Recently, Solar Square raised ₹100 crore as part of its series-A funding, on the back of a ₹30-crore seed round three months earlier. This may well be a story of a tech startup, except for the fact that it took Solar 7 years of operations to reach this milestone. This is typical of climate startups. It takes them time to generate sufficient traction to become 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 it largely goes to tech startups.
Thankfully, climate startups have become more attractive to VC investors, though many founders remain unsure how exactly to go about raising capital. Why are climate startups becoming attractive?
Mainstream climate technologies have little technical and market risk:VC investors typically seek to invest in firms that address large opportunities that can grow multifold in 6-7 years. Some climate sub-sectors have started to present such opportunities where technology and market acceptance risks have already been addressed. For example, India is one of the largest markets for renewable energy, with its solar energy generation alone set to quadruple by 2030. Government policies also support local production of components such as solar models and cells. As such, solar doesn’t carry any technology or market acceptance risk and solar startups resemble any other tech-startup for an investor.
Similarly electric vehicle (EV) adoption is expected to grow rapidly over the next two decades. India has a big auto industry that is keen to invest in new technologies. Government policies are promoting the creation of charging infrastructure and offering capital subsidies to decrease the cost of EV ownership. No wonder VC investment in this sector is rising, with investments across the value chain, be it battery recycling, charging infrastructure, EV and component manufacturing and financing. As per 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 mainstreaming of related industries such as green methanol (shipping fuel), ammonia (fo fertilizers) and the electrification of long-distance trucking. Decreasing costs of several such new technologies will make them ripe for mass 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, climate tech investing has increased in the last decade, with establishment of many deep tech-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 seed fund with a focus on the ocean, and Lowercarbon Capital’s $250 million fund for nuclear fusion startups). Many of these global funds have begun investing in India as well. 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 fund for alternate protein, invested in Phyx44, which makes dairy products through fermentation.
Some Indian VC firms such as Blue Ashva and Speciale Invest have also made investments in early-stage deep tech climate startups. Additionally, some corporates are also investing in 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 was no restriction on groundwater use. However, Zero Water Day in Chennai changed all this, with all consumers (especially industrial) willing to pay for water supply; this 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 corporates to use biofuels for their energy requirements. As biofuel supply is disaggregated, several startups have started offering aggregated solutions to large manufacturers. Two such start-ups, Buyofuel and Biofuel Circle, raised their seed rounds in 2021.
So, how should founders approach capital raising? For climate startups raising $1 million or less, there are several funding options available now, 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 these are largely led by impact investors, who typically invest in companies whose mission is aligned with their fund objectives. For example, a fund focused on energy access to 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 not likely to be interested in a startup that works on mainstream technologies such as solar energy or biofuels.
Therefore, climate startup founders should: 1) work out how their proposition fits into the impact fund’s objectives; 2) prioritize pitching to lead investors over seed investors in the early days of fund raising; and 3) explore strategic partnerships with corporates that either have net-zero commitments and/or could benefit in other ways from what their startups have on offer.
Bharti Krishnan & Krishnan Srinivasan are co-founders of FineTrain, an advisory firm for green businesses.
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