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Can Innovation Alone Buoy India’s Deeptech Startup Ecosystem?

Can Innovation Alone Buoy India’s Deeptech Startup Ecosystem?

Funding in deeptech constitutes a mere 1.45% of the total funding in Indian startups

Funding in India’s deeptech startups has increased at a CAGR of 22.8%, as against China’s 79%

Migration of high-skilled labour is a primary reason behind India’s struggling deeptech sector

Why is it that India has not produced an Alexa or a DJI? In India, the current state of deeptech is such that the country has not produced even one globally-recognised virtual assistant like  US e-tailer Amazon’s Alexa or a drone startup like China’s DJI. In the constantly evolving world of artificial intelligence and machine learning, these are just two entities in a long list underlining India’s failure to unlock the opportunity in Indian deeptech startup ecosystem.

The Indian startup ecosystem has produced 27 unicorns so far, but none belong to the deeptech domain. In terms of a total startup funding in Indian startups since 2014, the highest grossing sectors are e-commerce ($13.59 Bn), fintech ($8.14 Bn) and consumer services ($4.74 Bn), according to Inc42 DataLabs research. With its inability to attract significant venture capital, deeptech – which is a combination of artificial intelligence, internet of things, drones and robotics – still struggles to shine among its peers.

The State Of Deeptech Funding In Q1-2019

The overall startup ecosystem in India attracted a total funding of $3.42 Bn in the first quarter of 2019, 52% higher than the average quarterly funding in the domain between 2014 and 2018, according to Inc42 DataLabs research.

Despite a good start in the first quarter of 2019, deeptech continues to struggle to sustain the momentum in attracting high-value investments. In the first quarter of 2019, the deeptech sector recorded a total investment of $9.58 Mn, a mere 1% compared to e-commerce ($958 Mn). the funding in fintech and consumer services stood at $697 Mn and $212 Mn respectively. There is a visible lack of investor confidence in deeptech compared to other sectors.

Figure 2 indicates that all sectors barring deeptech received higher funding compared to the quarterly average between 2014 and 2018. E-commerce startups received the maximum funding ($958 Mn), followed by fintech ($697 Mn) and consumer services ($212 Mn). On the other hand, the total funding in deeptech came in at  $9.58, 73.83% lower than the quarterly average of $36.63 Mn in the sector.

Now, let’s take a look at the amount of venture capital in deeptech startups in some other parts of the world, such as the US, the UK and Israel.

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The State of Deeptech Funding in Global Startup Hubs

India lags its global peers such as the United States, China and Israel, which have recorded significant growth in total funding. In the US, the investor confidence in deeptech (CAGR 543.28%) is very high compared to other sectors, a characteristic missing in the startup hubs of China and Israel. The reason behind this is two fold. Not only are US, Chinese and Israeli deeptech startups better funded, but they also attract more big-ticket investors, as newer technologies are adopted relatively faster by the masses in these countries.

Challenges Facing the Deeptech Startup Ecosystem in India

Despite government initiatives such as Startup India, Atal Innovation Mission and MUDRA, the growth in Indian deeptech startup funding is far behind its Israeli and Chinese counterparts. One primary reason for this is the lack of monitoring and regulation, which leads to poor or failed execution of these government schemes.

Besides, some of the factors that hinder the growth of the Indian deeptech ecosystem which comprises of  startups operating in machine learning, artificial intelligence, robotics and internet of things are:

  • Lack of high-skilled workers:
    • To promote innovation in advance technologies such as artificial intelligence and machine learning (AI/ML), drones, internet of things,  a specialised workforce is a must. While India does have the required talent pool to facilitate breakthrough innovation, a majority of the high-skilled Indian labour choose to work in the western countries for better pay prospects. This migration of high-skilled labourers from India to the West has a negative impact on tech-intensive sectors such as deeptech.
  • Strong Market Presence of Global Players
    • Only a handful of companies – primarily global tech giants such as IBM, Google and Microsoft – provide the development platforms required to develop a deeptech-related product.  This skewness towards big corporates in the context of deeptech products is a result of the strong market presence that they have managed to develop in the Indian market over the years.
    • Despite having a significant number of homegrown drone startups, India was the second largest importer of drones between 2014 and 2018, according to a report by Stockholm International Peace Research Institute (SIPRI). India also accounted for 13.2% of the total global demand for unmanned aerial vehicles (UAVs), the report concludes.
  • A Low-Level Readiness of the Indian Public towards technology
    • Despite the country’s position as a  leading software services exporter, as the software exporter, Indian masses are less tech-savvy compared to other nations. This makes it difficult for companies to capture a larger share of the 1.2 Bn-strong vibrant Indian market.
  • Weak Intellectual Property Framework
    • Although the Narendra Modi administration has taken a multitude of steps towards improving the intellectual property rights scenario in the country, and some improvements visible in terms of the grant of patents, the confidence of innovators still seems to be lagging. In the financial year 2017-18, India granted 13,045 patent applications, marking a surge of almost 32.5% compared to the previous year, according to official data.
    • In contrast to this, the fifth edition of Global Intellectual Property Index by the US Chamber of Commerce 2017 assigns India a score of 8.75 out of 35, compared to 7.05 the previous year citing “fundamental weaknesses” in the country’s intellectual property framework.

For India to improve its position among the leading emerging startup ecosystems around the globe, a renewed focus on innovation is warranted. An effective and sustainable way forward could be by engaging the homegrown startups to sold real-world problems.

Innovation can prove to be the necessary evil to unlock the hidden potential in deeptech startups.  When it comes to promoting innovation, India can learn from the example of the United States in the early 1990s,  when the world’s largest economy used its work visa regulations to attract high-skilled labour in a bid to bridge the talent gap in its booming tech industry. As the issue of migration of high-skilled labour from India remains, a phenomenon often referred to as ‘brain drain’,  it may be a little while before deeptech attains its full potential in India. One way for the Indian government to start could be by way of attracting high-skilled labour through work visas from Asian peers where the job market has reached a saturation point. This will eventually fill the talent gap which has been created over the years due to the brain drain, hindering growth in sectors such as deeptech.

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Author

Sandeep Singh

Inc42 Staff

Sandeep is a research analyst at Inc42 DataLabs. As a market researcher, he has a keen interest in blockchain and public policy.

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