Avaana Capital On Its Sustainability Thesis And India’s Climate Tech Investment Opportunity

There’s little doubt that climate tech is a sector that’s still evolving from an investor point-of-view as well as the business and monetisation models. It’s the age of ESG, but beyond electric mobility and clean energy, the startup investor ecosystem is still coming to grasps with climate tech as an investment opportunity.

Running against this grain, Avaana Capital’s investment director Shruti Srivastava has become something of a specialist in the climate tech field. The IIT Madras graduate has had stints at JP Morgan, IFC and climate tech focussed Omnivore before taking on her current role at Avaana Capital, which has sharpened its focus around ESG (environmental, social and governance practices) businesses and business models.

From 2017 to 2021, Srivastava was a principal at Omnivore, the agritech and climate-focussed fund. It was during this time that she got a ringside view of how climate tech was changing agriculture. When the Avaana opportunity came along, she jumped at it to make an even bigger impact.

Founded in 2018, Avaana Capital backs startups that work on sustainable supply chains across industries, clean transport, sustainable input platforms, climate-resilient processes, precision agriculture, circular economy platforms as well as alternative materials and chemicals.

Earlier this year, Avaana Capital saw the first close of its second fund, which has a target corpus of $150 Mn. The firm’s portfolio includes the likes of FarMart, Terra.do, Turno, NinetyOne Cycles, Sentra.World among others.

“In the early stages of my career, sustainability was just a checkbox that companies and even investors ticked off. Now the fringe has started moving towards the centre and I saw early on how ESG can become a strong business value differentiator. And we can see that right now, amid the inflexion point for climate solutions in India,” Avaana Capital’s Srivastava told Inc42.

So, what does the Indian climate tech investment landscape look like at this point of time and how exactly are VCs  such as Avaana Capital evaluating models that seek to have a major impact in the next 5-10 years to make the most of this inflexion point?

Edited excerpts…

Inc42: Were businesses late in waking up to climate change risks and has this slow adoption hampered value creation for both investors and founders?  

Shruti Srivastava: It was around 2015 and 2016 that we first saw businesses waking up to the fact that climate was a genuine business continuity risk. This coincided with the rise of UPI and internet penetration, and, at Omnivore, I could tell that this would lead to game-changing solutions. I was already seeing this with agritech.

It may have been late, but businesses were talking about what’s good for the world, and now about what’s nice to have and did not frame it in terms of a future problem. The whole world saw it as the source of the next wave of value creation and that was also my belief.

When it comes to Avaana Capital, we are a young fund, but we are coming in at a time when there’s this huge change. Climate tech has now definitely reached an inflexion point.

If you look at our public listed companies, eight out of the top 10 listed companies have announced net zero targets when it comes to emissions. The whole world is moving in that direction. Everybody recognises that this is a planet continuity problem and it’s very much here and now and not far into the future.

Plus, if you see how regulation is moving, it’s again in the same direction. So, this is undoubtedly the time to invest in climate tech.

Inc42: Founders and investors have pointed out to me that climate tech is a horizontal play rather than a vertical. What are your thoughts on this?

Shruti Srivastava: Absolutely. I don’t think there’s a single industry or sector that won’t be affected. From insurance to food manufacturing to travel and fashion — climate tech considerations are being applied to every industry.

We are seeing a lot of regulatory push on what needs to happen to cement and steel as a way to reduce their emissions. Infrastructure companies are thinking about how to weatherproof their assets better. Insurance companies are already starting to take coastal buildings risk into account when underwriting. We are also seeing fashion majors emphasising ESG in their business whether it is a Zara or an H&M.

A few years ago, confectionery majors such as Mondelez, Kraft, Heinz and others huddled together to figure out how to mitigate the business risk of cocoa going extinct. Chocolate is a multi-billion dollar industry and to imagine that it might not be the same in the next few years.

So, there are genuinely big problems to solve today and which are not just philanthropic in nature. When it comes to EVs, it was something that only extremely eco-conscious consumers would adopt earlier, but today it’s very different. The cost curves have come down.

What we want to see now and what we are seeing increasingly are solutions that can help make businesses net zero and solve the risk. Every sector has a climate risk element and the other side of that risk tends to be opportunity for innovation.

That innovation is something we expect will come from the startup ecosystem in India. It’s seen significant growth over the past decade already.

Inc42: Usually investors are more interested in revenue projections, but when it comes to climate tech, we are seeing outcome projections and lives touched/saved milestones for the future. These are far less predictable than revenue. How do you evaluate startups from this lens?

Shruti Srivastava: Essentially, you need to do the same things you would for any other product or service. We look at the solution side, and how very well integrated the solution is into existing enterprise, government and development corridors.

What we hear from the industry is this pressing need to decarbonise. Not only are they required by their stakeholders to report but they see the business risk and the supply chain risks that come from not moving towards sustainability. So, it’s not a push anymore, but a pull.

On the consumer side, we are looking at innovation or a solution that enables affordability, which is a key lever for mass adoption.

So, the first question we ask ourselves is: how will the solution for climate risk mitigation, adaptation, and resilience. For countries like India, mitigation alone is not going to help, because we will still see consumption grow and we still have development goals to achieve.

Our energy consumption will go up from here because we’re lower than the global average for energy consumption. So, businesses need to look at mitigation, adaptation or resilience.

Besides these three filters, we ask ourselves what is the value at risk here, how much value can this company save and generate in the process.

And then we look at all of your standard metrics around unit economics. Does this make sense to be done affordably and hence will it drive adoption?

Then comes the background of the founders, their vision, being able to incorporate market feedback and are they agile enough to figure things out in their journey. Early stage investing is as much a founder bet as market bet, right? You need founders who will pick up signals early who will be agile in reworking things.

Inc42: Founders in this space might say that VCs aren’t taking climate tech seriously yet. What is your view on this and how do you set cycles and horizons for something 10-15 years down the line? 

Shruti Srivastava: This has two parts to it, which will help set the context.

So, if I look at the climate tech investing landscape in India, you have early stage accelerators to partner with startups at the concept or idea stage. They help founders build an early MVP. This is usually capital for experimentation.

And then we are seeing a lot of growth stage, generalist investors starting to invest in sustainability. We’ve also seen larger sustainability focus platforms that can be called impact private equity or something on those lines.

As most founders will tell you, the early stage space is very much a white space right now and there aren’t enough people looking at this space. And we don’t have enough dedicated funds compared to the US and Europe.

That’s also the reason why this has been a white space in India is because you need a specialised investor to help accelerate a climate tech business. Investors need an understanding of the climate problem itself and what technology is being applied here to get the right product-market fit.

So this space attracts specialised investors at an early stage but this tends to become generalist investors in the growth stage.

The problem in climate tech is that founders themselves have problems finding the right partner, the right financing and VC partner to help them grow. Which is perhaps why they feel that VCs are not serious enough yet. But this specialisation has to come to generalist funds at some point of time.

Inc42: Given this need to specialise, do you feel like there’s a bigger burden on investors from a technical standpoint to understand climate tech models? And is this an advantage for someone like you? 

Shruti Srivastava: So, we tend to be very, very research-driven and we front-load a lot of that diligence in the deal making process. The due diligence about potential outcomes and the viability of the tech happens up front. That’s the luxury of being a specialist; you’re seeing problems in different sectors from a different POV.

Secondly, we pick themes and go deep into them even before those themes have completely matured in the market.

So, by the time you have deals emerging, you’re able to act fast and correctly. Most founders see us as the first port of call and we keep hearing this from founders that they’re glad that we understand the space. They don’t have to explain the problem statement to us. And we usually have value to add in the solution.

Further, the Avaana Capital team has spent enough time doing technology investing and so stays at the top of their game on what new tech is emerging. We have global networks as an institution as well as individual networks that allow us to constantly keep upgrading our knowledge.

There’s literally no corporate boardroom that we wouldn’t have direct access to so we know their thinking on a variety of solutions. So, all of that also sharpens our thinking about emerging tech what is unlikely to work

Inc42: Which startups or models excite you when it comes to your portfolio right now? 

Shruti Srivastava: It’s hard to pick one because they’re all in different kinds of themes. Avaana Capital doesn’t really do competing bets. And each of these are important for the solutions they are creating.

How do you pick what’s more important? We have startups solving for food supply chains and climate-resilient food production, greening of logistics supply chains, energy transition, and solar. These are all solving different parts of a very large problem. A standalone solution cannot help save the economy or the planet and hence it is very, very difficult to pick one segment over the other.

Inc42: Could you shed some light on Avaana Capital’s deal flow funnel and how wide or narrow it has become in the past year? Amid this startup funding winter, do you find climate tech more resilient to cycles? 

Shruti Srivastava: Climate is still early in its journey, which is why some of the challenges of scale of other sectors have not yet come up. But founders have learned from experiences of the current downturn.

Newton said we stand on the shoulders of giants and what’s happening with the ecosystem today is that they’re all approaching climate as the next big problem to solve and following playbooks that have worked for other industries in the past.

Deal flow continues to be extremely robust. We evaluate more than 200 deals every quarter. We have recycling solutions, alternative materials, alternative processes for the chemicals industry and carbon emissions reduction and more. There is a lot that we see in battery chemistry, regenerative agriculture and carbon sequestration in nature and so much more.

What’s interesting in the current pipeline are the founders who have been part of the startup ecosystem for the last five to 10 years and have seen the zero-to-one journey before and even beyond that. They understand building systems at scale. They’re hungry with ambition, and they also understand what not to do.

Inc42: Monetisation has not been solved even in incumbent large sectors — what about an emerging sector like climate tech? 

Shruti Srivastava: Where climate tech is different from other sectors is that when there is a value capture or creation potential, these companies do not have to use discounted models to drive adoption. This is a real problem from a business continuity point of view unlike say a SaaS tool or any other B2B solution.

So, even in the final stages, we are seeing revenue grow because businesses are seeing climate change and sustainability as a problem. For example, FMCG players would readily pay for alternative, eco-conscious packaging because they have to look at reducing their own plastic footprint. The only caveat would be that it should be affordable, which is what we spoke about earlier.

Affordable innovation is going to be a central pillar of climate tech anyway. And we know that in India, the top layer of customers adopt western buying habits. Sustainable and climate friendly companies are breaking into this customer base and this adoption will fuel the drive towards affordability.

So, it really depends on the lever you are pulling for the consumer, how important that is for the consumer. Saying no to plastic is fairly widespread today, so now businesses have to look for a different lever to pull to drive adoption.

Inc42: How can startups commercialise grassroot innovations that can be scaled up to become robust climate tech platforms of the next few years? 

Shruti Srivastava: It will come down to affordability and cost. Startups can help with taking trends around climate action to scale. There are going to be several businesses or projects that will attract various kinds of climate capital  — venture capital is just one example.

There has to be a greater collective action to increase the capital avenues for climate solutions. It can be long-term debt, blended finance, outcome-based financing or even investments by capitalised startups to support grassroots innovation.

All of that is going to be required besides, of course, venture capital. It will take a village to propel climate tech innovation.