Investors are ready to invest in Indian climate startups

Recently, Solar Square was raised 100 crore as part of its series-A funding, on the back of a 30-crore seed round three months ago. This could be a story of a tech startup, except for the fact that it took 7 years of Solar operation to reach this milestone. This is typical of climate startups. They need time to build enough traction to be 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 estimated, and most of this goes to tech startup.

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

Key climate technologies have little technical and market risk: VC investors typically seek to invest in companies addressing large opportunities that can grow exponentially over 6-7 years. Some climate sub-sectors have begun to present such opportunities where technology and market acceptance risks have been addressed. For example, India is one of the largest markets for renewable energy, with its solar energy generation set to quadruple by 2030. Government policies also support local production of components such as solar models and cells. Because of this, solar does not carry any technology or market acceptance risk and solar startups are like any other tech-startup for an investor.

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Similarly, electric vehicle (EV) adoption is expected to grow rapidly over the next two decades. India has a large automobile industry that is keen to invest in new technologies. Government policies promote the creation of charging infrastructure and offer capital subsidies to reduce the cost of EV ownership. Not surprisingly, VC investment in this sector is on the rise, with investments across the entire value chain, be it battery recycling, charging infrastructure, EV and component manufacturing and financing. According to a McKinsey report, the cost of clean hydrogen is expected to drop by more than 60% (from $5 per kg today) by 2050. This will result in the mainstreaming of related industries such as green methanol (shipping fuel), ammonia (fo fertilizers) and the electrification of long-distance trucking. Lowering costs of some new technologies will make them ripe for widespread adoption.

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

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Some Indian VC firms like Blue Ashva and Speciale Invest have also made investments in early-stage deep tech climate startups. In addition, some companies are also investing or partnering with deep tech startups for mutual benefit.

Willingness to pay for climate solutions: Just a few years ago, it was unthinkable for industries to buy water, as there were no restrictions on groundwater use. However, Zero Water Day in Chennai changed all this, with all consumers (especially industrial) willing to pay for water supply; this has benefited water conservation startups like Boson Water, which converts used water from apartments into usable water for industries and has seen demand zoom.

Similarly, rising fossil fuel prices and net-zero commitments are forcing many large companies to use biofuels for their energy needs. As the biofuel supply is fragmented, some startups have begun to offer integrated solutions to large manufacturers. Two such start-ups, Buyofuel and Biofuel Circle, raised their seed rounds in 2021.

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

However, funding options for climate startups in the non-EV space seeking to raise their next round of capital ($1- 3 million) are still limited and are largely dominated by impact investors , which typically invest in companies whose mission is aligned with their fund’s goals. For example, a fund dedicated to energy access among marginal consumers will be most interested in startups that either serve such consumers or employ them in their value chain. Similarly, a deep tech investor is unlikely to be interested in a startup that works on basic technologies like solar energy or biofuels.

Therefore, founders of climate startups must: 1) find out how their proposal fits with the goals of the impact fund; 2) prioritize building to lead investors over investors in the early days of fundraising; and 3) explore strategic partnerships with corporations that either have net-zero 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, an advisory firm for green businesses.

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