFALL 5: Know your Market

Markets are different – what works in one geographic area, or one sector (e.g., industrial vs municipal; public vs private) may not work in others. The US utility market is largely public. Although private sector actors like Veolia, American Water and United Water (Suez) are increasingly taking on contract operations of public utilities, majority of US utilities are still public sector financed.

Another key feature of the North American market is that consultants rule. Nothing gets done without consultants. No technology gets adopted without the blessings of consulting engineers. Consultants do not have as much say in Europe or in China. In Europe, where privatized utilities have existed for over a century, much of the expertise that consultants provide is available within the utilities themselves. Utilities in Europe are more open to adopting innovative technologies, and continent wide frameworks like the Framework Program (FP) for Research & Development provides significant funding for innovative tech trials and encourages collaboration between academics, innovators, startups and more established firms. 

In Europe, many utility contract operators are massive construction and environmental technology conglomerates with annual revenues in the billions of dollars (e.g., Acciona, Agbar, Veolia, Suez). They have large R&D budgets that rival what many top universities spend on environmental studies and have access to a large number of facilities that they operate, and can use for their trials. Because they are in it to make money, they are also open to non-internally developed technologies. The large size of the contract operators and their generous resources also implies that facilities have a network of expertise they can tap into to manage any teething issues with innovative technologies.

However, success in Europe does not translate to success in North America. If you are trying to break into the North American market, then you must understand that consultants are gate keepers. They don't get paid for being innovative. They get paid for being right. Accessing consultants cost money. And any post installation support of an innovative technology will more than likely also require that the utility pay for the services of the consultant. No technology can make headway in the US without consultants being comfortable. That means they must be convinced of its efficacy and confident that there will be no surprises if they recommend it to their clients. This makes the availability of robust process models more important in the US than the European market.

How Process Models Can Help Enhance Adoption of New Technology – the SURE concept

Models can help make technology adoption SURE by allowing for:

Safe evaluation of scenarios;
Understanding of competing technologies;
Reduced adoption risk;
Evaluating real costs of implementation.   

In the chemical process industry no new technology can be adopted without first using process models to replicate its pilot scale performance and then on the basis of that, developing full scale plant models.

Water and wastewater treatment should be no different. In the last 30 years companies like Hydromantis, WEST (DHI), Envirosim and others have extended and enhanced the capabilities of process models for handling the complex hydraulic, biochemical and physical chemical processes that take place in water and wastewater utilities.

At Hydromantis our simulators have been used for the last three decades by consulting engineers for upgrading and designing new water & wastewater plants, regulators pricing the cost of new environmental standards, and by inventors seeking to know how their technology stacks up when compared to existing alternatives in terms of both performance and cost.

Models enhance predictability – a key attribute necessary for a utility focused technology. For instance, during a trial, a model can alert to the fact that there might be an initial acclimatization stage during the pilot when a facility might struggle to meet its goals as the microorganisms acclimate to the new process conditions. Without a process model, this event might seem like an anomaly, causing both surprise and concern that things are going wrong – sometimes prompting trials to be shut down just before they succeed.

Process modeling software are not the magic bullet that will solve all the world's problems – but they can and should play a more important role than they currently do in our industry.

Table 1: Major technology & investment focus areas in the water & wastewater industry, and the role that process models play in enhancing technology adoption

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