BackClimate tech in India is ripe for global venture capital inflows
Valuations look reasonable and VC funds could get early pickings
PremiumOne of the world’s biggest greenhouse gas emitters is trying to clean up. Global venture capitalists looking to put their money to work should keep an eye on it. The Indian capital region of Delhi is abuzz with activity. Rusty metal signs that tout “Electric Charging" stand out, along with stations that power electric two-and-three wheelers. Startups building technology to drive sustainability are in a hustle for funding. Corporate activity is chugging along, while capital expenditure has risen sharply in recent months and rail freight volumes reached record highs. India’s big companies, like Wipro, UltraTech and Reliance, are increasingly talking to shareholders about green-tech and sustainability. Private capital is looking to back climate action-related technology. Of the almost $27 billion of such investment globally in the first half of 2022, close to $2 billion went to India’s firms.
Impressive, but a few billion dollars is hardly enough, and weary global venture capitalists looking for green investments are missing from the picture. Billions more are needed to help steer these firms forward to meet emission targets. Tightening financial conditions don’t help, but the bigger the challenge for India is overcoming usual scepticism over its dysfunctional politics, creaky infrastructure and red tape.
What’s underappreciated, however, is all this climate-friendly activity isn’t solely being driven by multibillion dollar subsidies. Those measures, while moving in the right direction, haven’t been a massive inducement on their own. In several sectors, policies are still in draft stages.
India’s conviction to go green stands in stark contrast to how such shifts have transpired elsewhere. In China, carrot-and-stick policies and subsidies were rolled out for it. Even in the US, tax credits and incentives have been the drivers of change.
India’s post-Covid resurgence has been backed by better roads and infrastructure and a manufacturing turnaround. Now big money is going into green projects. Mobility and transportation have drawn much of the early-stage investment so far, which makes sense: The sector accounts for over 10% of India’s emissions. As thousands of miles of highways are being built, nascent electric-vehicle-charging-station firms are cropping up along with those making batteries and EVs. To fund electrification, the government is working with the World Bank to put in place an instrument to reduce risk in financing EVs. Banks are offering green car loans, while non-banking financial institutions are extending credit too.
The economic case for going electric is real, as the large-scale adoption of two- and three-wheeler EVs and e-buses shows, Road Transport and Highways Minister Nitin Gadkari told me in an interview. They’re bringing down the cost of commuting. India’s market for climate-tech solutions isn’t just a massive technology shift, but an affordable energy transition.
Entrepreneurs are working on projects from battery swapping and EV chargers to carbon accounting, as well as new ways to boost farm efficiency and public awareness. As one investor told me, these founders are putting not just their capital, but their time, energy and conviction behind these startups. They could have probably had their pick of jobs in Silicon Valley. Instead, they’ve chosen to solve transition problems in India. Says Anjali Bansal, who runs Avaana Capital, a large climate-tech venture capital fund: “This is only the beginning." Sustainability, much like the digital revolution was, will be the next big sea change “and thus a large and attractive opportunity to invest in technology for global green solutions." As India grows and energy consumption rises, she says there’s a recognition “we have so much building to do—we can do it right, right from the start." While early-stage investing around climate tech is gathering momentum, there’s still a paucity of domestic venture capital for the later stages, when working capital needs to rise: the missing middle. This is forcing entrepreneurs to be realistic about their companies’ value now and proactive about crowding in global capital for future fund-raising.
Climate tech is different from, say, more traditional tech investing. The former won’t just include asset-light software solutions but also investment in manufacturing, hardware and R&D for product innovation. That means global venture funds must adapt if they want in on the energy transition, especially when it comes to gestation periods and exit timing, as climate-tech fund Theia Ventures’ Priya Shah says.
For now, climate-tech investors can still come in at reasonable valuations, or with relatively small ticket sizes given the early stages. Global VCs sitting on the sidelines should take note: Rather than wait for the herd and pumped-up multiples, this may be the time and place to put their dry powder to work.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia.
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