NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Editor’s Note: Today is World Water Day, designated by the United Nations as a day to focus attention and build action to manage global water and sanitation needs. The above image by G.M.B. Akash took first prize in the WIN Photo competition in 2011 and exhibited in Stockholm during last year’s World Water Week. It shows a child in the Bangladesh capital of Dhaka. NextBillion Content Partner Acumen Fund has compiled some of the most compelling photos from across the water sector and its portfolio, which may be found here.

At Acumen Fund, we look to invest in for-profit, social enterprises that are using market-based approaches to increase the affordability, access, and quality of water and sanitation to the poor in the developing world. Our previous investments in the sector cover everything from an enterprise creating rural community water centers, to organizations using microfinance to increase access to sanitation. When considering the entrepreneurial landscape in the water and sanitation sector overall, there is an enormous opportunity for social investment to make an impact; however, in order to be successful, social enterprises will require innovative approaches to tackle the serious challenges that remain.

As we continue to look for new deals that focus on low-income customers, unfortunately the economics of the sector often make it challenging for social enterprises to serve the poor as customers, and so many either leave the responsibility to government and civil society, or end up having to focus on middle- or high-income customers. Part of the reason for this is that in many regions markets are distorted by a flood of NGO money into the sector. They often provide goods and services at free or subsidized prices, but they can sometimes be at low quality. This ultimately reduces consumers’ willingness to pay or desire to use products and services in water and sanitation.

Furthermore, there is often a real lack of education or consumer awareness in the market for why these critical goods or services are needed. Many customers think, “Why should I pay for drinking water when the water from the river is free and sweeter tasting? Why should I pay to use a toilet when there are other places I can go for free?”

With this as a general context, I do believe there are opportunities for investment and entrepreneurial solutions in the space. There are entrepreneurs out there that are innovating on technologies, but unfortunately it feels like many are still early stage and haven’t yet figured out how to actually build a business around the technology or product. The most interesting deals we see involve companies and entrepreneurs that are truly innovating on business models, and three of the most compelling innovations out there involve vertical integration, small-scale distributed infrastructure, or creative financing.

1. We are seeing a lot of organizations that are trying to vertically integrate across the water/sanitation value chain. They’ve recognized that in many regions it is difficult to rely on other parties to provide these functions and so are having to bring the entire chain in-house (this could include capture/storage, transport, treatment, reuse, etc.) These businesses have realized that some parts of the value chain are fundamentally going to be cost centers and other profit centers – but that you need to tackle all parts to make the whole process work and become financially sustainable.

2. Other opportunities can be seen with companies trying to do small-scale, distributed infrastructure where they are really trying to bring down initial capital costs and ongoing operating costs, often by using hub-and-spoke models which are modular and highly scalable. Potential issues with this approach include water and sanitation service quality and physical-infrastructure maintenance across the organization, to ensure consumer confidence and brand integrity.

3. And finally, we are also seeing deal-flow with businesses that are trying creative financing –whether it is microfinance at the household level for small water and sanitation improvements, or lending at the community level for community toilets or piped water mini-grids. Our recent investment in GUARDIAN is an example of using a creative approach to microfinance to increase access to improved sanitation in rural India.

We are also innovative businesses that manage to play at the intersection of water/sanitation and other sectors, such as agriculture or energy, for example by exploring new sources of revenue through waste-to-energy conversion or conversion of waste to fertilizer. Ultimately the most compelling opportunities are the ones that are able to foster partnerships with communities, civil society and government to fully function, while leveraging an innovative business model that drives financial sustainability and quality service.