While the climate crisis is having a direct impact on us, there has been little investment in start-ups that address such issues. Indian climate tech start-ups receive less than 5 per cent of total venture capital funding. Given the low level of funding in comparison to the urgency of the problem, it is not surprising that investment in climate tech companies continues to grow, despite a slowdown in venture capital funding to start-ups.
Climate tech companies raised around $800 million in the first half 2022, some 30 per cent more than the $600 million funding for the entire 2021. Climate tech start-ups had a strong start to the second-half with the news of $20 million funding by String bio, that converts greenhouse gases into proteins.
So far, most of these start-ups have been funded by strategic investors, which are large corporations interested in collaborating with them to gain access to new technologies and markets. These corporations invest their own funds and are thus unaffected by a slowdown in public markets. As consumer acceptance grows and technologies mature, climate tech start-ups will be able to attract capital from traditional venture capitalists as well.
Further, funding for climate start-ups is likely to gain momentum as they are seen as a means to achieving energy self-sufficiency in the aftermath of the Russia-Ukraine conflict, rather than just a decarbonisation tool. The current policy push for renewable energy, battery swapping and hydrogen would speed up and attract new investors to green start-ups.
Climate tech start-ups provide a wide range of solutions that either reduce carbon emissions or assist us in dealing with climate challenges such as food, droughts, and extreme heat. These include solutions such as electric vehicles, chemical-free agriculture, waste management, weather forecasting, water-saving crops, and sustainable cooling, among others.
So far, VC interest in such start-ups has been limited because many of these technologies are in their early stages and VC investors are unsure whether they will be able to exit their investment.
Indian climate tech start-ups received capital of around $1 billion during 2016- 2021, a tiny fraction of the $75 billion received by Indian start-ups during the same time. Much of the $1 billion in funding came from seed-stage investors, incubators and angels. Many of the seed-funded companies have begun to gain consumer traction and are ready for larger rounds of funding. Many such examples have already occurred in the first half of 2022, with companies such as Ecozen, Ecolibrium, String bio, and Recykal raising larger rounds of upwards of $5 million.
Furthermore, some of the climate tech sectors that are seeing increased adoption, such as electric mobility and sustainable agriculture, are now beginning to look appealing to traditional VC investors, who are looking for start-ups that cater to large markets through technology-driven solutions. This was evident in the $25-million Series A round of Battery Smart, led by Tiger Global, or the $100 million Absolute Foods round, led by Sequoia capital.
It’s no surprise that many new climate-focussed VC funds have been announced in the last year, including Omnivore’s $130 million climate agri fund and Speciale’s $40 million fund for deep tech. Kalaari Capital, a technology investor, recently published a report on the circular economy opportunity.
Strategic investors
Climate start-ups are attracting capital from strategic investors and corporates committed to achieving net zero carbon footprints and seeking new technologies. For example, Reliance Petroleum invested in Ambri Inc, a Massachusetts-based energy storage company. Back home, BP Ventures has invested in BluSmart, an electric taxi ride hailing company. These investors invest from their own balance sheets and do not need to raise capital from the private markets.
Nearly 300 major global corporations, including Reliance, ACC and Tech Mahindra in India, have signed the pledge to reduce carbon emissions. Many others who have not yet signed the pledge will need to improve their green credentials in order to remain relevant to their customers and access capital at a competitive price.
Automobile manufacturers, refineries, fossil fuel steel, cement, fertilisers, paper and pulp, and petrochemicals are among the industries most in need of such solutions, as they account for more than 30 per cent of total GHG emissions. Some of these companies, such as those in the automobile and fossil fuel industries, have already begun to invest in new technologies, and more are likely to follow.
Rising energy prices and a lack of energy security in the aftermath of war have piqued the interest of investors in green energy companies.
India is also pushing for renewable energy self-sufficiency through measures such as a production-linked incentive (PLI) for manufacturing solar cells and modules, as well as a new policy for battery swapping and hydrogen. The policies will spur investment and create an ecosystem for the production of solar cells, batteries, and hydrogen. This type of ecosystem will help a large number of start-ups that are currently developing solutions for energy transportation and storage, making them more investible.
Climate start-ups will play an important role in decarbonising Indian industry and will continue to attract capital from traditional venture capitalists as well as corporate venture capital partners. Investors who can identify the winners will profit handsomely.
The writer is Founder of FineTrain