Here is Why Investors are eager to fund Indian climate startups now
Solar Square recently raised 100 crores in series-A funding, following a seed round of 30 crores three months earlier. This could easily be a startup story, except that it took Solar 7 years of operation to reach this milestone. This is common among climate startups.
It takes time for them to gain enough traction to be appealing to investors. While investment in climate solutions is increasing rapidly, climate startups are estimated to account for less than 5% of venture capital (VC) funding in India, with the majority going to tech startups. Fortunately, climate startups have become more appealing to VC investors, though many founders are still unsure how to go about raising capital. Why are climate startups becoming popular? Mainstream climate technologies pose little technical and market risk: VC investors typically seek to invest in firms that address large opportunities that have the potential to multiply multiple times over the next 6-7 years.
Some climate sub-sectors have begun to present such opportunities, with technology and market acceptance risks already addressed. For example, India is one of the largest renewable energy markets, with solar energy generation alone expected to quadruple by 2030. Local production of components such as solar models and cells is also encouraged by government policies. As a result, solar carries no technology or market acceptance risk, and solar startups look like any other tech startup to an investor. Similarly, the adoption of electric vehicles (EVs) is expected to accelerate over the next two decades. India’s auto industry is large and eager to invest in new technologies.
Government policies encourage the development of charging infrastructure and provide capital subsidies to reduce the cost of EV ownership. It’s no surprise that venture capital (VC) investment in this sector is increasing, with investments across the value chain, including battery recycling, charging infrastructure, EV and component manufacturing, and financing. According to a McKinsey report, the cost of clean hydrogen will drop by more than 60% (from $5 per kg now) by 2050. This would result in the mainstreaming of related industries such as green methanol (shipping fuel), ammonia (for fertilizers), and long-distance trucking electrification. The falling costs of several such new technologies will make them ready for widespread adoption.
The deep-tech investor club is expanding for non-mainstream technologies: Historically, only a few global venture capital firms, such as Khosla Ventures, have invested in non-mainstream technologies. Climate tech investing, on the other hand, has increased in the last decade, with the establishment of numerous deep tech-focused funds such as Energy Impact Partners and Fifty Years. This trend is being accelerated by niche climate funds that focus on specific climate technologies (such as Propeller’s $100 million seed fund with an ocean focus and Lowercarbon Capital’s $250 million fund for nuclear fusion startups). Many of these global funds have also begun to invest in India. Many of these global funds have also begun to invest in India. Lower carbon Capital recently invested in River, an Indian EV manufacturer, Union Square Ventures in Rev, a charging infrastructure provider, and Better Bite Ventures, a Singapore-based alternate protein fund, in Phyx44, which produces dairy products via fermentation.
Some Indian venture capital firms, including Blue Ashva and Speciale Invest, have also invested in early-stage deep-tech climate startups. Furthermore, some corporations are investing in or collaborating with deep tech startups for mutual benefit. Willingness to pay for climate solutions: It was unthinkable just a few years ago for industries to buy water because there were no restrictions on groundwater use. However, Zero Water Day in Chennai changed everything, with all consumers (particularly industrial) willing to pay for water supply; this benefited water conservation startups such as Boson Water, which converts used water from apartments into usable water for industries and has seen demand skyrocket. Similarly, rising fossil fuel prices and net-zero commitments are forcing many large corporations to rely on biofuels for energy. As the biofuel supply becomes more fragmented, several startups have begun to offer aggregated solutions to large manufacturers. Biofuel and Biofuel Circle, two such start-ups, raised seed rounds in 2021.
So, how should entrepreneurs go about raising capital? There are now many more angel funds, climate/impact funds, family offices, and even traditional VC funds available for climate startups raising $1 million or less. However, funding options for climate startups seeking to raise their next round of capital ($1- 3 million) in the non-EV space remain limited, and these are largely led by impact investors, who typically invest in companies whose mission is aligned with their fund objectives. A fund focused on energy access for marginal consumers, for example, will be most interested in startups that either serve or employ such consumers in their value chain. A deep tech investor, on the other hand, is unlikely to be interested in a startup working on mainstream technologies such as solar energy or biofuels.
As a result, founders of climate startups should: 1) determine how their proposition fits into the impact fund’s objectives; 2) prioritize pitching to lead investors over seed investors in the early stages of fundraising; and 3) explore strategic partnerships with corporates that have net-zero commitments and/or could benefit in other ways from what their startups have to offer.