Lucrative Climate Tech Investments are Not Very Popular in India. Here’s Why

Sustainability is the new digital. Companies did not have a digital function 20 years ago. And today, you cannot imagine a business without digitalisation embedded in it. The same thing is happening to sustainability. Climate and sustainability are not only the biggest problems to be solved, but also the biggest opportunities available for the next 20 years,” says Anjali Bansal, Founder of Avaana Capital, a climate-tech focussed early-stage venture capital (VC) firm.

She bases her investment thesis on the enormous opportunity that climate and sustainability presents and compares it to the opportunity created by the digital revolution. On this principle, the Mumbai-based VC firm is currently raising its second climate -tech focussed fund with a target corpus of $150 million. VC firms such as Avaana Capital are among a growing tribe of dedicated early-stage climate tech focussed funds that are providing the missing piece of the puzzle of growth-capital requirements for the climate-tech ecosystem.

Climate tech as an attractive asset class for pure-play VC investors, and not as impact funding or ESG investment targets, has just begun to gather steam. Globally, climate tech start-ups raised a little under $40 billion across 600+ deals in 2021, as per a report from Climate Tech VC, a climate tech research and publication outlet. According to PwC’s “State of Climate Tech 2021” report, climate tech accounts for 14 cents of every venture capital dollar.

In contrast, Indian climate tech businesses received just $1 billion in VC funding between 2016 (when the Paris Agreement was signed) and 2021, reveals a report by London & Partners and Dealroom.co. Ad-hoc investments by impact funds, global foundations and generalist VC firms account for most of the climate-tech investments in India.

On the other side of the equation is a set of private equity (PE) players like Warburg Pincus, TPG, Green Growth Equity Fund (GGEF), and GEF Capital Partners (GEF) who primarily invest in climate-tech infra companies. In the past few years, a number of global development finance institutions (DFIs) such as the UK’s British International Investment (formerly CDC) and the Netherlands’ FMO have been doing direct investments, or co-investing with funds in which they are the limited partners (LPs).

In India, too, a few early-stage climate-tech focussed VCs have set up shop. Nature-Fix Climate (NFC) Ventures—a $200-million climate-tech-focussed VC fund launched by impact investor Harsha Moily and former Abraaj India MD Balaji Srinivas—is looking to tap into the massive climate-tech start-up opportunity. IIM Ahmedabad’s incubator-cum-accelerator, the Centre for Innovation Incubation and Entrepreneurship, is also planning to launch a new climate tech fund—named Bharat Innovations Fund—with a target corpus of $100 million. Investment advisory firm Unitus Capital is raising a dedicated climate-tech fund, too, sources say.

The emergence of these dedicated early-stage funds is indicative of the opportunity present in the climate-tech space. There is a sense of urgency among enterprises to start their net-zero journeys, and fulfil the sustainability commitments made to the board and shareholders. Indian corporates are also striving to bring transparency in their carbon footprint reporting to meet the stringent sustainability standards on sourcing and supply chains being set by their global clients. In addition, the societal need for sustainability across sectors is being felt like never before, and policy support from the government offers tremendous thrust to the cause.

However, climate-tech start-ups and investors are staring at a classic chicken-and-egg situation. Avaana’s Bansal says that her firm is seeing 200 start-up investment opportunities/pitches in a quarter, but admits that there is a severe lack of early-stage capital for them.

Shyam Menon, Partner & Co-founder at Bharat Innovations Fund agrees. “The equity gap in pre-Series A, Series A and B, from $1-2 million to all the way up to $10-15 million is real. Once you cross the Series B mark, and the business hits $10-15 million top line with reasonable unit economics, it is easier to get growth capital. It’s a pure business opportunity for investors, irrespective of whether it is climate, or not,” he says.

Capital is stuck in the late stages as most PE funds have capital allocation for climate, but the deal flow and pipeline are weak. PE firms typically look for companies that have gone through the journey from idea to Series B for large-ticket investments.

“There aren’t many late-stage tech companies in India. Close to 60 per cent of climate-tech start-ups are in the idea- and R&D stage, the rest are in commercialisation and scale-up phase. Climate-tech firms need a longer gestation period, so it will take a while to build large businesses in this segment, but we are getting there,” says NFC’s Moily.

Bansal feels VCs alone cannot cater to the massive requirement of the space, and that patient, science-based capital for creation of new solutions should come from different sources like corporations, labs, universities and foundations. “To create a real ecosystem for a new sector, you need different types of capital. Avaana focusses on providing equity capital for a start-up enterprise’s growth and scaling. Patient risk capital, required to support creation of new science, comes from foundations and most large corporations are now looking to invest here,” she says.

However, a majority of climate-tech funding goes to EVs, micro-mobility and other transit models, and not to tech that is directly cutting emissions. According to PwC, less than 20 per cent of funds go to critical areas—solar, wind and hydrogen energy, food waste technology, and alternative foods/low greenhouse gas proteins—that represents over 80 per cent of the emissions reduction potential.

Why are VCs not backing technologies that have a more direct impact on emissions? The answer lies in the strict fund lifecycles and return expectations of VC funds, making it tough for them to find alignment with climate tech, which needs a larger gestation period.

“If 100 per cent of a VC’s fund comes from LPs whose only goal is carbon mitigation, and nothing else, you have the perfect alignment between your LP, who is your investor, and general partner (GP) who is managing the fund. But VC funds have multiple LPs—regular investors who expect a return of 20-25 per cent IRR (internal rate of return). The challenge, then, is investment philosophy—maximum carbon mitigation potential versus maximum returns potential,” Menon says. He adds that as the game moves towards high carbon-mitigation-potential heavy industries like steel, cement and chemicals, commercial IRR and carbon mitigation will be high, too.

Moily, on the other hand, says that NFC is structured as a 12-year fund, unlike typical 8-10 year VC fund lifecycles, to accommodate the longer gestation period required for climate-tech ventures to reach commercialisation.

“For them (VC investors) to make a start, there are enough innovations out there. It’s just that they need to be patient, and understand that going from proof-of-concept to commercialisation can take anywhere between two to 10 years, depending on the type of the problem area,” says Mainak Chakraborty, Director and CEO of GPS Renewables. The bio-energy tech firm has raised close to $20 million in equity capital from a slew of investors including Neev II Fund managed by SBICap Ventures, the Netherlands-based Hivos-Triodos Fund, and Hyderabad-headquartered Caspian Impact Investments.

Despite the large opportunity present today, the clean-tech boom that went bust about a decade ago still makes investors jittery, especially as the world is facing another potentially harsh financial crisis. This time around though, investors are cautiously optimistic. Unlike the previous cycle, the tech solutions are asset-light businesses, and investors are mostly backing market-ready business models. There is a strong commercial need for such products as consumers today are more aware. Policymakers and businesses, too, are making genuine sustainability commitments.

“When we start seeing returns being generated from investments, we will see a lot more VC and PE capital coming into this space. We are just at the beginning of that journey, which is why I say, sustainability is the next digital. What we saw in digital in the last 20 years, we will see in sustainability for the next 20 years. It is just the beginning,” says Bansal, optimistic about the future of climate tech.

@binu_t_paul