120 climate-tech startups raised over 200 funding rounds from 272 unique investors over the past five years, says Early-stage Climate-tech Startups in India: Investment Landscape Report 2021. This indeed shows that a new wave of climate-tech is booming in India. Climate-tech startups are for-profit enterprises that work on innovative technology-based solutions that help cut carbon footprint or improve people’s adaptation and resilience to climate change.
The report states that there was a sustained growth in both volume and value of equity deals in the sector between 2016 and 2018, before a dip in 2020, owing to the COVID-19 pandemic. Climate-tech is a broad term comprising several sub-segments, of which Sustainable Mobility including EV manufacturing, clean logistics and novel components has recorded the highest investment activity. This is followed by Energy (including clean energy generation from new feedstocks, energy access, energy storage and energy optimization products) that saw 44 deals amounting to USD 301 million. Both these sub-segments, i.e. Mobility and Energy are ahead on the maturity curve and benefit from favorable regulatory environment and easy-to-capture impact metrics. Climate-smart agriculture, waste management and circular economy and environment and natural resources are the other sub-segments gradually beginning to gain traction in terms of new innovative business models as well as investments.
The four key factors aiding the growth in climate-tech are increasing realization on the need for climate action, a large asset base in clean energy (developed in the last decade) encouraging new startup innovations to service these assets, growing interest from global capital allocators and emergence of innovative deal pipeline. Even as the number of startups working on novel technologies (be it green hydrogen generation, alternative proteins or carbon capture to name a few) grows the enabling ecosystem in India including incubators and accelerators, policy advocacy groups and think tanks is also expanding.
The sector is presently at a nascent stage and needs mainstreaming. It accounted for only 9% of the investment flows to total impact investing flows, which include financial inclusion, healthcare, agriculture and education etc. Most deals were early-stage and of smaller ticket sizes, 68% received seed stage funding, and 83% of the transactions were USD 5 million or lower in size. An overwhelming proportion of investors and entrepreneurs called out the “the lack of patient capital” as one of the biggest weak links in the present ecosystem. Multiple structural interventions could help transition this sector from a niche narrow asset class to a more mainstream element of the VC and impact investing ecosystem in the country.
The report highlights that startups working on deep science/tech innovations need customized support in the early-stages for prototyping, testing, technical validation and product commercialization. It says this can be done by setting up dedicated Centers of Excellence (COEs), Specialized Entrepreneur Support Organizations, and greater academia-industry interface. Greater technical and business capacity in climate-tech sector needs to be built domestically, while also tapping into global network of domain experts.
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The report recommends that asset owners could incorporate the climate lens more centrally into their investment strategy and consider dedicated allocations and longer fund tenures which will be better aligned to the needs of the sector. Capital allocators such as Government-backed Funds, Corporate VCs, Foundations and Philanthropies can assume a larger role in moving the needs on early-stage climate-tech investing. Furthermore, well-designed blended finance and affordable debt structures can help in de-risking private investments and crowding in other relevant actors into the climate-tech sector.
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