In a forward-looking survey of climate capital allocators in India, funders were asked where they were most likely to deploy capital in the coming year (2023). An overwhelming majority of them called out software-based/ asset-light businesses as a primary focus, particularly at the early stage.
This mirrors traditional funding patterns in India. Software-based businesses are asset-light, have clear return timelines, and potentially rapid scalability. These businesses are well-understood and the risk-reward profiles are also well-charted. No one ever got questioned for funding an asset-light business over an asset-heavy one.
But… software can’t eat carbon.
Image: Carbon Direct Air Capture Machines (ClimeWorks)
Global economies are built on a mix of foundational technology, IP-led innovation, and production-centric businesses. In other words, “boring businesses”. In the transition to a green economy, it will increasingly be these “boring businesses” that lead the charge in making climate impact.
These are the businesses that will purify pyrolysis oil for full circularity, produce green silica, manufacture biotech agricultural inputs, deliver potable water through efficient water treatment systems, make green building materials, develop plastic- substitutes that are marine, land, and carbon-friendly, build and integrate carbon capture reactors, to name just a few types.
Like the companies that were foundational to the knowledge economy and the industrial revolution before it, these innovations will transform how economies function and businesses operate. Had society failed to invest in electricity, mechanization, steam engines, and new materials like plastics, the industrial revolution never would have taken hold; similarly, the IT revolution would have never found its feet had mainframes, computers, the internet, and mobile phones not come first.
Integral to these businesses are plant and equipment, machinery, hardware, infrastructure, and capex. Their growth trajectories, timelines, funding needs, and return profiles are, for obvious reasons, quite distinct from software-led business models.
However, the point of this article is not to create a false binary between “boring” businesses and “sexy” startups.
It is also not to say that software doesn’t have a critical role to play in creating climate impact. Software can work in close tandem with existing hardware foundations to deliver larger impacts.
In fact, some of the most successful models we have seen neatly integrate the two, leveraging the positives of each for accelerated scale and market traction, and using data to best optimise existing infrastructure. Some examples would include energy storage, battery technology, and battery management; software that optimises logistics and on-the-ground supply chains for radically improved resource efficiency; or sensors and data intelligence that manage critical water assets or protect valuable energy assets like the grid and make it radically more robust.
At Green Artha, our explicit focus is on funding the IP-led innovations – including green chemicals, biotech, green building materials, waste management, and industrial decarbonization – that will be the infrastructure backbone of the green economy. We see the opportunity as a confluence of 3 things: market trends and long-term indicators; entrepreneurs with clear and proven ability to create impact at scale; our own experience with businesses of this kind, their key drivers, and the business models that will make them successful. This allows us to work with companies that others might consider too technical or asset-heavy, and support them most effectively.
Ultimately, understanding the interplay between IP-led climate technologies, the funding/ capital allocation business model, and the fundamentals of the real economy is critical to this approach.
Boring businesses, along with their digital counterparts, are going to be critical to achieving the green transition we need at speed and scale. Accordingly, funders need to evolve – revisit strategies, invest time in understanding these business models, and build new risk-reward frameworks. With the right approach, these businesses will have a multiplier effect on financial and environmental RoI.
And yes, they will also be able to eat carbon.