Why Rally Cap VC, a fintech investor for emerging markets, is launching a $5M climate fund spinoff

Last year, Amini, a Kenya-based climate tech startup using data from satellites to offer insights on crop health and track farming progress, announced pre-seed and seed rounds six months apart.

Not only did the startup manage to raise rounds in quick succession, which was commonplace a few years back but now rare even for early-stage startups, but it also pulled in some heavy backers, including Salesforce Ventures, Female Founders Fund, and Pale Blue Dot.

This scenario reflects events of the fintech boom, only this time, climate tech is the trendy investment opportunity now.

Over the last three years, climate tech has tailed fintech as Africa’s second most funded sector, simultaneously a consequence and result of the several climate-focused funds emerging within that timeframe. With funds such as Novastar, Satgana, Equator and AfricaGoGreen Fund (AAGF) catering to seed- to growth-stage startups, fintech-focused Rally Cap VC has joined the likes of Satgana and Catalyst Fund at pre-seed and seed stages. The firm has reached the first close of Rally Cap Climate, its climate tech fund, at $2.5 million; it expects a final close of $5 million.

So why is a $20 million early-stage venture capital firm focused on emerging markets fintech dabbling in climate tech?

“There’s always like push and pull factors for every decision,” explained general partner Hayden Simmons, in an interview with TechCrunch. “On the pull side, we just found that, increasingly, many of the most exciting calls we were having with founders were on the climate side — and that dovetailed alongside our internal initiative to kind of expand our mandate beyond fintech.”

While Rally Cap still believes its fintech investment thesis holds long-term and continues providing portfolio support, general partner Hayden Simmons notes that the early-stage firm is now drawn to a certain founder type that climate tech offers: experienced senior executives-turned-founders whose products serve business customers.

But that’s not all. These days, many emerging market-focused investors are increasingly exploring climate investments, seeing them as commercially attractive and venture-backable rather than solely philanthropic endeavors, which was the perception for years. Additionally, there’s a growing urgency for enterprises, governments and consumers to adapt to climate change, driving the demand for cleantech solutions between countries and regions.

For Rally Cap, establishing a separate vehicle for climate tech startups in Africa and globally and providing them with cross-border support, including co-investment opportunities, aligns with this trend.

“We’re still keeping our African LatAm and emerging market DNA, and that’s our positioning even with U.S. or European founders,” Kyane Kassiri, partner at Rally Cap VC, said in the interview. “We stand out from other climate investors in that whenever global climate startups are ready for their solutions to be applied or expanded to Africa or LatAm, we know which doors to knock.”

Amini is one of Rally Cap VC’s portfolio companies. Others include Circadian, a Nigeria-based energy management software designed for tower operators; Mexican solar financing marketplace Solfium; and U.S.-based electrification infra platform Eli. The firm is currently finalizing a deal in a Brazilian cleantech, according to the partners.

Climate tech startups are typically categorized into mitigation or adaptation, two main strategies for addressing climate change. Mitigation, which aims to reduce greenhouse gas emissions using voluntary carbon markets or deep tech, often requires significant capital. Simmons explained that his firm’s climate fund prefers backing adaptation strategies, usually software solutions, due to easier market entry and less capital requirements.

“Some hardware is okay if that’s the wedge,” the general partner remarked. “Circadian and Amini both have hardware components, for example. However, the real recurring revenue and IP reside at the software layer. That’s really what we’re investing in, and that’s where we think we can generate the real sort of fintech-esque returns in this market.”

Rally Cap Climate invests between $50,000 and $100,000 in its portfolio companies while providing its limited partners with co-invest opportunities in some deals. The partners say the fund intends to make 50 investments in tandem with the strategy, number-wise, for other funds within the firm (its proof of concept fund has over 50 investments, while the number of startups in Rally Cap VC, its fintech fund, which the partners say remains priority and is currently at a 2x MOIC [multiple on invested capital], stands at 15).