--and again

2010:Clean tech gets PE traction
Chanpreet Khurana
Posted online: Mar 21, 2010 at 2214 hrs

It all began with a defunct laptop. Rohan Gupta, who was chief operating officer of Cinesprite Entertainment then, wanted to know what he could get for his four-year-old machine in Bangalore’s second-hand market. A less than satisfactory offer led Gupta to explore what happens to a computer after it is disposed of. A lot of ground research, interviews with government officials, people from industry and companies abroad that dealt in electronic waste management later, Rohan, along with his older brother Nitin, incorporated Attero Recycling, an electronic-waste management company, in 2008. India generates over four-lakh tonnes of e-waste every year, most of it recycled, reprocessed by unorganised players in a very unhealthy and environment-unfriendly manner. Starting the company on the premise of grabbing some share away from the unorganised sector was the easiest part.

Gupta remembers, though not fondly, the early days of Attero, and the grilling sessions he had with potential investors at a time when clean technology wasn’t a hot investment sector even with private equity (PE) and venture capital (VC) players, who thrive on spotting a trend early and getting in when valuations are low. “Investors want to know what the potential of the idea is and how quickly it is likely to boom. Also, it helps if the entry barrier is high and not too many competitors can mushroom overnight,” explains Gupta. Finally, last year, Attero Recycling received $6.3-million (around Rs 28.9 crore) in funding from Draper Fisher Jurvetson (DfJ) and NEA-IndoUS Ventures.

For Attero’s funding pitch, the brothers collated data such as the amount of electronic waste generated nationwide, the likely increase in this figure even in the short term, market research on what technologies were available for shredding and metal separation and which ones could be imported. “Who we are and our training also helped,” says Gupta, a chemical engineer. Nitin Gupta has studied electronic engineering at the Indian Institute of Technology, Delhi, and is also an alumnus of the Stern School of Business, New York University.

Attero currently handles 300-400 tonnes of electronic waste every year, a minuscule proportion of the total 4,40,000 tonnes generated in the country every year. With the ‘green agenda’ finding roots across global businesses in the aftermath of the United Nations’ Copenhagen Climate Conference last year, many experts opine that 2010 may, perhaps, turn out as a watershed year for clean technology investments in India.

A cusp year

Says Mohanjit Jolly, executive director, DfJ, “2010-11 is going to be seen as the time when clean technology investments really start happening in India in a meaningful way, especially from the VCs’ side.” Increasingly, companies—both potential investors and service providers—are looking to tap the sector as a viable and scaleable business opportunity. Indian Venture Capital Association president Mahendra Swarup says last year the clean technology sector in India attracted at least $160 million in private equity and VC funds, despite “limited opportunities”. Factors such as increased awareness after the Copenhagen Summit and policy decisions such as the proposal to institute a national clean energy fund, too, are promising signals for the industry.

VCs had been studying the sector for two or three years, and since Copenhagen, the sector has become top of the mind. While investments in larger projects by PE funds have taken off in the last year or two, it is only in the past six to nine months that smart ideas that need low initial investment and promise great returns have started to emerge.

Nexus Venture Partners’ Manoj Gupta sees significant changes in the clean technology sector over the next couple of years. “The sector has seen traction in the last three to five years. Until now, some of these companies were sub-scale and are only now getting to a level where we (VCs) are getting excited,” he says.

The VC firm, which makes investments in the $3-5-million bracket, last year put $3 million into D.light Designs, a company that makes solar-powered lanterns and has a presence in India and African countries such as Tanzania. Gupta, an avid blogger on clean technology and an alumnus of the Indian Institute of Management, Ahmedabad, says 10-15% of the fund’s portfolio may be dedicated to the sector over the next two years.

Another promising factor from a VC’s point of view, according to Jolly, is that some of the innovations are in areas such as power generation, which is an “influential catalyst for growth as a whole”. The chances, then, of governments working towards an enabling policy framework for new technologies and innovations are greatly enhanced.

This expectation is shared by others in the industry, and was acknowledged in finance minister Pranab Mukherjee’s Budget 2010-11 speech, in which he proposed setting up a national clean energy fund to facilitate research and innovative projects in clean energy technologies. Clean technology businesses, too, expect to get a leg-up from a policy framework that promotes sustainable practices. Attero’s Rohan Gupta cites the example of a 2001 notification that categorises e-waste as hazardous material that should only be disposed of by authorised recyclers. “India is a price-sensitive country. A push from the government will help,” he adds.

Different businesses, different funding models

Interest in clean technology opportunities has clearly been on the rise in the last six months, according to Subir Das, managing director of India operations at Invvest.org, a not-for-profit entity. He adds that the number of enquiries his company has been receiving on the clean technology projects that are underway is on the increase, as are requests for research and analysis into specific projects and country risks. “There are investors who are processing opportunities in sectors such as solar energy, waste to electricity generation and water management projects right now, and they could announce deals as soon as three to four months,” he says.

There are three broad categories of clean technology companies, and corresponding investment models, in India currently. The first kind of investment is project-based. This is a one-off, localised play in, say, setting up the infrastructure for a biogas plant. This is usually a capital-intensive proposition with benefits limited to that one project. VCs typically look for projects and technologies that have applications beyond one hub, and so these one-off kind of projects attract more PE funds that bring with them somewhat larger corpuses to invest. This segment comprises the bulk of clean technology companies, and investments, in India at present.

The second category is businesses that import technology and then Indianise it. The challenge here is not so much one of developing intellectual property, but of adapting, implementing and scaling it up—”take something that works and implement it here” kind of model— elaborates DfJ’s Jolly.

Attero Recycling can be classified into this segment. While the company has sourced some of the key ingredients and technologies required for shredding from US-based suppliers, it has Indianised the business model to suit the domestic market conditions.

The third kind are the companies involved in innovative play, the intellectual property, research and development sharks. “It’s a sort of 70-20-10 split,” adds Jolly, who is also on the board of Attero Recycling.

Wheat from chaff

To be sure, there still remain some hurdles in the path to fully realising the potential of the sector to tap VC funding. These include problems such as limited investment opportunities, and lack of clarity on valuation and, therefore, difficulty in developing a clear exit strategy.

When Karan Gupta first conceived of launching Breathe India Ventures, a start-up fund with a focus on clean technologies, in February 2009, he had a hard time convincing people the idea would work. He recounts that the first order of business was really to objectively view what were the attractive enterprises from an investor’s point of view. “Majority of the companies were pure hype. It’s not surprising that the numbers (data on deals for previous years) don’t reflect the growing interest,” explains Gupta.

Contrary to expectations, Gupta says setting up shop during a year when large parts of the Western world were still reeling from the effects of a recession did not present too many challenges. The quantum of funding for clean technology from investors in countries such as the Netherlands did slow, but the bigger problem remains a supply-demand mismatch. The industry is still in its nascent stages here, according to Gupta, and so there are few proven models for viable, scaleable ventures. “The general feeling is there are too many investors running after too few investees.”

According to Swarup, while the global financial crisis did slow investments in long-term projects such as clean technology, another reason for fewer investments was the dearth of good investment opportunities. “Clearly, things are getting better,” he says.

“Relative to two years ago, more interesting ideas are emerging. But in absolute terms that number has to become more meaningful,” adds Jolly.