A space that has managed to create and sustain buzz in the startup space and managed to get investors excited even in these tough times is Cleantech/ Energy Transition. Companies in the space have managed to make headlines with their innovation and eye-catching fundraise.

So, to do a deep dive into this emerging and exciting space, we sat down with Raiyaan Shingati of Transition VC. The energy transition-focused fund has invested in several upcoming startups, and just last year announced the launch of a ₹400 crore fund.

Transition VC – The Firm

“We invest seed capital in technology startups, that work towards decarbonisation and broader energy transition. So, that’s what we do,” that is how Shingati, co-founder and Managing Partner of the firm defines the company.

“We invest across the transition space, or climate tech as you would like to call it. We see the energy transition space as a sector and have divided that into demand and supply sides.”

On the demand side, we’re looking at the entire gamut of the value chain of mobility, from ground to marine to aerospace and drones. We are also looking at investing in a net zero journey of buildings, buildings consume one-third of energy almost and any technologies that improve energy efficiency in building materials are something we are looking at.

On the supply side, we invest in anything that is renewable tech, so projects or technologies that make existing renewable assets more efficient are something we look to invest in. Solar/ Wind is something that we’re looking at, Energy Storage again is a huge opportunity, we believe energy transition is not possible without energy storage applications and innovation in energy storage.”

Why Energy Transition?

Over the last decade, India’s biggest startups have come from the internet space, companies like Zomato, Paytm, Nykaa and several others have achieved great success and have made a lot of profits for their early investors. More recently, AI has been the buzzword in the startup space and companies that have anything to do with AI have garnered much attention, so considering all this, when asked about why the firm chose energy transition as its focus, here’s what Shingati said.

“So one of the key things that a VC looks at is market size. And the size of the energy transition market is huge. So even if say at times when a company is not the industry leader and is probably second third or fourth, because of the huge market size opportunity, they would still make a lot of money.”

When asked for a prediction about whether companies in the space could grow to be as successful as the ones in the Internet space, Shingati doubled down and said, “If I have to give a prediction, you could see about 10 to 12 unicorns, emerging in this decade from the energy transition space.”

So, the first cleantech wave possibly came around 2006 to 2011. That time, it did not serve very good investment results. So a few investors still have a bad taste in their mouths, but it did help us to get where we are today. So we believe we are at the right time to invest in clean tech from a financial point of view, we see climate change and energy transition as a business opportunity and a very financially lucrative business opportunity. Which also serves a greater purpose.”

The Greater Good

“We believe it’s the right time and not only from the financial point of view, but it’s also a need of the hour. So if we don’t do it today, we will eventually be forced to do it.

“Climate change is something that we have to address but even from an India point of view, from a nation, building point of view, as an aspiring and growing population, we would be consuming almost three times or two and a half times our current per capita consumptions of energy and that cannot possibly be fueled by importing of fossil fuels.

We have to grow and we cannot rely on external fossil fuels and have to be self-sustainable. And looking at geopolitics, we do not want to fall into the energy security issues that a lot of European nations have fallen into. So that’s what drives the entire team.”

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The Portfolio

“So from the Fund, the first investment we did was EMO. However, before we started the fund, we made a bunch of investments.

So we are one of the first investors in Exponent Energy. They do rapid charging for commercial vehicles, as fast as under 15 minutes. So this brings down the size of the battery and bringing down the size of the battery enables bringing down the cost of the vehicle. And it literally affects the EMI for the single vehicle owner. So the EMI of three wheeler EV versus a CNG or IC engine is on par or if not less.

We’ve invested in a company called Charge+Zone. So they are now one of India’s largest charge point operators, they are electrifying highways, which is what we need for faster, adoption for passenger vehicles. They also work with heavy commercial vehicles like buses, for example, all the BMDC buses that you see in Bangalore are electrified by them. So they’ve gained a lot of traction. They just closed a large series A round, of I think about $54 million (₹443 crore).

EMO is also gaining initial traction. And if all goes well, by the end of this year, we could probably see another funding round for them which would be at a substantial markup.

So we’re building an ecosystem of people who understand this opportunity, either those who’ve been in this space and have built companies, sold companies or are running successful companies. And others, who clearly see this as a huge investment opportunity and want to participate in it.”

The Process

“As a VC fund, we have a fiduciary responsibility to our LPs and we have to generate super returns for them and that’s what we have promised and that’s what we do.

So we do not come in at the idea stage, we would want to come in once, some pilots are done, some initial revenue traction is there.” Shingati further added that while initial revenue is not that important, having some pilots done is because then they can verify the product’s capabilities through their industry contacts and networks as well.

When all that is done that’s where they “come in, and get them that one or two million dollars whatever is needed to help them to achieve that product market fit and get to the series A round.”

“One of the most important things that we look for is the ability to pivot. So, in my experience of investing for almost a decade, no business actually sticks to the plan that it initially chalked out. It’s the founder’s ability to pivot when a googly is thrown at them and how they react to that, is something which is very important. So that is something that we try to evaluate.

And finally, obviously, the most important part is TAM, what is the target addressable market? What is the market size? Is it a billion-dollar-plus for us to play? Does it have room for error? Even if it’s a great product and a good entrepreneur, but the market size is not as convincing, we will probably pass. We want the market size to be huge.”

The Funding Winter

The most prominent elephant in the room these days when we talk about funding and startups, is the funding winter. In the past few years, several startups have had trouble raising funds as funding across the world seems to have dried up. Addressing this elephant Singhati said, “Clearly there’s a slump and we’re seeing that in numbers. Do we see directly it affecting us? Not entirely, so the focus now is more on micro and not macro.

The only difference that we see is that valuations have become way more attractive. There are not too many people who are just throwing money because it’s a buzzword or it’s hot. We still see that happening by the way, it’s not that it has completely evaporated.

But most of the VCs are now focusing on unit economics, sustainable profitability versus growth at any cost versus burning money being negative even on a gross level. At transition, we’ve always had a stand that we will not invest in startups, that are not gross profitable or do not have a sustainable profitability path.

Due diligence for startups has significantly increased, Singhati explains. People are not just writing checks because someone else is also writing and they want to be a part of it. But FOMO still exists, it hasn’t gone away and will probably continue to exist in sectors, which are so hot like climate tech but the pace of it has reduced let’s say that.”

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