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 it largely goes to tech startups

Investors are ready to invest in Indian climate startups

Recently, Solar Square raised 100 crore in its Series A funding, on the back of a 30 crores of seeds about three months earlier. This could well be the story of a tech startup, except for the fact that it took Solar 7 years of operation to reach this milestone. This is typical of climate startups. They take time to generate enough traction to become attractive to investors. While investments in climate solutions are growing rapidly, climate startups account for less than 5% of venture capital (VC) funding in India, according to estimates, and a large part of it goes to tech startups.

Fortunately, climate startups have become more attractive to venture capitalists, although many founders are unsure how to go about raising capital. Why are climate startups becoming attractive?

Traditional climate technologies present little technical and market risk: venture capitalists generally seek to invest in companies that address large opportunities that can multiply in 6-7 years. Some climate subsectors have begun to present such opportunities where technology and market acceptance risks have already been considered. For example, India is one of the largest markets for renewable energy, with its solar power generation alone expected to quadruple by 2030. Government policies also support local production of components such as models and solar cells. As such, solar carries no technology or market acceptance risk and solar startups look like any other tech startup to an investor.

Likewise, the adoption of electric vehicles (EVs) is expected to grow rapidly over the next two decades. India has a large automotive industry keen to invest in new technologies. Government policies encourage the creation of charging infrastructure and offer capital subsidies to reduce the cost of owning electric vehicles. No wonder venture capital investments in this sector are on the rise, with investments all along the value chain, from battery recycling, charging infrastructure, to vehicle manufacturing and financing electrics and components. According to a McKinsey report, the cost of clean hydrogen is expected to fall by more than 60% (from $5 per kg now) by 2050. This would result in the integration of related industries such as green methanol (fuel shipping), ammonia (for fertilizers) and the electrification of long-haul trucking. The falling costs of many of these new technologies will make them ripe for mass adoption.

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

Some Indian venture capital firms such as Blue Ashva and Speciale Invest have also invested in early-stage climate tech startups. Moreover, some companies also invest in or partner with high-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 the use of groundwater. However, Zero Water Day in Chennai changed all that, with all consumers (especially industrial) willing to pay for water supply; this has benefited water conservation startups like Boson Water, which converts waste water from apartments into usable water for industries and has seen demand rise.

Likewise, rising fossil fuel prices and net zero commitments are forcing many large companies to use biofuels for their energy needs. With biofuel supply disaggregated, several startups have begun offering aggregated solutions to large manufacturers. Two of these start-ups, Buyofuel and Biofuel Circle, increased their funding rounds in 2021.

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

However, funding options for climate startups in the non-EV space looking to raise their next round of capital ($1-3m) are still limited and these are largely driven by impact investors, who typically invest in companies whose mission is aligned with their fund objectives. For example, a fund focused on energy access for marginal consumers will be more interested in startups that serve these consumers or employ them in their value chain. Likewise, a deep tech investor is not likely to be interested in a startup that is working on consumer technologies such as solar power or biofuels.

Therefore, founders of climate startups need to: 1) determine how their proposal fits within the goals of the impact fund; 2) prioritize pitching to direct investors rather than seed investors in the early days of fundraising; and 3) explore strategic partnerships with companies that have net zero commitments and/or could benefit in other ways from what their startups have to offer.

Bharti Krishnan & Krishnan Srinivasan are co-founders of FineTrain, a consulting firm for green businesses.

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