The report “Early-stage Climate-tech Start-ups in India: Investment Landscape Report 2021” is the outcome of a ground-up study that puts a spotlight on the investment activity in the Indian climate-tech sector over the past five years
Given the gravity of the climate crisis in India, innovative low-carbon technology start-ups are needed to achieve the transition to net-zero. Climate-tech start-ups 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. For such enterprises to prosper, they need all-round support that includes abundant capital and conducive policies. So far, the discourse on climate finance has centred around large utility-scale renewable project financing with little focus on early-stage innovation driven start-ups, precisely the intention of our current research.
The four key takeaways from the report are as follows –
A new wave of climate-tech is blooming in India. 120 climate-tech start-ups raised over 200 funding rounds from 272 unique investors over the past five years. There was a sustained growth in both volume and value of equity deals in the sector between 2016 (18 deals; USD 102 million) and 2019 (58 deals; USD 506 million), before a dip in 2020, owing to the pandemic.
Sustainable Mobility leads the action, followed by Energy. Climate-tech is a broad term comprising several sub-segments, of which Sustainable Mobility (including EV manufacturing, clean logistics and novel components) has seen the highest investment activity (84 deals; USD 705 Mn). This is followed by Energy (including clean energy generation from new feedstocks, energy access, energy storage and energy optimisation 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 favourable 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.
A host of enablers lend climate-tech in India the potential for disruptive growth. The four key factors aiding the growth in climate-tech are (i) increasing realization on the need for climate action (ii) a large asset base in clean energy (developed in the last decade) encouraging new start-up innovations to service these assets (iii) growing interest from global capital allocators and (iv) emergence of innovative deal pipeline. Even as the number of start-ups 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, needs mainstreaming: The sector accounted for only 9% of the investment flows to total impact investing flows (which also include financial inclusion, healthcare, agriculture, 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.
Sector-focused ecosystem support: Start-ups working on deep science/tech innovations need customized support in the early-stages for prototyping, testing, technical validation, and product commercialization. This can be done by setting up dedicated Centres of Excellence (COEs), Specialized Entrepreneur Support Organizations (including incubators and accelerators) and greater academia-industry interface. Greater technical and business capacity in climate-tech sectors needs to be built domestically, while also tapping into global network of domain experts.
Availability of patient capital: 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 & Philanthropies can assume a larger role in moving the needle on early-stage climate-tech investing. Further, well-designed blended finance and/or affordable debt structures can help in de-risking private investments and crowding in other relevant actors into the climate-tech sector.
Proactive government policy: The government can play a vital role in creating demand for climate-tech start-ups by introducing policies that nudge consumers to adopt green products, subsidising the ‘green premium’ on such products and acting as the first large buyer itself. They can also help in improving the supply-side as well, through funding for the infrastructure (such as COEs, scientific labs etc.), and directed fiscal incentives.
Greater capacity-building: Given the multi-disciplinary and complex nature of climate-tech businesses, the investing community needs to build deeper domain understanding in the space. Investors as well as other professional service providers such as investment banks can benefit from capacity building interventions that can help cultivate relevant technical expertise for due-diligence/portfolio management of climate-tech start-ups.