Investors see opportunities amid a shift in focus toward environmentally sustainable ventures

“There is an increase in investment flow towards sustainability-focused companies due to the government’s push to promote renewable energy and sustainable infrastructure projects,” says Prateek Tosniwal, co-founder, Ivy Growth Associates and partner, Mi Capital Services. “With the cleantech industry projected to become a dominant source of energy by FY2050, India’s startup ecosystem stands to benefit in terms of investment flow, access to skilled talent and new job opportunities.”

These factors could collectively create tangible co-investment opportunities in cleantech startups at different stages of growth, he says. “As an investor, I also hope that this growth will incentivize foreign companies and institutions.” investors to explore India’s cleantech space.”

I started with a news point, as the next paragraph may be additional information. But it talks about startups in general and not cleantech, right? Otherwise, replace “these” with “cleantech”.

The Indian startup ecosystem has come a long way over the last decade. Investment firms, both domestic and international, have shown significant interest in these companies and this funding has further helped the startups grow. As per data shared by Tracxn, startups have raised nearly $105 million in risk debt funding through May 2024 this year, compared with $151 million in 2023.

Rohit Madan, Partner, Deloitte India, says that cleantech startups typically require a long headroom to turn a profit due to the higher investment requirements to develop and commercialize innovative technologies. Venture debt enables such companies to raise additional funds, while preserving capital and meeting the funding requirements to reach the next milestone. “Venture debt also enables access to capital in cases where traditional lenders might not be interested in funding companies that have not yet earned revenue or are in an early stage and whose current cash flows are low. Venture debt providers specializing in cleantech are well aware of the challenges faced by cleantech startups and can therefore provide flexible financing when there is better alignment with the company’s objectives,” Madan adds.

Strategies for cleantech startups seeking funding
Experts say cleantech entrepreneurs should focus primarily on perfecting their business model. Entrepreneurs must ensure that they have a solid business model, cash flow and revenue so that investors are confident that the company idea is not just another fad that is cashing in on the cleantech trend.

Tosniwal says that startups looking to raise funds to meet their working capital needs or expand their operations should develop a clear plan on how they intend to use the funds. For example, if a solar panel company is looking to expand its presence in the eastern Indian market, it should provide supporting data on target markets in tier-1 cities and growth potential.

“Companies that maintain data collection and reporting systems are better prepared to support their funding proposals. The best use of the funds raised would be to improve business operations by investing in technology, production, supply chain, and most importantly, R&D. Focusing more on quality from the start can help attract the right attention and help companies with a focus on clean technologies make a difference in the startup landscape,” adds Tosniwal.

Similarly, Madan says clearly showing why funding is needed at this stage and how it will be used to increase the company’s growth will help investors better appreciate the investment opportunity. “A clear articulation of future cash flows with details on expected revenues and how the company plans to repay debt is important, as is showing the fund’s upside potential from any equity component of the funding,” Madan adds.

Risk assessment and due diligence
Tosniwal says the shift towards sustainable startups is transforming the way investors approach risk assessment. Today, more and more investors are interested in supporting startups that focus on environmental, social and governance (ESG) issues and consciously work to reduce their carbon footprint.

“However, this trend is driven primarily by regulatory pressure and secondarily by the growing demand for sustainable solutions. As an investor, I evaluate factors such as the viability of the company’s business model and its overall profitability. sustainability “In terms of operations and delivery, factors such as the company’s environmental impact and regulatory compliance are among the most crucial requirements, in addition to profitability. Startups that can back up their claims of how their products or services have contributed to the country’s sustainability and reduction of carbon emissions are an attractive parameter,” Tosniwal adds.

In addition to the typical metrics to evaluate in any startup investment, such as value proposition, product-market fit, total addressable market, business model, team, competition, etc., it is particularly important for investors in cleantech startups to understand the problem the company is trying to solve and the potential environmental and social impact the company may create, says Madan.

“It is also important to understand the origin and creation process of the intellectual property and whether there is any proprietary technology within the company. Investors should also understand the risk mitigation measures taken by the company to protect its intellectual property from competition and leakage through any internal or external channels,” Madan notes.

The credentials of the team and technical advisors are also particularly important considering the nature of the business and also access to government and regulatory institutions that may be required for licensing, approvals and potential commercialization, experts say.