The first cleantech bubble took place in the mid-2000s, with investors taking significant bets in renewable energy start-ups (solar, wind, hydro) in Silicon Valley. Many of these start-up firms went bust, for a variety of reasons, ranging from cheaper imports available from Chinese manufacturers to steep declines in oil and natural gas prices leading to low adoption of cleantech products. However, the single largest reason for this collapse was because venture capital funds placed unrealistic expectations for quick returns, whereas deep tech start-ups (battery, cell or panel manufacturers) necessarily require a much longer gestation period for growth and scale-up. After this experience, many investors chose to avoid the sector for years despite the potential for enormous long-term gains.
However, nearly two decades later, the sector has seen a comeback, labelled now as ‘climate tech’. Interestingly, this new wave encompasses start-ups working across all thematic areas to cut sources of carbon emissions across energy distribution, built environment, mobility, heavy industry, as well as food and land use. Therefore, climate tech is much more than the clean tech—it is a broader concept that focuses on decarbonisation across multiple sectors of the economy, not just on the energy transition; and it is a deliberate pivot, which reflects the underlying complexity and the scale of the climate challenge. According to Price Waterhouse Cooper’s State of Climate Tech
report, over US $87 billion was allocated towards venture capital funding for climate tech startups between H2 2020 and H1 2021.
Climate tech is much more than the clean tech—it is a broader concept that focuses on decarbonisation across multiple sectors of the economy, not just on the energy transition; and it is a deliberate pivot, which reflects the underlying complexity and the scale of the climate challenge.
The new climate tech wave . A fundamentally core feature of investing in climate is that it is different from ‘traditional’, asset-light tech investing. Enterprise Software as a Service (SaaS), platforms, and marketplace models are certainly applicable across various climate tech sectors as an additional software layer to the hardware or middleware climate technologies. Technology advancements in the last 5 years such as artificial intelligence, machine learning, robotics, and access to geospatial data are helping climate tech start-ups grow faster. However, the bulk of carbon reduction occurs with physical products, manufacturing processes, and deep science innovation. Therefore, significant attention needs to be placed on R&D as it is one of the core tenets to building successful climate tech investment portfolios.
For most investors, building a thesis is essential for driving deployment strategy. Developing the thesis involves industry mapping, understanding supply and demand factors, regulatory headwinds or tailwinds, competitor benchmarks in domestic and global markets, and identifying the key market trends. But in the case of climate tech, the thesis-building exercise would also require a deeper dive into what drives decarbonisation and which kinds of processes will be ‘greener’, will use lower energy or water usage, and create circular loops for material reusage and refurbishment. In other words, diving deeper into the R&D and science behind these hardware technologies, and the measurement of the impact they generate.
Investors are only one of the pillars in ensuring that this second wave of climate tech start-ups does not result in a bubble this decade. For R&D innovation to really flourish, there needs to be a strong base of academic universities where students are given lab space, equipment, and other resources to conduct product and prototype testing. In India, IIT Madras’ National Centre for Combustion Research and Development
(NCCRD) is one example of an excellent incubation lab which works actively with aerospace engineers, automotive researchers and thermal power specialists to develop innovative solutions for industry in this field. In addition, the Indian Institute of Science’s Core
, and Time
divisions actively support IP-led start-ups towards commercialisation, assisting them with product-market fit, business planning, and access to corporate partnership. Similarly, the Venture Centre
in Pune is India’s largest science-based incubator for materials, chemicals, and biological sciences and engineering.
Developing the thesis involves industry mapping, understanding supply and demand factors, regulatory headwinds or tailwinds, competitor benchmarks in domestic and global markets, and identifying the key market trends.
However, India still needs to build dedicated R&D and deep science incubators for the climate tech sector, and create the relevant linkages both to industry and policy stakeholders. In the United States, Elemental
are two climate tech incubators which take lab innovations to market. Moreover, Stanford’s newly launched Doerr School of Sustainability
as well as Columbia’s Climate School
are creating research labs where the largest global companies are keenly eyeing new innovations which will eventually be adopted in their value chains. Industry networks such as Greentown Labs
and MIT’s Climate CoLab
facilitate partnerships with multinational corporations that have made science-based climate commitments.
In India, corporations are already gearing up for the net zero transition. According to a study completed by BCG, several Indian corporate houses have pledged to become net zero
or carbon neutral by 2050 or before, including Vedanta, JSW Group, Adani Transmission, Aditya Birla Group and Mahindra. These transitions would not only encompass replacement of fossil fuels with renewable energy systems, but also heat recovery systems, energy efficiency in buildings, waste recycling and carbon disclosures across supplier value chains.
In order for R&D climate tech innovation to rapidly accelerate, there are a few ingredients required: i) strong entrepreneurial ecosystem and deep science talent; ii) corporations that are leading the charge on sustainability and eager to integrate next-generation technologies to enable a clean energy economy; and iii) risk capital in the form of philanthropic grants from private foundations or government schemes, to fund prototype creation and lab. With reference to the latter, the Department of Science and Technology (DST), Department of Scientific and Industrial Research (DSIR)
and the Council of Scientific and Industrial Research (CSIR)
are examples of government organisations that can nurture and provide start ups with access to grants. Once venture capital investor horizons are adjusted to longer than the traditional horizon of 5-7 years (ideally 9-10 years or more), and there is a combined push from government, investors, corporations and entrepreneurs, then there is a much greater opportunity for R&D climate tech start-ups to scale up their ground breaking technologies, and contribute to the low carbon transition.
India still needs to build dedicated R&D and deep science incubators for the climate tech sector, and create the relevant linkages both to industry and policy stakeholders.
As Larry Fink, CEO of Blackrock, the world’s largest asset manager said, the next 1,000 unicorns will be in climate tech
, embodied by technologies such as green hydrogen electrolysers, battery recyclers, green building materials, novel agricultural and circular food systems, energy storage and more. We are at the right place and time to drive key stakeholders towards taking this step, and as a result, catapulting R&D start-ups operating in climate to a much more established commercial path of scale and success.
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