Part 1: Why is VC investing in climate tech challenging?
The Why and How of Venture Investing in Climate Tech
The Indian Venture Capital world wakes up to climate tech investing
VC investment activity in climate tech has surged in recent months, in stated intent as well as real investments. At least 75% of mainstream VC funds have announced setting up their climate teams/practices. More than 15 funds that have launched or raised capital in the last 6–9 months, have climate or sustainability among their top 2 pillars. Our funder database already has >80 venture investors looking at climate tech.
It does seem that early-stage investors have conclusively answered the question, “Why invest in climate tech” or “Why can’t you ignore climate tech investing”. Cynics could argue that some of those actions are driven by FOMO, where-else-to-go, or “my LPs are nudging”. Our belief is that the reasons are much better than those, and reflect a genuine appreciation of the opportunities and importance of climate investing.
Globally climate tech venture investing has grown 5X faster than overall venture investing, to now be ~25% of aggregate venture investing. Assuming a lag of ~4–5 years, and a secular growth rate of the VC industry in India, we can expect climate tech VC investing in India to be ~$4–5 Bn annually in 2028. It cannot be ignored. Best to prepare and be ready to win.
In this post, we will move forward from “Why invest in Climate tech”, and address: Why is it challenging to invest in climate tech as a Venture Capital investor?
There is natural trepidation and uncertainty to back climate tech start-ups. At the same time, Climate tech investing looks like the opportunity of a lifetime, and it probably is. But it could burn a big hole in the pocket!
In our view, it is important to recognize the challenges, and then prepare to mitigate them. Why is it challenging:
1. A large part of the climate world is unlike areas where the bulk of VC $’s have been deployed.
a) It is largely not software
b) It is largely not consumer
c) A lot of climate tech involves B2B sales, often of hardware solutions
d) Potentially, a large part of the value will rest in less understood deep technology areas
e) Policy and regulations are front and center with everything related to the climate sector, potentially the dominant tail-winds/head-winds
Many of the skill sets and more importantly convictions, beliefs and approaches will need a re-think. How do VC firms change some of their core DNA that has made them successful?
2. Climate tech is the classic mile-wide mile-deep problem.
a) It is a theme, not a sector. Climate first solutioning will up-end in every part of our economy over the next 20–30 years. In essence, the width is across everything that we do as humans
b) Fundamental shifts in the status quo, will not come from minor adjustments. So the solutioning will need to be very fundamental in nature. That necessitates depth — predict the long-term trajectory of industries, understand technologies at their core first principles, and have a deep PoV about the real long-term value pools in rapidly changing sectors, as well as in very nascent technologies.
How does one VC firm have the expertise to understand, assess and nourish start-ups in every one of the few hundred niches and fields, ranging all the way from:
a) Research/science first areas like battery chemistry, alt-protein development, plastic replacements, decarbonizing heavy industries, or carbon capture, it is a long list
b) Business model/ financing first areas like EV fleet deployment, roof-top solar, carbon credits, blended finance and asset-financing in many areas, et al.
c) and everything in and around and between, it really is a very long list.
Alright, so you have a topic which you are not tuned in nor trained for. And it is a hell of a large and complex area. And you’ve got to ace it. No pressure ;)
To wrap up this essay, the importance of early-stage risk capital cannot be overstated in the fight for our world. The status quo on everything that we do as humans needs to be questioned.
The future will be green, or not at all — Bob Brown, former Australian senator
That new future requires both an insane amount of innovation and creative capital from the best folks in the industry.
In parts 2 and 3 of this essay, we will address the question: How to invest in Climate tech as a VC. We will share approaches to reduce risks and increase rewards, given the challenges articulated above.
