Bridging the Funding Gap for Climate - Focused Companies in Emerging Markets
India stands at the threshold of an unprecedented energy transformation, driven by surging demand, rapid renewable capacity expansion, and a bold vision to achieve energy security through domestic capabilities. As the world's third-largest electricity consumer, India's energy transition represents both the scale of opportunity and the urgency required to power the nation's economic ascent while securing sustainability.
This transformation unfolds across multiple dimensions: expanding clean generation capacity, modernizing grid infrastructure to integrate 500 GW of renewables by 2030, diversifying into new energy sectors, deploying storage solutions at unprecedented scale, and leveraging digitization to optimize efficiency. Unlike advanced economies like Europe, which focus on optimizing mature systems, India must simultaneously build new capacity and digitize operations from a lower baseline.
Key Findings:
1. Stakeholder Insights - Climate start-ups struggling with a critical funding gap
In our research, we engaged in-depth discussions with key stakeholders within the climate ecosystem. This diverse group included entrepreneurs, comprising founders and CEOs of climate start-ups, who offered their first-hand perspectives on the challenges of scaling their ventures. Additionally, we consulted investment bankers, well-versed in climate tech investments, who provided valuable insights into the hurdles faced during fundraising efforts. Furthermore, we sought input from policymakers, who offered their perspectives on the value of supporting the broader climate tech landscape.
Through these focused conversations, we gained valuable insights into the specific difficulties faced by start-ups as they endeavour to scale their climate solutions within the context of EMs. This deep dive also provided us with a nuanced understanding of the challenges associated with fundraising for climate tech start-ups. Here are the overarching challenges faced by young climate tech companies in the selected EMs:
Many promising climate start-ups struggle with a critical funding gap, hindering their ability to scale and achieve real-world impact. This "missing middle" challenge arises from several factors:
Financing Gap for Scalability: After securing early-stage funding, start-ups often face a dearth of growth capital crucial for scaling their operations. The combination of emerging market risk and climate tech scale up risk contribute to hesitation for larger ticket investments beyond the early stage.
Patient Capital Needed: Climate solutions typically require longer investment horizons to mature. This clashes with the shorter timelines favoured by traditional venture capital models.
Capital-Intensive Nature: Unlike "capital-light" businesses favoured by VCs, many climate solutions involve building physical assets, demanding significant upfront investment.
Limited Market & Consumer Adoption: Lower Total Addressable Markets (TAM) and slow consumer uptake due to cost barriers can make these start-ups less attractive to investors seeking high returns.
Impact Measurement Hurdles: Companies struggle to effectively communicate their climate impact due to limited expertise in measuring and communicating environmental benefits.
This combination of factors creates a funding gap that stifles the growth of promising climate solutions. In addition to stakeholder insights, our research, supported by a comprehensive literature review and insights from multiple reputable research platforms, echoes the existence of “Growth Capital” financing gap for climate solution companies operating in EMs.
1. MIT Technology Review highlighted that globally, the pool of funding for the critical "growth stage," crucial for demonstrating first-of-a-kind technologies, remains relatively small[1].
2. Inc42 also emphasized that the climate start-up funding landscape presents a dichotomy, where early-stage deals continue to flow, however, deals exceeding $50 million are becoming increasingly rare[2].
3. International Energy Agency (IEA) analysis stressed that outside major hubs like the US and China, most countries lack local investment funds to adequately support their clean energy startups, particularly during the scale-up phase[3].
[1] MIT Technology Review - Climate tech is back and this time, it can’t afford to fail, December 2023
[2] Inc42 - Venture Capital Trends In India In 2023 And The Outlook For 2024, December 2023
[3] IEA - World Energy Investment 2022
Research Methodology
The study investigates the key roadblocks hindering the scalability of climate solutions developed by young start-ups in EMs with a focus to India. We employ a multi-pronged research approach to analyse the factors limiting growth within the climate tech sector of these regions.
Stakeholder Insights: Conversations with Climate Ecosystem Leaders: To gather qualitative data and gain a deeper understanding of the challenges faced by young climate tech startups in EMs, we conducted in-depth conversations with over 120 key stakeholders within the climate ecosystem. This diverse group included entrepreneurs, investment bankers, and other influential individuals actively involved in climate-related initiatives. Through these conversations, we aimed to gain valuable insights into the challenges faced by companies as they attempt to scale their solutions and navigate the complexities of fundraising within the climate tech space.
Comparative Analysis of Start-up Mortality Rate in Climate Sector: To corroborate the findings from interviews with climate ecosystem leaders, we conducted a comprehensive analysis of 843 climate companies which raised capital during 2017 – 2022 period, in the selected EMs between 2017 and 2022, focusing specifically on companies offering climate solutions. We examined company mortality trends across different stages of company development. By comparing these trends to the global benchmark, such as global data from a well-recognized investment database, we aimed to identify any potential discrepancies in the funding funnel specific to EM climate tech companies.
Quantification of Funding Gap: To assess the disparity in funding available to start-ups in the climate sector in EMs compared to developed markets, we analysed 1,697 funding deals data to estimate capital funding allocated to such companies within the selected EMs during the period 2017-2022. Additionally, we utilized data on climate investments in the US market during the same period as a benchmark representing developed markets. The US market serves as a reference point due to its established climate ecosystem. By comparing the total capital invested in the EM climate market to the estimated total investment required to reach US market funding levels, we were able to quantify the potential funding gap.
Landscape Analysis of VC and PE Funds: To gain a comprehensive understanding of the current funding environment for climate start-ups in the selected EMs, we conducted a comprehensive analysis of the VC and PE landscape. This analysis involved mapping the activities of over 80 VC and PE funds operating within these regions. Our focus was on examining the investment focus areas to identify potential gaps in the market and areas requiring additional resources for robust growth in climate solutions.
The cost crossover enables clean peak replacement while reducing renewable energy curtailment. As electric vehicle adoption scales—potentially adding up to 30 GW of peak load—paired storage, smart charging, and dynamic tariffs will become critical to monetize grid flexibility.
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Investment Landscape: Platform-Scale Opportunities
India's energy transformation creates investment opportunities spanning grid digitization, renewable manufacturing, storage systems, and new energy forms.
Grid and metering infrastructure offers immediate opportunities across advanced metering systems, grid analytics platforms, and loss reduction technologies. The ₹97,631 crore allocation for smart meter installations under the Revamped Distribution Sector Scheme represents just the beginning of a broader grid modernization program. Companies providing end-to-end metering solutions, from hardware manufacturing to data analytics and billing systems, are positioned to benefit from this infrastructure buildout.
Storage and flexibility services present high-growth opportunities as renewable penetration increases. Co-located battery systems, optimization software, and ancillary service platforms enable renewable developers to provide firm power while capturing value from grid services. The expanding electric vehicle ecosystem creates additional demand for charging infrastructure, smart grid integration, and vehicle-to-grid services.
Manufacturing opportunities span solar modules, inverters, transformers, and smart meters as India builds domestic supply chain capabilities. The government's production-linked incentive schemes support manufacturing across the clean energy value chain, reducing import dependence while creating high-value employment in emerging technology sectors.
Strategic Outlook: Leading the Global Energy Transition
India's energy transition has moved from targets to tangible scale, with record additions establishing renewables as the system's growth engine. The next imperative is building a resilient domestic supply chain—spanning modules, cells, inverters, transformers, storage systems, and digital controls—to lock in cost advantages and enhance reliability.
Localized manufacturing and digitally enabled hardware will accelerate grid-forming capabilities, reducing curtailment and peak thermal dependence while improving Discom financial health. This catalyzes broad economic gains: export-ready industrial clusters, skilled employment, and lower lifecycle energy costs.
By coupling scaled deployment with supply chain depth, India advances energy security, macroeconomic stability, and sustainability in tandem—offering a replicable model for emerging economies seeking growth-aligned decarbonization.