Whitehouse: spotlight on water innovation in oil and gas

The London Environmental Investment Forum and Global Corporate Venturing collaborated on the Leif Brief on Water Innovation in Oil and Gas, sponsored by Veolia. According to the executive summary, the oil and gas industry urgently needs new technologies to solve its mounting water problems. A growing array of technologies and entrepreneurs are responding with innovative new solutions. Venture capital – including the corporate venturing funds established by big oil and the family offices of successful industrialists – is therefore seeking out water technology investment opportunities.

Could this be the perfect storm of need, innovation and capital? Maybe.

When new water technology start ups meet the oil and gas industry in all its vastness, conservatism and capital intensity, you have a fascinating clash of business cultures, which needs to be overcome if innovation is to succeed and water problems are to be solved.

The annual Leif Brief on Water Innovation in Oil and Gas, in association with Global Corporate Venturing, published this month, highlights water-tech trends, deals and new water-technology businesses that are targeting the oil and gas industry. It also assesses different growth and investment strategies in a sector which has seen mixed results for venture investors.

Veolia sets out a case for its licensing strategy to quicken the pace of water-tech adoption, “an approach which could perhaps be described as venture licensing”, says Veolia’s Wayne Evans in his article “a fresh approach to water-tech growth in oil and gas”.

Investors quoted in the report cite the need for realism and patience.

“From an investor’s point of view, I see the ambition of early-stage [water-tech] companies in the industry to follow the fast-growth model as a real problem,” says Reinhard Hübner, investment manager at Skion, a Germany-based water-focused investment company owned by billionaire industrialist Susanne Klatten.

“This approach requires a lot of money and thus a high valuation to avoid a strong dilution of the founders,” says Hübner. “Looking back at targets we looked at years ago, I have almost never seen the fast growth actually happen. Skion does not accept the very high valuations sought by some water technology companies, particularly in North America. Such valuations only work out when there is the prospect of a high price on exit, which is in conflict with our long-term  investment strategy.”

The reports highlights other family office investors drawn to water-tech investing because it requires long-term commitment and, in some cases, because it creates a positive environmental legacy. But investors with an indefinite holding period on their investments are an exotic and rare species. So to increase their chances of raising capital, water-tech  businesses also need to approach more conventional exit-oriented venture capitalists. Moreover, many founders of water-tech businesses also want to exit and move on to the beach or the next deal.

Can corporate venturing come to the rescue by accelerating growth and thereby underpinning valuations? The best water-tech exit of 2014 – the sale of high-efficiency desalination business NanoH2O to LG for $200m – suggests that maybe it can. The venture units of Total and BASF invested in the company in its development and growth stages and were among the happy shareholders when it was sold. Veolia was an early partner to NanoH2O, qualifying its membranes by means of pilot plants in the Middle East, the Mediterranean and Australia.

Veronique Hervouet of Total Energy Ventures thinks NanoH20’s success is an encouraging precedent, but is cautious. “NanoH2O’s exit to a leading Asian industrial player looking for market validated technical innovation is a very positive signal for the water-tech and broader clean-tech ecosystem,” she says. “The future will tell if NanoH2O’s success will attract more investors to this space. Water-tech, like other clean-tech targeting industrial markets, will remain challenging for investors lacking the ability to understand the full value chain in which innovation will be deployed with corresponding risks and opportunities for key actors involved.”

Skion’s Hübner believes corporate venturing still has to prove itself in water. “I am sceptical as to whether or not corporate venturers are able to speed up the decision making processes in their big parent companies in favour of a technology they have invested in,” he says. “And despite the talk of solidarity on water issues from the oil and gas industry, I think that there would still be a reluctance to use a technology which has been invested in by a competitor’s corporate  venturer.”

The Leif Brief cites several corporate venturing investors – some of them from big oil, some from other industries – who are keen to prove they can help drive the growth of the water-tech businesses in which they invest. It also reports on some of the water-tech businesses they are backing. It can be downloaded here or from the Leif website.