Funding Bottleneck Hits India's Deep Tech and Climate Startups

India’s deep technology (deep tech) startups, particularly those in the climate tech sector, are grappling with significant funding challenges. Despite the growing global emphasis on sustainability, these startups continue to face a severe shortage of growth capital, limiting their scalability and long-term impact.

Why do most deep tech startups struggle to secure funding beyond the early stages? Why is domestic investment in climate tech still lagging despite India’s ambitious sustainability goals? Can policy interventions and investor confidence bridge this gap?

TICE presents this in-depth report, analyzing the funding bottlenecks in India’s deep tech ecosystem, the challenges faced by startups, and the way forward.

Early-Stage Focus Leaves Growth-Stage Void

Over the past few years, investments in climate tech have constituted a minor segment of the overall startup funding landscape. Notably, a substantial portion of this capital has been funneled into early-stage ventures, leaving a conspicuous gap for startups seeking to progress beyond initial phases. A report by IIMA Ventures and Japan's MUFG Bank highlighted that less than 3% of startups in India's climate tech ecosystem have successfully secured Series B funding or higher.

Investment Shortfalls in Renewable Energy

The renewable energy sector exemplifies the broader funding inadequacies. In 2024, India attracted over $13 billion in green energy investments. However, this figure starkly contrasts with the estimated $68 billion required annually to achieve the nation's target of 500 gigawatts (GW) of non-fossil fuel power by 2030. This discrepancy underscores the urgent need for increased financial inflows to meet ambitious sustainability goals. 

Systemic Challenges Impeding Progress

Several systemic issues exacerbate the funding drought for deep tech and climate tech startups:

• Regulatory and Logistical Hurdles: Project delays stemming from land acquisition challenges, grid connectivity issues, and regulatory complexities deter potential investors.

• Human Capital Deficit: A significant skills shortage hampers the renewable energy sector's growth. The industry faces a skill gap of approximately 1.2 million workers, with demand expected to rise by 26%, necessitating 1.7 million skilled professionals by 2027. This deficiency escalates operational costs and impedes technological innovation.

• Risk Perception: High-profile corporate controversies, such as allegations against major conglomerates like the Adani Group, have heightened risk perceptions among investors, leading to increased caution and reduced capital inflows into the sector.

Global Funding Trends and Domestic Implications

The global downturn in venture capital funding has further strained India's deep tech ecosystem. In 2024, the Indian space industry experienced a 55% decline in funding, securing only $59.1 million compared to $130.2 million in 2023. This trend reflects broader investment contractions and underscores the challenges deep tech startups face in attracting necessary capital. 

Government Initiatives and the Road Ahead

Recognizing these challenges, the Indian government has launched initiatives to bolster the sector. Notably, a $1.3 billion incentive scheme, PM E-DRIVE, aims to promote electric vehicle adoption and reduce pollution. The scheme allocates funds for subsidies on various electric vehicles, including two-wheelers, three-wheelers, ambulances, and trucks, and sets aside resources to enhance EV charging infrastructure and encourage new technologies. 

However, bridging the funding gap requires more than governmental support. Attracting foreign capital is essential, but protectionist policies and high interest rates pose challenges. Moody's emphasizes the necessity of international finance and improved capital flows, while domestic measures like offering green bonds have not fully succeeded. The sector needs an estimated $300 billion by 2032 to stay on track for its ambitious goals. 

India's deep tech and climate tech startups stand at a critical juncture. Addressing the funding bottleneck necessitates a multifaceted approach, including regulatory reforms, skill development, and fostering investor confidence. Strategic collaborations between the government, industry stakeholders, and the global investment community are imperative to unlock the sector's potential and drive sustainable innovation.