A capitalist's view on water conservation (or, why a price on water is impractical)

Laura Shenkar, is the founder of The Artemis Project, a San Francisco, Calif.-based firm that advises companies on corporate water strategy and the use of water technologies in commercial and industrial markets.

We spoke to her about the venture capital buzz around water tech, the practical problem with a price on water and the leverage points that are needed to make the sector attractive to investors and the general population.

SmartPlanet: You're based in Silicon Valley. Tell us a bit about the VC scene as it pertains to water.

LS: I see water from the perspective of an IT-intensive investment that would become a real engine of commerce. We all know that there's a limited amount of water on Earth. As there are more people and business, there's less to go around.

I focus on the crack in the beginning of the industry. Those early streams of success. The Internet 20 years ago was not one concept, but little developments that came together. The difference with water is that the Internet is a nice thing to have, but we all know we'll continue to need water.

Are people's minds changing? I would say by and large no. They don't really need to worry in developed countries about getting water to drink. But there are certain areas where you have the opportunity to use water more mindfully.

Venture capitalists earn very large returns when they accurately predict something that no other investors are seeing. One, this is a very obvious proposition -- you're never going to stop needing water. Two, there is very little investment today.

There is no question about the general opportunity, but the detail is the real challenge. There is a history of investments that have not gone well and another of great companies with great ideas that have not succeeded.

The infrastructure is breaking down, but it's not an emergency yet. It hasn't hit the radar.

SmartPlanet: We've asked water experts about why it matters. What does not? What's just noise?

LS: Fifty percent of investment today worldwide in equipment and chemicals is in municipal infrastructure. This is the slowest moving, least innovative market for a lot of industries.

Compare that to cleantech -- you know how painful it was to have energy [utility] companies take renewable energy seriously. Water is 30 years behind the energy utility. The last thing you want to be innovative about is water. You want the same technology to give you clean water. Right?

[A large percentage of investment is in] industrial applications. Most are conservative and wait 10 years after municpialities to adopt technologies.

10 percent is [in] agriculture. On average, agriculture uses about 70 percent of the water in the world.

I'm talking to you from California. Eighty-five to ninety percent of the water in this state is used in agriculture. Why would you conserve water in the urban environment when the farmers are flooding the fields?

I moved from Israel seven years ago. Everything in Israel has irrigation -- 80 percent of the country. Not because it saves water; it's because you're lazy. It just works.

California is indicative of the world as a whole. Water here is an asset to farmers. They're so pressed in their economic model that environmental concern is not [impactful] to them.

If there's something more incendiary than raising water prices, it's raising food prices. They're desperately trying to lower the cost of their input to make that food.

You can force them to do it, but you need to think of their economic model.

SmartPlanet: A price on water seems harder than it sounds. So how do you get there?

LS: The trigger that has worked best in California is the relationship of water and energy. Water is a mass -- it must be stored. There is a true energy cost anytime you try to move water. And an infrastructure cost. I can make as much desalinated water as you want, but there's a cost.

That discussion actually makes policy move faster than talking about water for what it's worth.

The other question is, where [in the world] do you hit scarcity issues? When you hit those, water rights go out the door.

You need enough water for each person to drink and bathe for each person in an area. That's mission critical. After that, you need water to cool a nuclear reactor. You don't really want to turn them down. Then you start to see a baseline water need that is significant -- and that's no fun, no agriculture, business, nothing. Then you start to look at business needs. Ecosystem needs -- lakes and rivers need a certain amount of water for them to survive. You need to limit pollution.

Getting water policy to move anywhere in the world requires a true water shock.

In terms of policy, it's such political football. What comes from a good intentioned effort is small and distorted.

One thing that's working is the idea of green jobs. It's a hot button issue for politicans everywhere. How do you generate a real economic base for a specific area? This is where venture capitalists come in. Water becomes an interesting event.

If you look at places that might consider sponsoring technology, it's usually because they have a dire water need to they have the academic and business base for it. Ontario. Israel. Australia. China -- a dire problem, in particular with disposal of waste.

If you're not an enormous corporation that can't do a lot of shooting and not hitting a target, and you're a small company who needs to shoot golden bullets, you want to [find] customers who are willing to move fast.

The water industry is the benchmark for the most conservative industry on Earth.

It's truly not a worldwide problem yet.

SP: California is hard up for water, but other states such as Pennsylvania are not. How do you capture a population's interest when scarcity isn't an issue?

LS: Pennsylvania has plenty of water. And it's occasionally addicted to energy. New York and Pennsylvania are sitting on an enormous reserve of natural gas, the Marcellus Shale.

You're looking for real urgency and drive. You need a very sophisticated, wealthy, fast-moving customer -- the opposite of a utility. One who sees water technology as a critical issue.

The water management on-site [in hydrofracking areas] has issues with accountability and oversight. They're under regulatory scrutiny. This is the first perfect storm I've seen for water technology.

SP: Because fracking uses a lot of water and is under the political microscope, regulatory scrutiny will force companies to use less of it.

LS: Right. You need to assume that the most essential thing for life is plentiful and virtually free if you're going to move the needle on water. It's not an easy thing for investors or policymakers to swallow.

You could make a world of difference if agriculture handled things better. But I just don't know how.

SP: Let's talk global for a second. A developed market like the U.S. or a developing one like Africa: which makes more business sense?

LS: The question is timing. Look at the cell phone -- they sell them incredibly in Asia and Africa. But that was only when it was developed and matured and proven in the developed world.

You can't afford to do it any other way. Developing countries just don't make sense for startups.

If you take a capitalist view of water -- "I want to do good in the world, but my job is to be a VC" -- you're creating a mechanism that can be profound in solving problems where policy has not succeeded. Water is Job No. 1 for municipalities, but it's so essential that the problem is distorted.

Look at Google. It's really changed the world in a lot of good ways. But they never set out to do that. You look at water, and you know you have to do more.

This post was originally published on Smartplanet.com