The world is running out of time to reverse the impact of climate change. If there’s one topic that brings nations as well as businesses together, it’s the need to fund emerging cleantech technologies.
India, which has committed to aggressive targets of installing 450 gigawatts of renewable energy by 2030 as part of its commitment to bring down the carbon footprint of the world’s sixth-largest economy, is not behind.
Just last month, the Centre announced a production-linked incentive (PLI) scheme for the automobile sector amounting to Rs 259.38 billion. The scheme incentivises the electric and hydrogen fuel cell vehicles.
Criticised for contributing to air pollution, the automobile sector is under pressure to innovate and deliver vehicles running on clean technology. But, the automobile sector is just one of the segments of the cleantech ecosystem. Other segments include solar, wind, agriculture, power efficiency, biofuels, among others.
How are these not-so-glamorous sectors placed in the overall scheme of things?
The volume and value of deals for cleantech start-ups have increased steadily with more funds now willing to make their bets on this sector. However, a closer look within the segment shows that the policy push and flow of funds has been skewed, favouring certain subsectors over the others. Is the trend likely to change?
Let’s begin with the positives. Things are getting better. Despite a temporary slowdown in 2020 as a result of the pandemic, 120 such start-ups raised $1.2 billion over the past five years, a report by the Impact Investors Council (IIC), Climate Collective and Arete Advisors has shown. The number of deals in the sector has jumped from 18 in 2016 to 58 in 2019, while the value has increased from $102 million in 2016 to $506 million in 2019. The year 2020, like for all other sectors, was an aberration due to the pandemic, causing the number of deals to drop to 48 and shrinking the investment value to $236 million. The dip mirrors a global trend with the International Energy Agency estimating that early-stage venture capital investment to support innovative energy technology firms stood at an estimated $3.1 billion globally in 2020—a 30% drop from 2019.
But, the support for cleantech start-ups is nothing compared to those operating in sectors such as edtech, or fintech in India that have many unicorns (start-ups valued at $1 billion or above).
Even within the impact investing segment, which looks at funding players in the environmental and social space, cleantech accounts for just 9% of the total investment flow in the past five years. Most deals were ‘early stage’ and of smaller sizes with 83% of the transactions being worth $5 million or lower. The long-term prospects of the sector look promising though, and climate tech in India is on “the cusp of disruptive growth”, the IIC-led report states. “A recovery in investments in 2021 is already being seen,” Ramraj Pai, CEO at IIC tells Outlook Business, with about 40 deals in the cleantech space already inked in the first six months.
A Sector Nobody Can Ignore
A major factor behind the rise in investments has been a policy push at both the national and international level towards transitioning to cleaner forms of energy. India has already announced several policies to aid the transition. A big driver of investments in the cleantech space has also been international funds and grants flowing into clean energy, energy transition and climate change. For instance, the Asian Development Bank’s new arm, ADB Ventures, which invests in early-stage technology companies, announced funding in two India-based start-ups—electric vehicle manufacturer Euler Motors and energy efficiency-as-a-service provider Smart Joules—earlier this year. However, funding from venture capital has been less prominent.
Arjun P. Gupta, founder of Smart Joules, tells Outlook Business that back in 2014, he had struggled with getting funding or even grant money in India when the start-up was founded. As a result, he was forced to identify sources overseas. “They have existential anxiety which has forced them to create grants and other funding for entrepreneurs like me,” Gupta says, laughing. Gupta decided to rely on such grants, own a pool of capital and debt capital from Tata Cleantech Capital for their initial projects. “We never had a seed round and went straight to getting Series A funding,” he points out. A key struggle was to reduce the period of returns and give predictable outcomes.
“Solar, as a technology, has been around forever but performance and returns-related inhibitions still persist. Energy efficiency is ten times more complicated and it is very difficult to predict how much will be saved. Hence, VCs are reluctant to make an upfront investment with uncertain outcomes,” Gupta says.
As a result, Gupta aimed to reduce the payback period to two years as compared to four-plus years for solar. He went out to companies and explained his model in simple terms: A guaranteed 15-20% decrease in energy consumption. “We told them that if you’ve been paying Rs. 100 for your energy bills, now you will be paying Rs. 90.”
Gupta’s experience is part of a broader trend. Nearly 90% of the cleantech entrepreneurs surveyed in the IIC study highlighted that a “lack of patient risk capital” was one of the key challenges that they were facing in securing funds. Almost 45% of the entrepreneurs surveyed also shared that the challenges around funding were worsened by “stringent return expectations”. On the other side of the table, there are perception issues as well.
“The general perception by general partners is that the risk-return profile of deep-tech climate start-ups is not well suited for venture capital, given that climate-tech solutions need deep R&D and long timelines for commercialisation—and this is compounded by the fact that there have been relatively few successful exits in this space,” the report says.
But have things changed in the last few years? “Most definitely yes,” Gupta replies. “There’s a drastic change between where it was in 2014 and where it is now. Earlier, if there were 10 names in the cleantech space, today you can name 500. There is also a 50x increase in supply side for climate tech funding.” There are now larger sums of money available and more names to go to. Also, funds that had earlier expressed their disinterest, even five years ago, now want to invest in cleantech.
Sangam Ventures is one such seed and early-stage venture fund that invests to improve access to sustainable energy and resource productivity solutions. So far, it has invested in six cleantech start-ups, including Smart Joules. Sangam also runs India's first and only dedicated cleantech incubator and has assisted more than 30 start-ups till date to become investment-ready.
An Unequal Playing Field
Despite the increasing flow of funds, not everyone has it easy. In fact, some subsegments have fared significantly better than the others. Owing to the buzzing interest in electric vehicles, sustainable mobility has seen the highest level of investments with 84 deals worth $705 million going its way in the last five years. The sector continues to draw significant investor interest, with two-wheeler EV manufacturers such as Ather Energy and Ola Electric leading the way. The government push is also tilted towards clean mobility. The recent PLI scheme for the automobile sector is the case in point. In November, Hero MotoCorp-backed Ather Energy raised $35 million in a funding round led by Flipkart co-founder Sachin Bansal, while ride-hailing giant Ola’s EV arm ‘Ola Electric’ is reportedly eyeing to raise $1 billion to scale operations.
Throwing light on the incentives for the segment, Hetal Gandhi, director at CRISIL, says that there is a three-level push happening in EVs.
Firstly, the Central government is pushing for localisation of components and batteries via the PLI scheme. The scheme is set to trigger a capex of Rs 875 billion by fiscal 2025 supported by incentives of a whopping Rs 440 billion, according to CRISIL estimates. This would, in turn, attract investments in linked start-ups and more. The second leg focuses on the Central government providing purchase incentives to customers via subsidies and the third leg is where state governments are announcing additional investment-linked bonuses. “A combination of these three is set to favour EVs,” says Gandhi. She adds that in tandem with the growth of investments in EVs, fuel cell and hydrogen-based technologies will also drive incremental clean investments over the next five years.
Apart from the skewed policy push, venture capital firms are also taking a cautious approach. Even under sustainable mobility, a greater part of the funds is flowing towards the two-wheeler and three-wheeler segments where the demand is higher in India.
“VCs are now following LP interest and what is now looking inevitable like EVs. However, they are still just playing at the edges and focusing on two-wheelers and three-wheelers,” says Karthik Chandrasekar, founder of Sangam Ventures.
Pai of IIC, however, hints at the “hierarchy” of investment continuing despite subsegments such as climate-friendly agriculture tech, pollution control and purification, water management and biofuels tapping investor interest in the next few years. Kalpesh Gada, senior advisor at IIC, adds that this reflects the direction of the government policy push. “In the larger sense, there is a government realisation that policy push is needed at various places. However, this push is more visible in energy and mobility,” he says.
Gupta of Smart Joules says segments such as energy efficiency have been getting a “stepchild treatment”. “For EVs, hydrogen and renewable energy, the government has given out clear and bold statements, clearly articulating the goals. That leads to investments from big industrialists such as Mukesh Ambani and Gautam Adani. However, for energy efficiency, that is missing.” What is the reason behind that? “Energy efficiency is more difficult to understand, and thus, more difficult to sell,” he replies.
However, Sangam Ventures’ Chandrasekar is more optimistic. “The prospects for energy efficiency are huge in India. The performance of start-ups such as Smart Joules and Promethean Energy, which have generated considerable returns for customers and investors, has added to the confidence,” he says.
“At Sangam, we’ve been building a thesis on how to do cleantech right for the past four to five years and building businesses from the ground up that are now ready to absorb capital and demonstrate scale in underinvested sectors like energy efficiency and biogas,” Chandrasekar adds
The plan, it seems, is to keep going.