Investors are ready to invest in Indian climate startups

Recently, the solar yard was raised R100 crore as part of its Series A financing, on the back of A R30 crore round three months ago. This might be a tech startup story, except for the fact that Solar took 7 years of operations to reach this milestone. This is the case for climate startups. It takes time to generate enough traction to become attractive to investors. While investment in climate solutions is growing rapidly, climate startups account for less than 5% of venture capital (VC) funding in India, as expected, and it largely goes to tech startups.

Fortunately, climate startups are becoming more attractive to venture capital investors, although many founders remain unsure of exactly how to go about raising capital. Why are climate startups attractive?

Mainstream climate technologies have little technical and market risk: Venture capital investors typically seek to invest in companies with large opportunities that can grow multifaceted in 6-7 years. Some climate sub-sectors are beginning to present such opportunities as technology risks and market acceptance have already been addressed. For example, India is one of the largest renewable energy markets, with solar power generation alone set to quadruple by 2030. Government policies also support domestic production of components such as modules and solar cells. As such, solar carries no technology or market acceptance risks, and solar startups are just like any other tech startup to the investor.

Likewise, electric vehicle adoption is expected to grow rapidly over the next two decades. India has a large auto industry that is keen to invest in new technologies. Government policies encourage the creation of charging infrastructure and provide capital subsidies to lower the cost of ownership of electric vehicles. No wonder venture capital investment in this sector is on the rise, with investments across the value chain, whether it be battery recycling, charging infrastructure, electric vehicles, component manufacturing and financing. According to the McKinsey report, the cost of clean hydrogen is expected to drop by more than 60% (from $5 per kg now) by 2050. This should lead to popularization of related industries such as green methanol (shipping fuel), ammonia (fo), and electrification of trucking. for long distances. Lowering the costs of many of these new technologies will make them ready for widespread adoption.

For non-mainstream technologies, the club of deep tech investors is growing: Traditionally, very few global venture capital firms, such as Khosla Ventures, have invested in non-mainstream technologies. However, investment in climate technology has increased in the past decade, with the creation of several deep technology-focused funds such as Energy Impact Partners and Fifty Years. This trend is accelerating with niche climate funds focused on climate technologies for specific sectors (such as the $100 million Propeller seed fund with a focus on the ocean, and the $250 million Lowercarbon Capital fund for nuclear fusion startups). Many of these global funds have started investing in India as well. More recently, Lowercarbon Capital invested in River, an Indian electric car maker, Union Square invested in Rev, a charging infrastructure provider, and Better Bite Ventures, a Singapore-based alternative protein fund, invested in Phyx44, which makes products dairy through fermentation.

Some Indian venture capital firms like Blue Ashva and Speciale Invest have made investments in early-stage deep tech startups. In addition, some companies also invest in or partner with emerging deep technology companies for mutual benefit.

Willingness to pay for climate solutions: Just a few years ago, it would have been unthinkable for industries to buy water, as there were no restrictions on the use of groundwater. However, Zero Water Day in Chennai changed all this, as all consumers (especially industrial ones) were willing to pay for water supplies; This has benefited water conservation startups such as Boson Water, which converts used water from apartments into usable water for industries and has seen an increase in demand.

Similarly, rising fossil fuel prices and zero net liabilities are forcing many large corporations to use biofuels for their energy needs. Due to the categorization of biofuel supplies, many start-ups are starting to offer batch solutions to large manufacturers. Two startups, Buyofuel and Biofuel Circle, have raised seed rounds in 2021.

So, how should founders approach raising capital? For climate startups raising $1 million or less, there are many funding options available now, thanks to various angel funds, climate/impact funds, family offices, and even traditional venture capital funds.

However, funding options for climate startups in the non-EV space seeking to raise the next round of capital ($1-3 million) remain limited and are largely led by impact investors, who typically invest in companies whose mission aligns with theirs. Fund objectives. For example, a fund that focuses on energy access for marginalized consumers will be more interested in startups that serve these consumers or employ them in their value chain. Likewise, a deep tech investor is less likely to be interested in a startup working on mainstream technologies such as solar energy or biofuels.

Therefore, climate startup founders must: 1) work out how their proposal fits with the goals of the Impact Fund; 2) prioritizing the presentation to lead investors over core investors in the early days of fundraising; 3) Explore strategic partnerships with companies that have zero net commitments and/or can benefit in other ways from what their startups have to offer.

Bharti Krishnan and Krishnan Srinivasan are co-founders of FineTrain, a green business advisory firm.

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