Given the commitments India made at COP26, it was expected that the Union Budget 2022-23 would provide the much-needed nudge to the clean energy sector. Among the incentives announced in Parliament last week was a year’s extension of a tax waiver for climate start-ups and their counterparts in other sectors. Significantly, green start-ups have also been included in the sunrise industry landscape. 

The prominence and policy focus given to solar energy, photovoltaic (PV) manufacturing, electric vehicles, battery swapping, electronic waste, and reverse logistics will, in all likelihood, help start-ups not only find their feet but also dig in heels to become a greater part of the climate mitigation effort. 

But they need an enabling ecosystem and funds to take forward their business ideas. As Abhishek Jain, Fellow and Director, Powering Livelihoods, Council on Energy, Environment and Water (CEEW), put it, “Many of the young enterprises struggle to compete with the low-cost Chinese imports of electronics, controllers, and motors that are essential for various cleantech applications. Incentivising small, young start-ups through lower GST rate can help make some of them more competitive until they achieve economies of scale.”

Nascent but determined

Though start-ups in the sector are still in the nascent stage, many were born out of innovative ideas, cutting-edge technological breakthroughs, out-of-the-box thinking, a passion for problem solving, and the wish to be independent entrepreneurs. The commitment to climate mitigation is sometimes even ahead of their wish to make profits. These for-profit entities need funds and the right policy support to move ahead. The ‘Early-stage Climate-tech Start-ups in India: Investment Landscape Report 2021’ — brought out by Impact Investors Council, Climate Collective and consultants Arete Advisors a few months ago — delves into these issues and offers pointers to build a more enabling scenario. 

Let’s take a look at their findings and recommendations.

Looking at climate-tech start-ups over a period of five years from 2016, the study found that 120 of them managed to raise over 200 funding rounds from 272 investors. There was a sustained growth in both volume and value of equity deals in the sector between 2016 (18 deals; $102 million) and 2019 (58 deals; $506 million), before it dipped in 2020 due to the pandemic. In all, the start-ups raised equity capital of $1.3 billion from 2016 to 2020.

The researchers also found that much of the investment was garnered by start-ups specialising in mobility and energy. “Sustainable mobility (including EV manufacturing, clean logistics and novel components) has seen the highest investment activity (84 deals; $705 million). This is followed by energy (including clean energy generation from new feedstocks, energy access, energy storage and energy optimisation products) that saw 44 deals amounting to $301 million,” the report said, attributing this to a “favourable regulatory environment and easy-to-capture impact metrics”.

However, segments such as waste management, circular economy, smart agriculture, biodiversity, forestry, green hydrogen and carbon capture have grown at a slower pace and only now coming into their own. Though there have been some innovative start-ups, often with novel technologies or solutions based on artificial intelligence or Internet of Things (IoT), with potential to be scaled up, they need mainstreaming. 

Need for ‘patient capital’

The report noted that along with the growth in the number of start-ups, there was also a rapid expansion in an enabling ecosystem represented by incubators and accelerators, policy advocacy groups, and think tanks. 

But there were challenges as well. For instance, the sector accounted for only 9 per cent of the investment flows to total impact investing flows (which include financial inclusion, healthcare, agriculture, education and others). The deals were ‘early-stage’ and small. About 68 per cent received seed-stage funding, and 83 per cent of the deals were $5 million or less. 

In a survey of investors and entrepreneurs, both stakeholders pointed to “the lack of patient capital” as one of the weakest links. They felt that “multiple structural interventions could help transition this sector from a niche narrow asset class to a more mainstream element of the venture capital and impact investing ecosystem in the country”.

The report recommended customised support for deep science and tech start-ups through dedicated centres of excellence, specialised entrepreneur support organisations, and more academia-industry interface. They also needed help to establish market linkages, with the government as the large first buyer and corporates as large buyers. On the financial front there was need for longer fund tenures, grants and blended capital. To top all this was the key requirement of policy and regulation to subsidise and incentivise green action, green growth, and green products.

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