The climateXcapital Framework to Assess Venture Capital invest-ability in Climate Tech

Essay 2: VC investing in climate tech - structuring the landscape, our 4 cohorts view

Mile-wide, mile-deep. A fair way to describe the nature of the climate tech investing problem. One of the laments for a new climate tech investor: where to start, it is all very overwhelming! This Essay will attempt to structure the varied world of climate tech with an early-stage investor’s lens - perhaps introduce a vocabulary that enables easier conversations. In this Part 1 of Essay 2, we will share a framework to classify different sectoral themes within climate tech into 4 Cohorts. In the next parts of the essay, we will detail out the 4 Cohorts.

We have segmented the climate tech landscape into 4 Cohorts on the basis of three parameters: Scalability, Defensibility and Asset Intensity. These 3 parameters give us a high-level view of “Attractiveness”. We need to overlay 3 additional parameters - technology readiness, market readiness and regulatory environment - to calibrate the readiness of the sectors/sub-sectors, let’s call them “the Readiness 3”.

Basis the first 3 “Attractiveness” criteria, the 4 cohorts we define are: Scalers, Executors, Disruptors and Outliers. As with any classification, the boundaries can be blurry and debatable. Let’s dive in and see who are these 4 cohorts.

A. cXc’s 4 cohort framework to classify Climate-Tech:

[Low -> High: increasing level of attractiveness from an investor's POV]

1. Scalers: Software-type businesses. Scale fast naturally. Classically understood by VCs. Key themes in this cohort:

a. Carbon/ ESG accounting

b. Data/ analytics solutions

c. Energy demand-supply matching software

d. SaaS solutions that enable better resource utilization - water, energy etc.

e. Consumer behaviour influencers

Scalers tend to be highly scalable (as long as the market size supports that potential to scale), and capital efficient. Naturally, they tend to attract a lot of early VC activity and interest. But as they say, there are no free lunches - OR if it looks good to everyone, it stops being so good. The opportunities and risks for the different themes within Scalers are very different - that’s for Part 2!

2. The Disruptors: Disruptors could range all the way from deep science projects to mainstream adoption-ready technologies, with deep IP being the common theme. Disruptors are at the forefront of breakthroughs in areas such as precision fermentation for alt-protein development, advanced carbon capture technologies, sustainable materials, nuclear fusion and more.

Determining the “Readiness” that works for your risk profile is the trickiest bit. Come in too early, and you are stuck with a long gestation period and complex capital cycles. Come in too late to the sector, you forgo big value creation. The alpha will come from identifying the Readiness a little before everyone else does!

As Disruptor segments start scoring high on the “Readiness 3” and the IP moats reduce, they will give rise to Executor opportunities. Disruptors can have different capital intensity and could cross over into the Outliers cohort.

We believe the biggest opportunity is to do technology transfers for market-ready technologies from developed markets and adapt them for India. Dramatically reduces technology readiness risks and time to market. We need to see a lot more of this!

Ideas on how to think about the Disruptors - that’s for Part 3!

3. The Executors: The bread and butter of VC investing in India. Well understood and “relatively” easy to invest. Founders need to be execution rock stars. Smart, driven and have the ability to go through walls without hesitation. Build like an army on the move in an aggressive campaign. Three kinds of Executors include:

a) Roof-top solar deployment, EV fleets, EV sales and marketing, and Biofuel production, are examples of erstwhile Disruptor sectors that became mainstream and gave rise to Executor opportunities.

b) Eliminators of any kind of deadweight loss (loosely put waste-killers) - eg. circular economy cross-linkers, energy efficiency, agri-supply chain solutions.

c) Climate finance requires differentiated solutions, both on the sourcing and deployment side. Climate Fin-tech is the third bucket of Executors.

Two of the biggest structural risks in Executors: a) will the big incumbents eat up these categories and blow away the upstarts, b) will Executor plays morph into capital intensive Outliers?

We will share our views on the 3 sub-themes, risks and opportunities in Part 4!

4. The Outliers: Why would we even bring up high capital-intensive businesses into a VC invest-ability discussion? The simple reason is that many of these businesses are almost certainly going to become the largest sized over time. Arguably out of the 1000 climate unicorns that Larry Fink imagines, perhaps as many as 50% would have a manufacturing or asset-intensive element to them. They can lend themselves to deep moats, disproportionate profit pools et al. Do you ignore it all, and say not my business, or do you find the sharp wedges?

Historically, many such investment themes have created massive outcomes. From a different era, railroads, oil drilling, industrials, et al, got the then equivalent of angel/ HNI/ VC money - and those capital providers built legendary multi-generational fortunes ??

However, they have also been the source of the largest VC disasters. Finding the winners here may be the real holy grail of Climate Tech VC. We will brave it and share our thoughts in some detail in Part 5!

In Parts 2-5 of this Essay, we will detail each of these 4 cohorts, with a comprehensive view of sectors and sub-sectors, for example, companies globally and in India, any success stories, risks associated as well as potential return scenarios on VC investing.

B. The Readiness 3: High impact and very tricky to work through

As we detail out the cohorts, we will weave in the “The Readiness 3”: technology readiness, market readiness (commercial viability and acceptance) and regulatory environment (importance, how supportive and in what time frame), at a high level. As they say, the devil is in the detail. There are many big questions that lead from these 3 areas - here we leave you with more questions, but we promise we will do our best to come back and answer “some” of these.

1. The blended view of the 3: What is the hype-curve (or some variant) version for climate tech for India - that blends in all of the “Readiness 3”? Some of the areas are easy to see - Solar and (parts of) Mobility are further along the curve. Outside of these obvious ones, determining the real position on the curve is challenging. It often will require a wider understanding of global trend lines, a view of cutting-edge technology, and taking a position on cost curves and regulatory outlook.
2. Technology readiness: Is there a fall-off position in the technology readiness curve below which a VC investor should not bother themselves? What is a structured approach to assessing technology readiness - knowing that the TRL scale exists is good for a party chat, but it doesn’t help when the rubber hits the road! How do you de-risk at different stages of the curve?
3. Market readiness: What factors will hasten or set back market readiness - finance, advocacy, regulatory support, depth/density of market players? How do you take a position on cost curves (and hence green premium)? What role do incumbents/corporate/CVCs play in this dimension?
4. Regulatory environment: Our view is that the Indian policy environment has been forward-looking on climate tech efforts. However, there is a lot more that the world needs! Is the policy view benevolent/ ambivalent/ defensive in different sectors? Which sectors/sub-sectors need the maximum policy push? What are the hidden gems and jewels of climateXpolicy (climate tech-meets-policy)?

Don’t tell us we didn’t warn you of the mile-wide mile-deep nature ;)

Note: we are not yet addressing the financial outcome questions:

• Is climate tech viable at all as a financial investor?
• What are the spaces where an investor can make money
• What are fair risk-reward return expectations?

This current essay is yet building the legitimacy to address those very thorny buggers. We will come to those in due course, stay with us!

Before you go, a humble request to share your feedback, and if you think this writing is relevant to your friends and colleagues, please do share, and ignite more debates and discussion!