Green Horizons: Navigating The Role Of Venture Capital In Fueling India’s Climate Tech Landscape

In recent years, India has displayed great seriousness about climate change impact and many initiatives have been launched to steadily convert the industries that generate maximum emissions into eco-friendly sectors. 

The country has already pledged to achieve net-zero emissions by 2070, and this transformation is critical to progress toward that goal. However, the biggest area of concern for the development of the Indian climate tech industry is access to finance. 

The Government of India has taken some steps to make funds available in the form of loans and subsidies to promote climate tech in the country, but the allocations can’t adequately serve all needs without the private sector’s involvement. 

According to the United Nations Framework Convention on Climate Change (UNFCCC), any local, national, or international financing from the public and private sectors aimed towards mitigation of climate change risks is to be regarded as ‘climate financing.’ 

This definition holds great importance for India as we have so far lagged in terms of the ‘green funds’, and financial commitments from corporates toward the development of clean tech. 

Why VCs Need To Play A Greater Role

The funding shortage is not due to a lack of structural maturity of the financial sector in India, but mostly due to the orientation of the funds available. The bulk of the capital in the market is consumed by large-scale enterprises, and companies in highly lucrative sectors such as technology, retail, etc. 

On the other hand, the climate tech sector has a longer gestation period. Startups in this arena need funds to fine-tune their prototypes and concepts to make them scalable and sellable products and services. 

There is a need for greater capital intensity and in most areas, climate tech startups also need to deal with government regulations and certifications while building their business models. Compared to say software ventures, climate startups often struggle to secure enough funding to overcome the “valley of death” between basic research and commercialization. 

The climate tech startups face unique risks to their runway include changing procurement and facility costs and supply chain reliability, all of which worsen their risk profile particularly especially in the absence of a clear path to market and profitability.

VCs Need A Strategic Rethink On Climate Tech

Investments in the climate sector struggle to deliver ROI due to limited investor understanding. In India, there is a lack of deep comprehension compared to the US and Europe, which have advanced climate tech ecosystems. 

Climatetech startups don’t always offer patented technology; they leverage existing ideas to create solutions. It involves ideation, prototyping, testing, refining, and scaling, with iterations and potential pivots. 

This process takes time, with startups typically requiring at least 1000 days to achieve product-market fit and generate revenue. Knowledge asymmetry goes both ways as the scientists, engineers, mathematicians, and other technical specialists responsible for pioneering climate tech advancements often possess limited experience in the realm of finance. 

This makes it imperative for potential funders to also provide knowledge and social capital in addition to financial capital.

Understanding Various Segments Of Climate Tech

Climate tech encompasses different segments like hardware, deep tech, EVs, and renewable energy. In hardware and deep tech, founders with technical expertise can present tangible products clearly to investors, making it easier to demonstrate value. 

However, the transition to EVs will take considerable time, as they currently represent a small fraction of the overall vehicle market. Developing EVs involves various components like powertrains, batteries, software, and data analytics, requiring a deep understanding of EV technology and digital twins concepts. 

In such challenging scenarios, startup founders must demonstrate patience, perseverance, vision clarity, and belief in their solutions. While some investors may struggle to grasp the vision or market potential, founders should remain resilient.

Current Scenario Of VC Funding In Climate Tech

So far, these considerations have implied that investments in the climate tech sector remain mostly confined to early stage and pre-seed companies, and the startups that need funds for the growth stage remain unserved. 

Even when investors see merit in such businesses, they are usually deterred by the scale of investments needed since most climate-tech companies require more capital than an average early stage startup. 

Even among the companies that get early-stage funding in the climate tech arena, the majority are in the EV and renewable energy segments. This has resulted in there being massive unserved demand for the development of other technologies and equipment such as energy efficiency, clean manufacturing, agriculture, waste management, etc. 

The capital intensity of climate startups makes them more sensitive to funding cycles, seeing much larger and longer troughs in access to capital. As general tech VCs realign their portfolios to reduce risk, climate tech startups, particularly ones that need to set up manufacturing units for hardware or say biofuels, would struggle the hardest to raise money. 

Even VCs that maintain a climate tech thesis could switch focus to software-based and capital-light business models. A similar trend was observed in the first cleantech bust, where funding to build demonstration plants and factories evaporated. 

In Conclusion

India has incredible potential for climate tech development, and the country can also emerge as a leading light in the global quest for sustainability and zero-emission living. 

VC firms are providing funds, expertise, and network support, and enabling startups across all aspects of the climate-tech sector to evolve. 

The right combination of investment, guidance, innovation, and policy support from the government will undoubtedly lead India toward a sustainable and prosperous future!

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