Green-unready

Addressing climate change requires a focus on reducing emissions and increasing carbon sinks. In the bid to reduce emissions, innovative solutions that are climate-ready and can be adopted at scale are the need of the hour. Entrepreneurship can accelerate the lab-to-market transition of innovations and create scalable solutions for deployment. But what is required is an integrated innovation curation, venture development, and capital access model to de-risk the early-stage start-up pipeline and attract mainstream capital and corporate interest to accelerate growth. 

It is a well-established fact that innovators and entrepreneurs, particularly those harnessing science and technology to create high-impact solutions, have historically been underfunded leading to a series of “valleys of death” exposures in their lab-to-market journey. This experience leaves many breakthrough innovations stuck inside R&D labs, journal articles and patent offices, discouraging entrepreneurial risk-taking. Risk capital is most needed in commercialising high-impact innovations, but is least available at this stage. The reasons include absence of impact-market thesis, poor innovation curation and sub-optimal venture development efforts by the ecosystem enablers. The lack of empathy, unrealistic expectations and a wi­d­espread misunderstanding of risk-return trade-offs further exacerbate this gap bet­ween the capital providers and product start-ups. In addition, high product development risk, longer gestation period, inability to foresee an exit horizon, and poor assessment and pricing of risk keep most investors away from such early-stage investments, leaving the state and philanthropy as the only source of capital to this sector. Impact articulation also remains a challenge and requires unique expertise, leading to emission claims often going under the scanner for lack of evidence or questionable assumptions. Given that the understanding of a low-carbon future and green premiums is still on the anvil, the climb for a climate start-up gets far more arduous. 

As any transition to low-carbon technologies requires not just a gear shift but also a track-change, and possibly, even a complete paradigm shift for the sector as a whole, this may mean immediate implications on production cycles, profitability, behaviour shifts, often impeding adoption. Climate solutions, therefore, need a range of well-rounded, multi-stage financial and non-financial support from the ecosystem. Five principal elements that need to come together to support innovators and entrepreneurs are R&D and innovation pipeline, venture incubation infrastructure, focussed acceleration platforms, multi-stage and blended capital pools, and finally, multi-stakeholder partnerships for market access. None of these elements can deliver the mammoth goals in isolation and, therefore, a well-integrated stack of enabling elements is absolutely essential. 

Innovation scouting requires not just grand challenges that cast a wide net to identify and attract innovators and entrepreneurs; it also demands precision, rigour, and perspective for early targeting of high-potential solutions, curated for all stages of start-ups. The second and third elements of the stack — incubation and acceleration — also need a major relook and a thorough approach, as they may mean different things for different solution segments. For instance, while early-stage enterprises require closer handholding and product development support, relatively advance stage start-ups requ­ire more support in piloting on the ground, fu­nd raising and market access. Again, the type of lab infrastructure and specialised handholding will vary depending on the range of technologies involved. Any incubation or acceleration support for early-stage climate innovations needs to go beyond the regular hard-wired thought process to integrate a range of risks, uncertainties, volatilit­ies, dependencies, sensitivities, and not to for­get, a fine understanding of the complex and layered business and social heterogeneity. 
 

Funding, the fourth critical element, is one of the major gaps in absolute terms and distribution both. The private capital markets, though evolving with increasing appetite to underwrite early-stage start-up risks, specially chasing the business models built on consumer internet and digital platforms, are unfortunately not yet ready to support risk-taking by science and technology start-ups where the intent is to solve deep-rooted problems facing the communities and the planet. Availability of funding also has discrepancies viz-a-viz the stage of an enterprise, at times alternating between surplus funding at one stage (say, pilot) and absence of funding at the next (scale-up). This lopsided and disjointed funding ecosystem also discredits its own efficiencies in addition to momentum loss and an overall jarring ride for fledgling start-ups. Limited capital pools are also getting thinly distributed across multiple start-ups, leading to a significantly sub-optimal capital allocation for some of the most promising impact creators and potential winners. Having to make do with whatever funding is available, entrepreneurs often end up making wrong choices when it comes to funding sources, instruments and deployment, sometimes negatively influencing their strategic priorities. A more comprehensive, cohesive, patient and hybrid climate fund is needed to resolve these cracks in the overall landscape and level up funding towards decarbonisation and the net-zero scenario. 

And finally, partnerships are one of the most underrated aspects of creating this rich, all-encompassing ecosystem that we are talking about. Right partnerships at all levels of the ecosystem (public-private, academia-business, industry-incubator, grassroots partnerships, and so on) are necessary to push beyond our respective mandates and spheres of influence for “net-zero” to be a reality. We are behind time in stepping up our game. All ambitions hereon need to be audacious— if we want to avoid a climate crisis. 

Kumar is the founder and CEO and Rakesh is the portfolio director for clean energy and climate action at Social Alpha