Climate tech startups seem to have caught the eye of investors, thanks to the increased push towards green and clean technology with individuals as well as large corporations looking for ways to minimize their carbon emissions.
Barring 2020, climate tech startups have seen a steady increase in capital infusion. In 2019, $615.6 million was deployed in the space. The amount fell to $375.9 million in 2020, but more than doubled to $836.7 million in 2021. So far in 2022, $1.4 billion has already been invested in the space, according to data from Tracxn.
There are currently 2,165 companies in the space, ranging from electric vehicles to battery manufacturing and swapping to firms helping corporates and individuals keep an account of their carbon footprint.
Of these, nearly two-thirds or 1,403 remain unfunded, while only 503 startups have received external capital. 179 have shut shop and eight have managed to go public. The space mainly has EV-related businesses, the data showed.
“Startups in the climate and sustainability space are going to be as important as e-commerce. Worsening weather conditions across the globe are leading to more companies coming up in the space. Climate tech is a key sector for us and we’ll be backing around four more companies by investing about $10 million in them over the next 12-18 months,” Anup Jain, managing partner, Orios Venture Partners, said.
“While a bulk of the investments have been made in EVs and batteries so far, going forward we’re interested in plastic and waste recycling and startups in the whole space of carbon credits since large corporates will be forced to buy carbon credits in order to become carbon neutral going forward,” he added.
Larger VCs said the demand in the space is being propelled by India’s promise to cut its emissions to net zero by 2070. Large corporates are already hopping onto the bandwagon. Earlier this week, FMCG major Hindustan Unilever (HUL) said it would give grants and equity funding of up to Rs 1.6 crore each to five startups working on plastic waste management.
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“Initially, the fact that we need to do something about climate change came from consumers, but increasingly enterprises and governments are becoming super aware of it too. Climate tech is also largely an unsolved category — it’s a brand new problem to solve, companies haven’t done it in the past. We’re very positive about the space. Our investment last month was definitely the first of many, we’re loving it and looking to partner with more climate-tech founders,” Rahul Taneja, partner at Lightspeed, said.
Since the space is fairly unexplored, climate tech startups have their share of hurdles to overcome.
“Adoption may be the single biggest risk and something that companies need to carefully think through. All companies in climate tech will face some level of adoption risk. This refers to how quickly the market will develop. An example of this is voluntary carbon markets. If you look at the McKinsey projections for the size of the global voluntary carbon markets, it could range from $5 billion to $50 billion over the next decade. At $50 billion there’s a potential for many interesting companies, whereas at $5 billion, the opportunity set would be limited,” Rajan Anandan, managing director, Sequoia India and Southeast Asia, said.
“Some startups may face technology risk – for example for those building new battery tech. Then there are the regulatory risks — for example for companies that are focused on carbon markets,” he added.
Climes, a startup founded by Anirudh Gupta and Siddhanth Jayaram, and backed by Sequoia India and Kalaari Capital, helps consumers offset their carbon emissions by selling climes — a unit it uses to negate a consumer’s carbon emission. Consumers can in turn use these units to fund green projects like forest conservation. It has so far sold 3.7 lakh climates and is hopeful of selling a billion over the coming years.
However, while VCs may continue to back climate tech startups to develop the technology in the initial stages, once a business requires heavy capital expenditure to set up factories, plants and machinery to scale, they may not show the same level of enthusiasm.
“Climate tech founders are in a dilemma regarding the kind of financing they need to raise — venture capital may not be the best option. Venture capital is for high-growth businesses that are asset-light. Capex involvement is done more by private equity players and public markets who are seeking benchmark, normal returns. So, startups will need to find people who can invest in the capex side of things while founders can raise venture capital for the software side of things,” Orios’ Jain concluded.
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