Investors are ready to invest in Indian climate startups

VC investors have made climate startups more attractive, although many founders remain unsure of how to raise capital. Why are climate startups becoming so popular?

Mainstream climate technologies pose little risk to the market and are generally well-suited for VC investors. They seek to invest in companies that have large growth potential that could grow multifold over the next 6-7 years. Certain climate sub-sectors are beginning to offer these opportunities even though technology and market acceptance risk have been addressed. India is a major market for renewable energy. In fact, its solar energy production is set to quadruple between 2030 and 2030. The government also supports local production of components, such as solar cells and solar models. As such, solar doesn’t carry any technology or market acceptance risk and solar startups resemble any other tech-startup for an investor.

Similar to electric vehicles (EV), adoption is expected grow rapidly over two decades. India is home to a large auto industry, which is eager to invest new technologies. To reduce the cost of owning an EV, the government has policies that encourage the development of charging infrastructure. This sector is seeing a rise in VC investments. These investments span the entire value chain: from battery recycling to charging infrastructure and financing to component manufacturing. McKinsey reports that the price of hydrogen will fall more than 60%, from $5 per kg currently to $0 by 2050. This would lead to the mainstreaming and adoption of related industries like green methanol (shipping gas), ammonia, fo fertilizers, and electrification long-distance transporting. Many of these new technologies will be more affordable and therefore easier to adopt.

The deep-tech investor club for non-mainstream technology is growing. Historically, very few global VC companies, such as Khosla Ventures have invested in nonmainstream technologies. Climate tech investing has grown in the past decade with many funds that are focused on deep tech, such as Energy Impact Partners or Fifty Years. This trend is accelerating with niche climate funds that focus on climate technologies for specific sectors (such as Propeller’s $100 million seed fund with a focus on the ocean, and Lowercarbon Capital’s $250 million fund for nuclear fusion startups). Many of these global funds also invest in India. Lowercarbon Capital recently invested in River, an Indian EV maker, Union Square Ventures invested in Rev (a charging infrastructure provider) and Better Bite Ventures (a Singapore-based fund for alternative protein) invested in Phyx44 which produces dairy products by fermentation.

Blue Ashva and Speciale Invest, two Indian VC firms, have made investments in startups that are early-staged in the deep tech climate. For mutual benefit, corporates may also invest in or partner with deep tech startups.

Willingness to Pay for Climate Solutions: Until a few years back, industries couldn’t afford to purchase water because there was no limit on the amount of groundwater that could be used. Zero Water Day, a celebration in Chennai that celebrated water sustainability, changed everything. Now, all consumers (especially industrial), are willing to pay water supply costs. This has benefited water conservation startups like Boson Water. Boson Water transforms water from apartments into useful water for industries, and has seen demand increase.

Similar to the rise in fossil fuel prices, many large corporations are now using biofuels to meet their energy needs. Numerous startups are offering integrated solutions to large companies as a result of the disaggregation in biofuel supply. In 2021, two such start-ups, Biofuel Circle and Buyofuel, raised seed rounds.

So how can founders approach capital fundraising? There are many funding options for climate startups that raise less than $1 million. These include traditional VC funds, angel funds, climate/impact funds and family offices.

The funding options for climate startups seeking capital in non-EV areas are limited. They are typically led by impact investors. Impact investors invest in companies whose mission aligns with their fund objectives. A fund that focuses on energy access to marginal customers will be more interested in startups that serve these consumers or use them in their value-chain. A deep tech investor will not be interested in startups that work on mainstream technologies like solar energy and biofuels.

Therefore, climate startup founders should: 1) work out how their proposition fits into the impact fund’s objectives; 2) prioritize pitching to lead investors over seed investors in the early days of fund raising; and 3) explore strategic partnerships with corporates that either have net-zero commitments and/or could benefit in other ways from what their startups have on offer.

Bharti Krishnan & Krishnan Srinivasan are co-founders of FineTrain, an advisory firm for green businesses.