VCs’ Growing Interest In Climate Tech Startups

In 2017, a video of a starving polar bear on its deathbed, shot by National Geographic photographer Paul Nicklen, sent shockwaves across the world. A viewer famously called it the “face of climate change”. 

Five years since then, the situation has only worsened. Air and water quality has deteriorated, the list of species facing the threat of extinction has gotten lengthier, and ice caps are continuing to melt. 

Growing concerns around climate change have led to the launch of several climate tech companies around the world, which is well supported by enthusiastic funding from venture capitalists. In the past five years, 120 of these companies have raised more than 200 funding rounds from 272 investors in India alone. According to the data from Tracxn, as of September 2022, USD 1.4 billion has already been invested in such companies. In fact, there has been a steady increase in investment in this space since 2019, with the exception of 2020 when climate tech startups received a total of USD 375.5 million. The amount invested in this domain in 2021 was USD 836.7 million.

It’s global!

At the turn of this century, climate tech started receiving much attention. A lot of venture capitalists started funds specifically for this sector. But suddenly, there was a lull when the market turned bad. Seems like now is the sector’s time in the sunshine again, with another boom in climate tech investment on the horizon. As per Pitchbook’s study, investors predict that climate tech is poised to be the biggest disruptor in the next five to ten years—ranked only after fintech and artificial intelligence. In particular, investment in early stage ventures is strong because there is a solid business case for climate innovation.

Venture capital investment in climate tech companies has boomed since the Paris Agreement. The report ‘Five Years On: Global climate tech investment trends since the Paris Agreement’, by London & Partners and Dealroom.Co, showed that US and China are leading the race with USD 48 billion and USD 18.6 billion investments in climate tech respectively, between 2016 and 2021. Europe, on the other hand, was found to be the fastest-growing region globally—the European VC investment in this field was seven times higher in 2021 compared to 2016. India was ranked ninth on this list.

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India’s turn

Prime Minister Narendra Modi pledged at the Conference of the Parties 26 (COP26) that India will attain zero emissions by 2070.

Supporting this vision is India Inc., which is aggressively innovating to resolve complex climate challenges through renewable energy sources, agritech, and software. Several new businesses working in the climate tech sector have mushroomed in the last few years. “Climate action and sustainability are emerging as the next big mega trend, with significant global capital coming into the space. We are seeing exceptional founders now working to solve global Climate,” said Anjali Bansal, Founder of Avaana Capital in the latest release. Avaana Climate and Sustainability Fund is an early-stage climate-tech investor in India. This VC firm invests in thematic areas of Energy and Resource Management, Mobility and Supply Chains, and Sustainable Agriculture and Food Systems.

The bulk of the investments in the climate tech sector has been towards EVs and clean energy. In fact, since 2016, sustainable mobility has gathered an investment of USD 705 million across 84 deals; the energy sector has gained USD 301 million across 44 deals. Ola Electric became the only green tech Unicorn from India when it raised USD 131 million in a Series C funding round in September 2021. 

(Credit: Crunchbase)

This could be because both sustainable mobility and clean energy are mature domains and stand a greater chance of benefiting from favourable regulations and easy-to-assess impact metrics. Going forward, other sub-sectors like climate-smart agriculture, carbon capture and storage, and plastic and waste management will begin to gain further traction.

Adding to that, Swapnil Shrivastav, the Co-founder of Uravu Labs, told Analytics India Magazine, “There have been significant changes in perception and policy during the past decade. VCs’ interest in climate tech startups continues to rise with growing market opportunities for new and existing technologies. VCs are raising large funds focused on the climate tech sector and new pools of capital are also emerging, which allow climate tech companies to focus on technological development, financing, and commercialisation”. Uravu Labs is a Bangalore-headquartered startup that develops 100% renewable water solutions. He further added, “As we move ahead with technology, not only do we need lower carbon emissions but also look at resource management when it comes to domains like food, water, and waste”.

Required intervention

Experts believe that startups tackling niche challenges could benefit from customised support, especially in the early stages of prototyping, testing, and product commercialisation. Given the complexity of this business, investors could make available relevant technical expertise or portfolio management of climate tech startups.

The government could introduce policies which nudge customers to opt for green products by subsidising ‘green premium’ on them. The government could also direct fiscal investments. Setting up dedicated centres of excellence could also be favourable.