Will 2023 Be The Defining Year For India’s Climate Tech Startups? 

There’s really no bigger challenge facing humanity than climate change. But even in 2023, a lot of the public discourse revolves around personal responsibility rather than collective action to tackle climate change.

Perhaps the answer lies in leveraging technology which has already changed the human way of life in most ways, and making it equally easy for individuals and businesses to take the right steps. And that’s the intersection that India’s climate tech startup ecosystem is playing in.

While this is definitely a global challenge, the solutions are very region-specific and need to be tethered to the ground reality. It’s also why there’s a lot more early-stage investor interest in the Indian climate tech startups over the past couple of years, but things have been slow beyond the early stage.

Even as startups push toward innovation in this vital area, climate tech has not seen the same investment maturity or depth as other prominent areas. Investors are still circumspect about how some climate tech business models will pan out in the long term, regardless of the obvious value these startups will unlock in the future.

But the feeling is that the tide is about to change. In 2023, we will start seeing climate tech permeating across verticals and sectors some founders claim. And the sector’s niche models will start seeing initial traction.

So far, the India’s climate tech startup landscape is dominated by electric vehicle companies and while growth here will be key for the larger push in other areas, it’s also time that investors and the government pay attention to other areas.

Will VCs Finally Take Climate Tech Seriously?

India’s climate change reversal goals requires significant groundwork across several industries, and perhaps investing in early-stage climate tech startups can address critical pain points to begin with but there’s also a need for accelerating growth of these startups.

Founders need investors to take a bigger chance and investors are waiting for India’s climate tech startups to crack the model. In the end, while climate tech is said to be vital by both sides, the sector is stuck in this cycle of wants and needs.

Accelerators and early-stage venture firms Huddle and Merak Ventures have teamed up in the form of ClimAct, an accelerator programme to boost climate tech. The programme offers upfront pre-seed capital of $200K each and a follow-on investment of up to $1.5 Mn and has seen support from the likes of agritech and biotech-focussed Omnivore, Sequoia Capital, Matrix Partners and other marquee names.

India’s ambitious COP27 goals need to be supported by VC investments in the climate tech sector in conjunction with policy changes to boost startups and innovation. India has seen a host of policy reforms that have paid dividends in other sectors, and even in climate tech when it comes to EV, clean mobility and solar power. But other areas need a bigger focus.

The global climate crisis makes everyone equally vulnerable and India is particularly at risk given that it ranks seventh in the global climate risk index and is home to more than 1.35 Bn people. While the net-zero carbon emission target of 2070 is still a long way away, the biggest push has to come from the private sector and climate tech startups.

As per a Unitus and Climake India report, the Indian climate tech market needs a capital infusion of over $1 Tn by 2030 in line with the country’s sustainability goals.

“It’s not easy for funds to be specialists in life sciences, pure climate tech, hardware or deeptech and carbon credits. It took a while for VCs to get familiar with other sectors too, so the process has begun and we will see more specialist funds in the coming months,” said Omnivore founder and managing partner Mark Kahn.

In many ways, 2021 was a watershed moment for climate tech investments, as it saw more funding than the previous three years combined. With $2 Bn invested in the past eight years (2014-2022), the climate tech startup ecosystem is still relatively nascent in comparison to other more prominent sectors.

But in the context of what is needed we are far beyond the curve.

The Vast Climate Tech Landscape: Not Just EVs

Of course, it’s hard to pin down which businesses fall under the climate tech category. Even electric vehicles with their overarching mission are part of this sector, whereas there are other newer areas of interest that on the face of it do not seem to fall in climate tech.

But even the likes of agritech startups, solar and clean energy companies, alternative fuels and materials startups, biotech and agrifoods life sciences companies, sustainable consumer brands and others also come under the climate tech umbrella. Opportunities are also expected in recycling and waste management, alternate meats, carbon management, and other areas.

Undoubtedly, EVs are the focal point of this sector with most startups also operating in the clean vehicles segment. But in 2023, it’s time to look beyond EVs.

With so much investment coming into the electric vehicle segment and focus on clean mobility, often this segment is equated with climate tech as a whole.

But climate tech tackles diverse areas beyond just electric vehicles. While India saw 1 Mn EVs sold annually for the first time in 2022, electric vehicles are only a drop in the climate tech bucket.

Simply put, climate tech can be defined as any technology that is centred around mitigating and addressing the impact of global warming, reducing greenhouse gas (GHG) emissions or advancing sustainable practices by business and individuals.

Climate change is set to impact habitats and ecosystems that are typically not talked about such as sustainable agriculture and climate resilient crops. Both of these areas require a huge R&D investment from the government and private sector.

While biotech startups such as LoopWorm and a slew of agritech startups are looking to solve these problems with modern technology, India does not have the R&D base to give a big push that the US and China can.

Many would say that the climate tech is broad while cleantech is narrower, but the broad term also indicates that climate change will affect every individual in the world, and therefore it cannot be easily bracketed.

Climate Tech As A Horizontal Play

“Climate tech is not a vertical play. It’s a horizontal opportunity because it affects everyone and all businesses will need to adopt some form of climate tech to remain sustainable in the future,” says Siddhanth Jayaram, cofounder of carbon credits startup Climes.

But founders such as Jayaram also acknowledge that while climate tech is a huge opportunity, the VC world has not woken up to it. VCs have been habituated by the returns cycles in non-climate businesses, but the same realisation involves a longer horizon when it comes to climate tech.

For instance, India’s climate tech startups outside the EV segment do not yet have the concrete revenue track record that VC valuations are based on. Many of these models are new to the VC world too.

Carbon credits have been around for a while, Jayaram said, but it has never seen great adoption. He hopes technology might change the equation. But the lack of precedence or a revenue track record means many VCs do not yet know how to evaluate these deals beyond the idea and the founder.

These two points largely matter in the early stage and a lot of seed funded climate tech startups struggle to go to the next stage because their revenue models or product-market-environment fit are still evolving too, says Jayaram. So it’s a chicken and egg problem.

But as more and more companies are forced to adopt climate-friendly practices by circumstances and regulation, the investment maturity is likely to follow.

Scaling Up Climate Tech In 2023

Of course, this is one area where India cannot afford to wait. Even though climate-focussed technology takes longer to be proven in the market, investors need to take riskier bets now. After all, that was the point of venture capital at one time.

Given the current economic conditions and the fact that business sustainability is being put before environmental sustainability by many companies, climate tech startups face uncertain business prospects. A renewed policy push is definitely on the top of the list of demands for startups in this space.

Government policies such as a blanket ban on single-use plastics, Renewable Power Obligation (RPO) mandate on states, EV push and the National Hydrogen Mission are trying to tackle climate change.

Beyond this, India’s climate tech startups are calling for a carbon tax on companies that would make carbon credit solutions more relevant, and others want a powerful regulator to ensure adoption of climate tech as well as access to the government marketplace. This will accelerate go-to-market solutions for cleantech and thereby improve their potential to raise capital.

“The combination of subsidies and market taking off has seen electric vehicles and solar power reach something of an inflexion point,“ believes Matrix Partners’ Sudipto Sannigrahi.

And this has made it commercially viable for individuals and businesses to move to EVs or solar. So now we need to see a similar push from the government at the right time in these other areas, he added.