An investor probably works hardest on the timing. You want to be early, but not too early; and you certainly don’t want to be too late. The cost is high in both instances.

It’s a dilemma that many early to mid-stage investors face today with climate tech, which is any technology that helps decarbonise the economy and deal with climate change. While working on this story last week, I found many investors asking themselves if they should invest in sustainability, or something else where they have more demand visibility. General Atlantic’s Emmanuel Lagarrigue is not one of them. 

“If you don’t invest in climate tech now, you won’t make money,” he said during the kick-off event for Environment Defense Fund’s India entry last week. 

Lagarrigue is the managing director of BeyondNetZero (BnZ), a US$4-billion climate tech fund set up by General Atlantic in July this year. And unlike a typical growth fund, the firm has a four to five-year horizon for its investments. 

That’s short even by a venture fund’s timeline and General Atlantic is known to write growth capital cheques with longer holdings. But Lagarrigue believes that while the world is on the cusp of a new industrial revolution, which is probably as big in size and magnitude as the previous ones, it is going to be much shorter. Undoubtedly shorter than the internet/digital revolution that started 25+ years ago and has minted trillion-dollar companies today. 

For those who’ve been watching this space for a while, the meltdown in climate tech investments between 2006-2011—called cleantech then—is still fresh in memory, and investors in India are justifiably looking for demand stimulants. 

Maybe they’ll come thick and fast this time. Will companies be ready to serve the demand?

Let me cite an example from the first cleantech wave, a company that’s lived long enough to reap the rewards from the second—Praj Industries. 

Last week, the Indian oil ministry said India aims to sell only 20% ethanol-blended petrol from 2025. This will force automobile manufacturers to reconfigure their existing vehicles to run on blended fuel. Transport minister Gadkari had already hinted a few weeks ago that the government would mandate “flex fuel engines” for auto manufacturers in the next three-four months. Such flexible fuel systems allow vehicles to run on more than one type of fuel. 

Ethanol demand will now hit the roof. This renewable and colourless chemical is primarily produced by the fermentation of certain starchy grains as well as cellulose-based feedstock like maize, wood chips, wheat, and a host of other biomass types. More than 80% of ethanol produced in the world is used as fuel or fuel additives. 

In September, the ethanol blending level in India was at around 8.5%; the government wants this to grow to 10% by April 2022, and then to 20% by 2025.

During the first wave of cleantech, one of the big reasons why ethanol got beaten down was that it sent commodity prices soaring. It made little sense to use food grains for feedstock in first-gen ethanol tech; and second-gen ethanol production technology was taking too long to become commercially viable. 

Praj continued to develop not just second-generation but multi-feed tech for ethanol and other bioenergy products. But due to a lack of comprehensive government policy, it chose to target the global market—especially Europe, China, and Latin America where large scale ethanol plants were being built. 

The growth was slow; it kept the stock price subdued for long stretches. 

Cut to 2021:

[The stock price has seen a ~300% rally in the past year]

The domestic policy instability, which was a drag on Praj’s market expansion, is now coming to an end. The end goal, the sops, the incentives—all seem to be aligning. 

According to the June 2021 Niti Aayog roadmap:

The Centre has also announced that the incentives on sugar sacrificed for producing ethanol from B-heavy molasses, sugarcane juice, sugar syrup, sugar have been doubled from October 2021. (In principle and for all practical purposes, India should incentivise use of second generation biomass-based ethanol and not just ride on surplus sugar and grains. But that’s an edition for another day.)

For now, Praj is not just extracting value-added products from its tech, but also many deals from energy companies. Its tech and solutions today account for about 10% of global ~100 billion litres of ethanol production in 2020. (The US and Brazil produced 84%of the world’s ethanol.)

Coming out of the pandemic year, Praj Industries’ order intake doubled to Rs 1,406 crore (~US$190 million) in the first half of the year ending March 2022, compared to Rs 715 crore (US$96 million) in the same period of the previous year. Income from operations grew nearly 140%. Profits are equally good.

Investors are lapping up its shares. The FII and public shareholding in the company has grown from 11.6% and 40.3% respectively at the end of the March 2021 quarter to 15% and 45.3% in the quarter ended September. 

As the world rushes to reduce its dependence on fossil fuel, it’s fair to assume that Praj will fare well because it spent all those years developing its technologies. As much as India needs to indigenise decarbonisation technologies, the country doesn’t have time for slow-burn tech developments. Nor have investors the luxury to time things to perfection. 

As BnZ’s Lagarrigue says, investing in climate tech is more complex than simple early-stage VC funding or late-stage private equity growth funding. Investors will need to work on alliances, build bridges; not just fund and forget.

In that case, just like companies, they too will have to rethink their business models.

That’s all for this week. Do write in to [email protected] with your feedback and suggestions on what we should explore and write about. 

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