Intersection Between Climate Technology and Global Venture Capital

Attempts are being made to reduce emissions from one of the world’s largest sources of greenhouse gases. Investors in the global venture capital industry should keep an eye on it.
The streets of the Indian capital, New Delhi, and its environs, are always busy with people going to and from their many destinations. Stations to charge electric two- and three-wheelers stand out, coupled with rusty metal signs advertising “Electric Charging.” Startups developing technologies to promote environmental sustainability are actively seeking investment.
Business is humming nicely, with capital expenditures and rail freight volumes both at all-time highs in recent months. Many of India’s largest corporations are having sustainability-related shareholder meetings, including Wipro Ltd., UltraTech Cement Ltd., and Reliance Industries. In addition to government funding, private investors are eyeing climate change technology. Nearly $2 billion of the nearly $27 billion invested around the world in the first half of this year went to businesses in India.

A few billion dollars isn’t nearly enough, and weary global venture capitalists looking for green ventures aren’t included. Helping these companies reach their carbon goals will cost billions more. Although worsening economic conditions are a hindrance, India has an even greater obstacle in dispelling the widespread mistrust that has built up because of the country’s dysfunctional politics, aging infrastructure, and cumbersome bureaucracy.

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What is often overlooked, though, is that billion-dollar subsidies are not the only thing driving all this climate-friendly action. These improvements are a step in the right direction, but they haven’t generated much interest yet. Plans are still in the early phases of development in a number of fields. The green movement in India is a sharp contrast to similar movements in other parts of the world.

China’s government has used subsidies and other incentives to coerce startups, industries, and established businesses into joining the program. Change has been pushed forward in the United States, too, by means of tax credits and incentives.

Improvements in transportation and infrastructure, as well as a rise in manufacturing, have contributed to the country’s success since Covid. The most significant financial support has been allocated to conventional fields. The motorbike manufacturer Hero Group and the investment firm KKR & Co. are investing $450 million in the independent electricity generator Hero Future Energies Pvt.

The renewable energy projects funded by Brookfield Asset Management Inc.’s over $2 billion in investment have increased their capacity from 39 gigawatts in 2015 to 110 gigawatts in 2018. Once-shackled banks are once again providing capital for the energy industry. A solar farm is being built in the western Indian state of Rajasthan, and even Inc. is getting in on the action.

It makes sense that early-stage funding has largely focused on mobility and transportation. About 10% of India’s carbon footprint is attributable to this industry. A new industry of charging stations for electric vehicles is emerging alongside manufacturers of batteries and EVs as thousands of kilometers of motorways are constructed.

The government is collaborating with the World Bank to implement an instrument that would reduce the risk associated with financing electric vehicles in order to pay for electrification. Green auto loans are now available from a variety of financial institutions, including traditional banks and credit unions.

Road Transport and Highways Minister Nitin Gadkari told me in an interview that the widespread adoption of two- and three-wheeler electric vehicles and e-buses proves the economic rationale for going electric. They are reducing the expense of getting to work. The climate technology business in India represents not just a significant increase in technological sophistication but also a relatively inexpensive change in the country’s energy infrastructure.

Importantly, many graduates of the country’s top universities, such as the Indian Institute of Technology, are starting businesses that are developing innovative solutions to environmental problems, such as carbon accounting and electric vehicle charging infrastructure, and new methods to increase agricultural productivity and educate consumers about environmental issues.

One investor told me that the founders are putting more than just money into their businesses; they are also investing time, effort, and belief. In Silicon Valley, they would have been able to pick and choose from the many available job opportunities. Instead, they’ve decided to take advantage of this opening to aid in the resolution of India’s energy transition problem.

Anjali Bansal reviews hundreds of agreements every quarter as the head of Avana Capital, India’s largest climate-tech venture capital fund. When asked about it, she only answers, “This is simply the beginning.” Like the information technology (IT) revolution, the sustainability revolution will bring “a substantial and appealing opportunity to invest in technology for global green solutions.” She notes that “we have so much building to do — we can do it well, right from the start” as the country develops and energy usage rises.

While there has been a recent uptick in early-stage investments in climate-related technologies, there is a dearth of domestic venture capital for the latter phases, when working cash needs to increase. Business owners are being compelled to take a sobering look at the current value of their firms and to actively seek out global finance in preparation for future fundraising.

Meanwhile, investing in climate technology looks different from, say, investing in traditional technologies. The former will consist of product innovation-focused investments in manufacturing, hardware, and R&D, in addition to asset-light software solutions. Priya Shah a partner at the climate-tech fund Theia Ventures, explains that this implies global venture firms will need to change their strategies in order to participate in the energy transition.

At this early stage, investors in climate tech can still get in at reasonable valuations or with tiny ticket sizes. Attention all idle global VCs: now may be the moment and place to put your dry powder to work, rather than waiting for the herd and inflated multiples.

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