Climatetech: An Idea Whose Time Has Come
Whatever their reasoning, industry stakeholders across the board agree on one thing: the climatetech sector will be as large as e-commerce in the next 10 years
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It was during the mid-18th century that a new chapter in world history began. The discovery of fossil fuels such as coal, oil and natural gas ushered in great innovations, mechanising manufacturing processes and opening up new business opportunities as factories sprung up across Great Britain.
Almost three centuries on and several environmental crises later, the rise of a new fuel (so to say)—climate technologies—is expected to make the world go round, powering its electric vehicles, green homes and decarbonised industries as governments race to actualise their global climate commitments. Once again, a new business opportunity is on the horizon. What and how big is it?
The What and Why of Climatetech
A plethora of seemingly synonymous terms exists today to describe business ventures built with a focus on environmental sustainability: greentech, cleantech, low carbon-tech, climatetech, and so on go the categorisations.
Tracing the etymology of these nomenclatures reframes the humanitarian cause of sustainability in terms of the concerns of commerce and industry: According to a blog by Neal Dikeman, a partner at environmental technology-focussed merchant bank Jane Capital Partners, the word 'cleantech' originally meant cleaning supplies equipment. From 2002 onwards, the term came to refer to a popular investment asset class and technology category as venture capital investors' interest gravitated to the new tech fad of green and clean technologies such as renewable energy and biofuels following the collapse of the dot-com bubble in the previous year. By 2005, 'greentech' was also being applied as an alternative for cleantech.
"Between 2006 and 2011, the field of 'cleantech' underwent one of the worst boom-and-bust cycles in the history of technology investing. During these years, venture capitalists plowed over $25 billion into cleantech startups and lost over half their money. More than 90 per cent of the cleantech startups funded in this period did not even return the money invested in them," notes Rob Toews, partner, Radical Ventures, in a column in Forbes. As a result of these losses, venture capitalists turned away from cleantech investing for almost a decade.
They would only reconsider the prospect with renewed vigour in the wake of growing climate disasters, including historic wildfires in California in 2020, severe heat waves in Europe in 2021 and devastating floods in Australia in 2022, as well as landmark climate conferences, such as UN's COP (Conference of Parties) meetings and the WEF (World Economic Forum) summits in the last three to four years, all of which were underscored by the ever-expanding youth movement for climate protection led by the likes of Swedish activist Greta Thunberg and an unprecedented global pandemic. At COP26 in November 2021, India pledged to reach net zero carbon emissions by 2070, setting the stage for the country's researchers, engineers, entrepreneurs and investors to focus on developing clean technologies and decarbonising overall commercial activities.
Consequently, climatetech funding in India increased by nine times from $400 million in 2021 to $3.7 billion in 2022, according to research and analytics firm HolonIq's estimates. A recent Deloitte study further points out that limiting rising global temperatures and exporting climate solutions account for a $11 trillion opportunity for India. As per growing consensus, the resurgence of 'climatetech' investments across the world, including India, is part of a new era in the same sector of clean technologies—ClimateTech 2.0, if you will.
"Climatetech today encompasses more than cleantech did in the 2010s...ClimateTech 2.0 builds on top of the advancements in clean energy made over the last decade, encompassing solutions that support sectors as diverse as consumer, agriculture, manufacturing, maritime shipping, transportation, and construction," explains a blog by San Francisco-based VC firm Bessemer Venture Partners.
Climatetech Startups: More than EVs and Renewables
Still in its nascent stage, the Indian climatetech sector has become largely recognisable for the ongoing innovations in electric vehicles and renewable energy technologies, courtesy the rise of a multitude of players (such as Ather Energy, BluSmart, SUN Mobility and Log9 Materials) that includes green unicorns (a rarity!) Ola Electric and ReNew Power.
But the climatetech ecosystem spans across several other sectors: for instance, Husk Power Systems builds bio-mass-based rural micro-grids in Bihar; D2C brand Neeman's makes eco-friendly footwear; Bengaluru-based String Bio develops synthetic biotechnology solutions for waste carbon recycling; Aerem provides online solar rooftop financing solutions; and so on. How do these climatetech companies make money? Are they as lucrative from a monetary standpoint as other tech businesses?
Vivek Pandey, the co-founder of Pune-based Ecozen, is quite bullish on the subject and believes that the market for the startup's climate-smart deeptech solutions is set to rise to $25 billion by 2025 in India. "Through our deeptech expertise in motor controls, IoT, and energy storage, we are transforming cold chains (through the Ecofrost product line) and the irrigation industry (through its Ecotron product line), improving the incomes of over 120,000 farmers and helping decarbonize agriculture," he explains, claiming that the company is profitable at the EBITDA level and is currently growing at a CAGR of over a 100 per cent.
Noida-based electronic waste recycling company Attero Recycling has been profitable for the last three years and is currently planning an initial public offering in 2025, states co-founder and CEO Nitin Gupta. "We are able to extract metals from lithium-ion battery waste with 99 per cent efficiency," he says, adding that the company plans to become a supplier for battery metals in the next seven years. Attero further aims to have revenue worth $2 billion in the next five years by way of expanding business in the lithium-ion battery segment, as per media reports.
The Helping Hand of Venture Capital
While climatetech entrepreneurs and investors are evidently rather optimistic about the sector's general prospects, the subject of funding draws in diverse reactions. A large majority of the startups in this space are currently bootstrapped, and of those that have received funding, an overwhelming number is at the pre-seed or seed stages. What will it take to build green unicorns in India, you might wonder! The fact remains that the Indian climatetech sector is in its infancy: while the likes of Gupta and Pandey report having experienced a seamless fundraising process with good interest from the investor community (Attero and Ecozen have both raised Series C rounds), many startups also encounter hiccups along the way as they set out to secure capital.
"In the initial days, as a hardware technology company in the climate-tech space, it's quite challenging to get funding. There is good technology risk at this stage. To mitigate this, we had to explore alternative funding sources such as government grants, competitions, and support from international agencies for technology development. We were able to secure around $100,000 to 120,000 in funding through such sources and using these funds we proved our technology and developed functioning prototypes, which made it easier to secure funding from VCs and other institutional investors," explains Pardeep Garg, co-founder, Uravu Labs, which is working to develop renewable water infrastructure.
According to Garg, climate tech startups have a long gestation period and need more capital in the early stages before commercial businesses can be established and scaled. Payoffs in these ventures take many years, so it is hard to convince investors of huge returns in the near future. "After the initial pilot orders, startups need to get traction and then meet the demands of the market which is also quite different and no playbooks exist as we see in the tech space," adds Garg.
Investor interest is sometimes also hindered by the fact that many climatetech startups are not consumer-facing businesses. Usually, they operate as B2B or B2B2C because businesses, corporates and governments are key customers who can bear the 'green premium' of new innovations. These challenges, however, might be temporary given the dynamism of the ever-expanding sector itself. With the Indian government's push on sustainability, the focus on climate investing is increasing every day. "SEBI has indicated ESG reporting for top listed companies in the country. Further, most LPs of growth and even early-stage funds today have a greater focus on ESG deliverables. E in ESG is clearly climate change driven in its impact," states Anup Jain, managing partner, Orios Venture Partners.
"All funds are actually mindful of their carbon footprint and carbon mitigation when making investments," adds Jain. Orios VP, a Mumbai-based early-stage sector-agnostic fund, has so far invested in two climatetech startups—BatterySmart in early 2020 and Varaha last year. "BatterySmart has been rewarding for us so far and we expect similar outcomes from our newest investment," he says in a bid to dispel doubts about the profitability of climatetech ventures.
Additionally, several climatetech-focussed funds have emerged in India in recent time, further fuelling capital infusion in the sector: Gurugram-based Climate Angels, Bangalore-based Transition VC (with a INR 400 crore maiden fund), and New York-based Green Frontier Capital (which has a branch in Mumbai) are some examples.
Optimistic about the sector's future in the country, Sanchayan Chakraborty, partner, Aavishkaar Capital, explains, "Technologies at the cusp of commercialization are the most lucrative for venture money. Furthermore, climate tech is a cross-cutting theme across existing sectors and offers adjacencies in each space to go good." The Mumbai-based impact fund recently launched an 'ESG First Fund' focused on strengthening the ESG practice of mid-cap businesses while offering them flexible capital to scale to new markets.
According to Chakraborty, all forces are aligned for the success of the Indian climatetech market: the demand is huge; there is a strong regulatory push; individuals and corporations have a strong intent to act; there is more focus on tech as an enabler; and solutions have steadily matured from CapEx heavy solutions to asset-light OpEx models.
Whatever their reasoning, investors across the board agree on one thing: the climatetech sector will be as large as ecommerce in the next 10 years.