Nobel prize money is a lifebelt thrown to a swimmer who has already reached the shore in safety.

These lines from George Bernard Shaw ring so true when one finds minds and innovations trying to thrive for the want of money. The ideas are around, the will palpable and the cry for a better earth is echoing aloud. But sufficient VC support or Angel investing and capital pump-ins for greener ideas, clean technologies and sustainable development concepts in India are still a far cry. The motion is set but the pace is slow. Do VCs find it attractive to fund green or clean start-ups? How true is the concern on the not-so-encouraging commercial attractiveness and market execution problems of such projects?
Its time we ask.
 

Turn-offs

Funding a green venture is not the same ball game as nurturing an exciting tech start-up. The market is different, the capex is overwhelming, and the levels of vision, patience and even prophecy needed can be intimidating enough.

Green ideas and sustainable development are perceived as a domain of environmentalists/NGOs, as points out Dr Pramod Paliwal, a Professor at the Institute of Petroleum Management, Gandhinagar (IPMG) who has been avidly pursuing research in sustainable development, energy security and cleaner fuels: Whatever progress has been made so far has been due to the efforts of these two interest groups. But there is little evidence to suggest that such initiatives have been converted into feasible solutions. However, the scenario on clean technologies is a little different as he sees it: The organized sector has indeed made some advancement on this front, but this, I feel, has been largely due to market pressures and not necessarily a proactive one. Entrepreneurs have shown little interest in these areas and obviously the VC too has to wait for requisite signals before it acts.

As explained by Pravin Gandhi, managing partner, Seedfund, We have great interest in such technologies, but would not be able to afford the levels of capital required here. Gandhi, who is also president, TiE, Mumbai describes the perceived apathy of venture capital in green and clean technologies as an upshot of the high-risk profile that such ventures have. Apart from examples like Suzlon and Jatropha related ventures, there havent been many early stage start-ups in green soils. Most of them are existing or growth-stage capital infusions, as he recalls. The challenge is significant for Indian VCs. There are surely technologies in this sector being developed in India and it appears to be the flavor of the times too. But the excitement of Green IT would make sense to a VC only if the costs of doing it are reasonable.

Another deterrent to VC interest in alternative technology sectors is the issue of market attractiveness. Commercial viability is a huge concern.

Clean technologys large-cap bias coupled with lack of commercial attractiveness cannot be easily overlooked, says Dr Paliwal. The concerns, though largely prevalent, are not necessarily true. However, no serious efforts have been made in India to channelize small investments/start-ups in this area.

Gandhi, however, shrugs off the issue of bucks translating into bang as a minor concern. Market attractiveness of such ventures, as he says, is remarkable. It is being tapped in the US but with the risk factor attached in India, other sectors like retail and telecom throw up more tempting opportunities.

Moreover, the commercial viability problem is not specific to India in case of such ventures, he adds. Its a global question. And its not limited to the project but also to the end product. We have not started using ethanol that way yet, he cites. There are distribution snags and the product has to eventually get sold. Also, most technologies consume a lot of the money on R&D and cost-reduction aspects, as these are the ultimate market drivers when it comes to consumers interest and affordability. Competing with incumbent technologies is not that easy. The venture essentially needs good teams and execution abilities.

Green in the Blues?
Repeating successes like Suzlon is not at all easy owing to long gestation periods and VC horizons of seven to ten years as many VCs, small and big, admit.

Rahul Khanna, director, Clearstone Venture Advisors, the local investing arm of the US venture capital firm Clearstone Venture Partners, explains the slow take-off of VC-backings as a lack of the requisite ecosystems and regulatory encouragement. Theres a greater risk to change behavior. If someone devises a new vehicle, the auto industry needs to change with the technology. Ditto for the respective regulatory environment. Its an industry that has to collectively embrace the change, be it the suppliers, the channels, the marketers or the customers. In fact, if the government does not mandate a shift, its hard for new technologies to take off and take over. It requires an eco-system shift and one cannot influence the market forces and thats why it is difficult for a non-theme based fund to play in this area. One cant be as aggressive as required here, he reasons. Hence, its a hard game for general-purpose funds to participate in or spark this new wave. Given the relatively high quantum of investment, its PPPs (Public-Private Partnerships) or VCs with a specific mandate that can successfully invest in new ventures of this kind. There are some bright ideas in the field of energy but the sector is still dominated by the government, he says: Commercial execution, distribution hiccups, time horizons, lack of fundamental IP are the main reasons that stall VC interest.

Dr Paliwal echoes the sentiment here. There is a lot of resistance to change, unless the regulatory system intervenes, he adds. A lot needs to be done to monetize the social and environmental benefits that a sustainable business provides.

Vineet Rai, founder and CEO of Aavishkaar gives a first-hand account of the experiences and tribulations that marketing fronts of a green venture bring up. It has done two such investments and agrees that commercial viability issues are serious ones. We had to struggle a lot but now the projects are profitable. It is very important for a VC to focus on the idea as well its feasibility and have a solid understanding with the entrepreneur concerned, he advises.

Point of no Return?
Seedfunds Gandhi, who has earlier co-founded companies like Hinditron and claims the first IPO of a technology company where he exited at 80x, has also exited two previous investments at 10x+ and a few at 3-5x+. Talking about what rate of returns would excite him in a clean or green technology venture, he doesnt see any major difference on the paybacks expected. Still, in case of a clean technology venture the returns have to be significantly high because of the time that a VC has to stay with the venture. That commands a much higher IRR.

Clearstones Khanna dovetails here. He thinks that investing in green should justify the yield play. With over $650 mn of committed capital for investment, Clearstone has invested in 25 and 30 active portfolio companies with past success stories. In India, its focus has remained on telecom, financial services, gaming, media and entertainment.

Exceptional Exceptions
Not everyone is averse to taking the plunge though. And, interestingly, it is smaller players with not-so-big-war-chests that are keen in experimenting with green ventures. Aavishkaar is one such case in point, that has an investment pipeline of 8-10 companies this year, of which three would be in the energy space. CEO Vineet Rai, who tells that from $6 mn the aim is to hit $25 mn in corpus by March 2008, explains the small but strong excitement: Unlike bigger players, our transaction cost is small and we can afford bigger risk-taking capabilities.

His list of candidates is long, varied and strong. We are looking at all the options. With the likes of Vinod Khosla evincing interest in green technologies and with the oil brimming over the $100 a barrel mark, all of us are concerned for innovations that are essential, he says.

Aavishkaar India Micro Venture Capital Fund intends to promote development in rural and semi-urban India by providing micro-equity funding (Rs 10 lakh to Rs 2 crore), approximately $20,000 to $500,000, and operational and strategic support to commercially viable companies increasing income in or providing goods and services to rural or semi-urban India.

Success stories like Suzlon are more of not only exceptional but unfortunately exceptions as well. Nonetheless, this indigenous pioneer in the wind energy market that started way back in 1995 when soaring power costs and infrequent availability of power hit the textile business hard, its founder Tulsi Tanti, who then looked to wind energy as an alternative, incidentally though first as a customer. The company went public with a highly successful IPO in September 2005. It is today a behemoth to reckon with, ranked as the fifth leading wind turbine supplier in the world, with over 7.7% of global market share in 2006.

Green-eyed Comparisons
Times Bryan Walsh in his article Gambling on Green reckons green investment by American venture capital at $2.6 bn in the first three quarters of 2007, that was incidentally the highest level ever recorded and nearly 50% more than the 2006 total. As the report adds, by 2006, the clean-tech sector saw 11% of all venture capital in North America and Europe. Europe hasnt been behind and not even our next-door neighbors. China showed 20% of total venture capital being invested into clean companies in 2006 which was interestingly double the percentage in the US.

VCs were growing green in China with investments rising by 147% to $420 mn between 2005 and 2006.

In terms of pay-offs, some statistics that were thrown up show a bullish streak.

Revenues for companies in solar energy, wind, biofuels and fuel cells surged from $40 bn in 2005 to $55 bn in 2006, according to the research group, Clean Edge. Green venture capital in the US is projected to rise to $18 bn by 2010, according to Nicholas Parker of the research group, Cleantech Network, cited the Time article.

India Sprouting
Now, back home in India, venture capitalists invested over $777 mn in about 57 deals for entrepreneurial companies during the first three quarters of 2007, according to the Quarterly India Venture Capital Report. The leap, if not revolutionary, is significant enough as this was nearly five times the $158 mn invested during the first nine months of 2006 and more than twice the annual investment record of $320 mn set in 2005.

 siblings are not lagging in furrowing the green fields. Private Equity firms invested a record $7,460 mn over 299 deals in India during 2006, according to a study by Venture Intelligence. In 2007, an EvalueServe report on VC investment in India estimated about $4.4 bn to flow into India via VC funds over a year. At that point, about 44 US-based VC firms were seen interested in investing heavily in start-ups and early-stage companies in India. These included names like Helion Venture Partners, Intel Capital India, Sequioa Capital, Seedfund, etc. But just how much of the VC euphoria for start-ups falls in the lap of green, clean and alternative technologies, still stays a moot point.

Venture Intelligence, that tracks private equity and venture capital in India and Indian-founded companies worldwide, throws up some buoyant names here. Among PE firms, following the highly successful ChrysCapital and Citi investment in Suzlon, other funds are actively investing in the Wind Energy sector. Baring PE in Auro Mira Energy and UTI Venture, ChrysCap and Bessemer Ventures in Shriram EPC are some pertinent examples. In Bio-fuels, APIDC, SIDBI VC and UTI Ventures have invested in Hyderabad-based Natural Bioenergywhich has just begun production of bio-diesel based on Jatropha seeds. In solar, the only play is Moser Baer whose expansion into this sector is backed by IDFC PE, Warburg Pincus, ChrysCapital and IFC. In fact, at this point the investment in all the above indicated companies would be around $300 mn.

Green Still Looks Rosy
India has several ingredients which can make it successful in the alternative energy area: availability of natural resources, cost-effective engineering and manufacturing talent and high-cost of importing traditional fuels, says a bullish Arun Natarajan, founder & CEO of Venture Intelligence, a research service focused on private equity and venture capital activity. He does not see alternative energy posing a threat to traditional favorite sectors among investorslike IT, BFSI and Manufacturingany time soon, but he definitely feels a strong interest in this sector. The main reason is that the technology behind alternative energy sources seems to be reaching a point of maturity to make economic sense without needing the artificial crux of tax breaks.

VCs like Clearstone are already eyeing this field with a fresh perspective. The fund is exploring areas like e-waste and recycling sectors. I dont see a lot of incumbency in this space. There are many opportunities to create interesting brands in the green space particularly, Khanna says.

Going ahead, areas like waste management and alternate technology ideas would be looked at with interest by VCs, both from the regular and the social venture funds, Gandhi says. And it might take some thematic (specific green-focus funds) to ride that bandwagon. We will see thematic funds emerging around these technologies. There is so much money in the market that lot of specialized funds may spring up as we move ahead. I see a shift around the corner, says Clearstones Khanna.

Just how much of the green crops can VCs sow and reap, would be a new and interesting Midas story altogether. A noble cause indeed.

Pratima Harigunani/CyberMedia News
maildqindia@cybermedia.co.in

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