July 23, 2007 4:00 AM PDT

Testing the waters for clean tech

Clean water is always in demand, but what about clean water tech start-ups?

Sensicore, which builds sensors and software for monitoring municipal water quality, is hoping that investors have a big thirst for clean tech ventures. The Ann Arbor, Mich.-based company intends to file to go public on the Toronto Stock Exchange later this year, according to CEO Malcolm Kahn.

Founded in 2000, Sensicore is among a wave of clean tech start-ups creating technology to better manage natural resources. But even though water conservation and quality is an increasingly pressing problem, there are few high-tech water management companies.

Water utilities, which are heavily regulated, need to spend heavily to upgrade their basic infrastructure of pipes and treatment plants, rather than on cutting-edge technologies. Meanwhile, people expect pristine water from their taps but generally aren't willing to pay more for better water quality, said Rob Day, a principal at the clean-tech investment arm of @Ventures.

"It's a huge challenge to get people willing to pay for good water," Day said. "And we're not seeing as many entrepreneurs in the water space even though it's one of the biggest screaming needs."

Industrial giants like Siemens and General Electric have water purification businesses, and some start-ups such as Nano H2O that do specialized filtration technologies have attracted venture investment.

Sensicore, which started selling products earlier this year and is not yet profitable, is trying to distinguish itself by marrying information technology with water management, Kahn said.

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Its system compiles water quality information and maps it onto a Web-based application that shows workers at a treatment plant what's happening in their distribution networks.

The basis of its product is "lab-on-a-chip" sensor technology, based on research from the University of Michigan. Rather than have a separate sensor to measure different chemicals, a single silicon chip-based sensor can gather several inputs, such as chlorine or ammonia levels.

The sensors are cheap enough so that municipalities can use many, which gives them redundancy in the case that a sensor breaks down. That means fewer trips out to water distribution pipelines for maintenance people and lower costs, Kahn said.

The company is already working on the next generation of its monitoring system, which is scheduled to be available next year. The sensors will be able to gather information over a range of different networks without having to send a field engineer to the sensors, Kahn said.

"The online incarnation will be able to continuously feed back to our networks," he said. "Ultimately, the strategy we have is the building of a database, a kind of fingerprint of the kinds of problems that happen in a water distribution system using common sensing technology."

Pipes over chips
As part of its Big Green Innovations initiative, IBM is looking at water management. IBM is trying to partner with Sensicore as it seeks out IT-related systems to modernize the decidedly low-tech world of water quality monitoring, according to Andrew Clark, director of strategy at IBM's Venture Capital Group.

IBM sees potential in gathering large amounts of water quality information and combining it with weather models. By crunching water data, it can build highly customized applications for municipalities or farmers to better manage water, Clark said.

"In most municipal areas in the U.S., we don't have a quality problem and we haven't had any terrorist issues," he said. "But in other countries, like China or India, they have terrible problems with quality."

Right now, Sensicore is selling to U.S. municipalities where its system is being used in about 50 facilities, Kahn said.

Maintenance crews use a handheld device to check on water quality, which pulls data from its sensors in the water. To get information from the distribution network back to a water treatment plant headquarters, a Bluetooth wireless connection passes information to a water engineer's cell phone, which is then sent to Sensicore's data centers.

Its software can be accessed via a Web browser and presents information using Microsoft's MapPoint Web service to give engineers a clearer idea of quality along the network.

Although municipalities in the U.S. are required to measure and meet quality thresholds, even Kahn admits selling to municipalities is not easy.

"If you look at the market dynamics, (municipalities) are spending upwards of $200 billion on infrastructure improvements, replacing pipes and putting in new lines," Kahn said. But "water quality is viewed today as more of a necessary evil."

As a result, Sensicore markets its system as a way to reduce spending on chemicals and service calls and to cut down on customer complaints.

Despite the tough environment, water-related venture capital deals are showing signs of going up. In the first half of the year, $37 million went into water treatment-related deals following $68 million in 2006, according to the Cleantech Group, which compiles data on venture investment.

That investment is dwarfed by energy-related deals, which were $2.6 billion in 2006. But growing concerns over water, stemming from climate change and concerns over national security, could drive more spending, said Cleantech Group Chief Operating Officer Craig Cuddeback.

Some of that spending may come from different sources than venture capitalists, though, such as bankers involved in multimillion-dollar project finance deals.

"If you talk to any venture capitalist, they will all say they are looking for a water deal," said @Venture's Day. But "utilities face challenges on a basic level of infrastructure improvement before they get into the type of technology solutions that a VC would like to back."

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