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From a company in Bangalore that makes solar water heaters to another in Chennai that's put eco-friendly bikes on Indian streets, a clutch of Indian companies is grabbing attention. These startups don't have corporate hierarchies or exhaustive balance sheets but they are already on the radar of the biggest venture capitalists of the world. As governments launch a new round of post-2012 climate change-related negotiations in Bali this week, the financial sector believes the existing technologies of today can 'decarbonise' the energy mix. Instead of waiting for the big technological breakthroughs of tomorrow, it's the smaller ideas of today that could well make a difference.
This is where the Indian startups come in. What's common to all of them is that these are technologies that have tremendous potential to reduce carbon emissions. What's perhaps missing in all of them is the money to scale them up. Enter the Venture Capitalists (VCs).
The last UNEP report calls this the ''world's newest gold rush''—investors poured $71 billion into companies and new sector opportunities in 2006, a 43 per cent jump from 2005 (and up 158 per cent over the last two years). The trend continues in 2007 with experts predicting investments of $85 billion this year.
In India, the estimated size of the ''clean energy'' market is $1 billion over the next 15-20 years. And this is just the beginning. ''These investments make economic sense. They aim at maximum yield by using the minimum resources, hence minimising waste and increasing profitability—and it is this profitability that will drive this business up,'' says Suneel Parasnis, country head of New Ventures India.
New Ventures India started in December 2005 with three years of funding from USAID. Today it works with CII and a Washington DC-based environmental thinktank, the World Resources Institute. In India, the VCs have begun scouring the market for entrepreneurs that look promising and the word has spread. This is also the source of Parasnis's optimism. This month at a large Investors Forum organised in Mumbai, 157 companies sent in their business proposals. Compare this with the 50-odd who did so last year. New Ventures India specialises in identifying intrepid companies, handholding them, helping them develop an attractive business model and then marrying them to a venture capitalist with deep pockets. They have 40-plus venture capitalists in the Green Investment Network and the list is growing.
Some of the companies they identified this year range from those that manufacture micro-hydel pumps and electric bikes to those that make plates out of leaves. When the company experts begin to scour the market, they look at certain criteria: the obvious one is environmental benefit. While companies are being identified, there is activity on the other side as well. Several private equity (PE) groups are creating funds exclusively for investing in clean technology in India. These groups include the Nevada-based Arvco Capital Research Llc., Washington DC-based Global Environment Fund, New Delhi-based Sun Group and Mumbai-based Yes Bank Ltd. These companies are in the process of designing dedicated funds for clean energy in addition to the general funds that also invest in the same segment.
Estimates suggest that 40 per cent of all venture funds are going to come to India. Last year, the biggest recipients of these funds were the more well-known companies: Suzlon for wind power and Reva for its electric car. Suzlon Energy received $141 million in PE investment and provided high returns to those investors.
This interest among VCs, in turn, finds reflection in a whole new set of activity among investment banks. Some of the examples in India are ICICI bank and Yes Bank. International investment banks such as London's Climate Change Capital and Deutsche Bank have already begun to add their might to this sector. ''Deutsche Bank's interest in clean energy is considerable, and stretches from centre-stage projects to energy efficiency to experimental projects. In India for example, Deutsche has arranged large financings for companies such as a global leader in Wind Energy Turbines, and a company who pioneered energy use reduction in the wireless telecom market. Deutsche Bank has even, very recently in Europe, supported a unique pilot project for a pioneering round-the-world flight by a light aircraft powered only by solar cells,'' said Pavan Sukhdev, India country head for Deutsche Bank.
Most banks in India are in the process of increasing their capacity or fine-tuning the special, dedicated private equity funds. Banks like ICICI and Yes Bank familiarised themselves with the green energy market even before it became hot.
Yes Bank is not yet ready with its equity fund but hopes to do so in the next few months. ''We are ahead on the learning curve on this,'' said Vivek Mehra of Yes Bank, speaking of his long-standing association with renewables. ''So far, we have limited ourselves to providing structured credit, but are slowly moving towards building an equity option,'' added Mehra.
There's a slight hitch though. With most funds available for companies that require more than $3 million, very few small manufacturing units can benefit from these equity funding.
''There have been delays and second thoughts. After all, the VCs are putting large sums of money in a sector that is still seen as nascent,'' says Parasnis.
But initial problems apart, the future looks clean.
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