This Is Where Climate Tech Meets Global Venture Capital

On Sep 29, 2022

One of the world’s biggest greenhouse gas emitters is trying to clean up. Global venture capitalists looking to put their money to work should keep an eye on it.

Drive through the streets of New Delhi and its surrounds and the Indian capital is abuzz with activity. Rusty metal signs that tout “Electric Charging” stand out, along with stations that power electric two-and-three wheelers. Startups building technology to drive greening and sustainability are hustling for funding.

Corporate activity is chugging along, while capital expenditure has risen sharply in recent months and rail freight volumes have reached record highs. India’s biggest companies — including the likes of Wipro Ltd., UltraTech Cement Ltd. and Reliance Industries — are increasingly talking to their shareholders about sustainability. Private capital is looking to back climate change-related technology, too: Of the almost $27 billion of such investments globally in the first half of this year, close to $2 billion went to India’s firms.

Impressive, but a few billion dollars is hardly enough — and weary global venture capitalists looking for green investments are missing from the picture. Billions more are needed to help steer these firms forward to eventually meet emissions targets. Tightening financial conditions don’t help, but the bigger the challenge for India is overcoming usual skepticism over its dysfunctional politics, creaking infrastructure and red tape.

What’s underappreciated, however, is all this climate-friendly activity isn’t solely being driven by multibillion dollar subsidies. Those measures, while moving in the right direction, haven’t been a massive inducement on their own. In several sectors, policies are still in draft stages. India’s conviction to go green stands in stark contrast to how such shifts have transpired elsewhere in the world. In China, carrot-and-stick policies and subsidies were rolled out to push entrepreneurs, industries and firms to get on board. Even in the US, tax credits and incentives have been the drivers of change.

The country’s post-Covid resurgence has been backed by better roads and infrastructure, and a manufacturing turnaround. Big checks have gone toward mainstream areas. KKR & Co. launched an Indian roads infrastructure investment trust and is also putting in $450 million in Hero Future Energies Pvt., an independent power producer with a portfolio of solar and wind projects, alongside motorcycle maker Hero Group. Brookfield Asset Management Inc. is investing more than $2 billion into renewable energy projects, which have tripled capacity to 110 gigawatts from 39 gigawatts in 2015. Once-encumbered banks are back to funding the power sector. Even Amazon.com Inc. announced plans to set up a solar farm in the western state of Rajasthan.

Mobility and transportation have drawn much of the early-stage investment so far, which makes sense: The sector accounts for over 10% of India’s emissions. As thousands of miles of highways are being built, nascent electric-vehicle-charging-station firms are cropping up along with those making batteries and EVs. To fund electrification, the government is working with the World Bank to put in place an instrument to cut risk in financing EVs. Banks are offering green car loans, while non-banking financial institutions are extending credit, too.

The economic case for going electric is real, as the large-scale adoption of two- and three-wheeler EVs and e-buses shows, Road Transport and Highways Minister Nitin Gadkari told me in an interview. They’re bringing down the cost of commuting. India’s market for climate-tech solutions isn’t just a massive technology shift, but an affordable energy transition.

The other crucial ingredient: The entrepreneurs — many from the nation’s best universities like the Indian Institute of Technology — are founding firms working on projects from battery swapping and EV chargers to carbon accounting, as well as new ways to boost agricultural efficiency and raising consumers’ green awareness. As one investor told me, these founders are putting not just their capital, but their time, energy and conviction behind these startups. They could have probably had their pick of jobs in Silicon Valley. Instead, they’ve chosen to tap this opportunity to help solve the energy transition dilemma in India.

Anjali Bansal runs Avaana Capital, India’s first and largest climate-tech venture capital fund, and looks at hundreds of deals every quarter. She says: “This is only the beginning.” Sustainability, much like the digital revolution was, will be the next big sea change “and thus a large and attractive opportunity to invest in technology for global green solutions.” As the country grows and energy consumption rises, she says there’s a recognition “we have so much building to do — we can do it right, right from the start.”

While early-stage investing around climate tech is gathering momentum, there’s still a paucity of domestic venture capital for the later stages, when working capital needs to rise: the missing middle. This is forcing entrepreneurs to be realistic about their companies’ value now and proactive about crowding in global capital for future fundraising.

Meanwhile, climate tech is different compared to, say, more traditional tech investing. The former won’t just include asset-light software solutions but also investment in manufacturing, hardware, and research and development for product innovation. That means global venture funds will have to adapt if they want in on the energy transition, especially when it comes to gestation periods and exit timing, as climate-tech fund Theia Ventures’ Priya Shah says.

For now, climate-tech investors can still come in at reasonable valuations, or with relatively small ticket sizes given the early stages. Global VCs sitting on the sidelines should take note: Rather than wait for the herd and pumped-up multiples, this may be the time and place to put their dry powder to work.