India’s venture capital firms and fund managers often talk about innovation, but in the age of generative AI and deeptech, such talks seem shallow
Between 2014 and 2023, deeptech startups secured over $1.5 Bn in funding, but many of these companies are much smaller in scale versus today's deeptech giants
As the perennial question goes, when Indians are the ones building products and platforms for Google, Microsoft, Amazon, Meta and other AI giants of today, why have no such companies emerged from India in the past decade?
India’s venture capital firms and fund managers often talk about innovation, but in the age of generative AI and deeptech, such talks seem shallow.
That’s because when we look at the startups that have raised the most funds in India over the past two years, or the ones that have given exits, the innovation is only seen in the business models and commercial models, rather than technology itself.
For instance, when it comes to AI and deeptech, Indian startups have largely benefitted from the IP creation and technology created in Silicon Valley and Europe, but only a few claim to have created such an IP. And so comes the perennial question — when Indians are the ones building products and platforms for Google, Microsoft, Amazon, Meta and other giants, why have no such companies emerged from India in the past decade?
The answer, among Indian VCs at least, is the lack of the patient and domestic capital base that was needed to create those giants in the west. And as the first wave of startups mature, it’s unlikely that such large outcomes will ever be seen in India.
But large outcomes is something that VCs should be chasing. And what can be larger than creating the next Nvidia or OpenAI in India, as foolhardy as it may seem right now?
As OpenAI’s Sam Altman said in 2023 Indian startups cannot hope to build something like a large language model (LLM) for $10 Mn or even $100 Mn. Microsoft poured in billions and so did other investors, leading to the stage where OpenAI stands today.
Even so, it’s a loss-making company — the latest projections show a staggering loss of $14 Bn even in 2026. Yet, no one can argue that OpenAI has created the groundswell for generative AI and machine learning that will have a lasting impact.
Despite the ongoing funding challenges, the sector has continuously grown in the last three years. In 2023, deeptech startups raised $496 Mn compared to $397 Mn in 2022, according to Inc42’s latest “Indian Tech Startup Funding Report 2023”.
Overall, between 2014 and 2023, deeptech startups in India secured over $1.5 Bn in funding across 343+ deals, but many of these companies are much smaller in scale versus the traditional tech giants. So what will it take for India to grow its deeptech expertise?
Deeptech Is Just Beginning
It’s perhaps not surprising to some investors that Indian companies cannot come close to behemoths such as OpenAI or Google. The DNA of tech in India is quite different from that in the West, according to a Bengaluru-based early-stage fund’s founder.
As he said, in the West, the idea in the early 1980s and 1990s was always to build something for the world to use, and export technology because the US market was limited at that time. “India began late, and therefore, we will be late on many things. When we decided to leverage tech, there was the realisation that no one is catering to Indian problems and consumers. Tech startups could only build on top of existing IP, and this also suited us because we were focussing inwards rather than outwards,” the founding partner added.
That’s something other marquee funds are also claiming. Peak XV’s Rajan Anandan told Inc42 last year that deeptech playbooks are now being written in India, and typically, Indian startups move from application to the tech side because that’s the go-to-market strategy that has worked so far. As Anandan put it, AI startups have been around for decades, and investors have backed them for years, but what India needs now is the infrastructure
And this is also why viewing AI as the primary deeptech segment is perhaps facetious and myopic. “We are seeing what’s happening beyond AI and that’s very critical for the Indian tech economy to mature beyond where we are. [At Peak XV] we have two semiconductor companies. Mindgrove is making systems on chip. InCore is building a fabless semiconductor startup, while Newtrace is working to improve India’s green hydrogen production,” Anandan added, indicating the beginning of VCs backing startups creating tech IPs in India.
The True Depth Of Deeptech
Developing a global generative AI success story from India means dealing with the reality of how expensive it is currently, even though deeptech itself allows so many varied business models, according to All In Capital founder Kushal Bhagia.
We are talking about robotics, industry 5.0, machine learning, generative AI, semiconductors, AI computing capacity and of course data refinement and enrichment. All of these are open for disruption, Bhagia said.
Most early stage investors do not have the appetite and today, startups cannot build tech IP with 10s of millions of dollars, like it was possible in the 1980s. The investor quoted above added, “The age of the garage startups is well and truly over. Today, the technology that is defining the world is being made in shiny buildings. Do you really expect Indian companies to build the same from the garage?”
What many investors are asking for is not just domestic capital, but domestic capital that is patient. To extend the analogy, Indian startups are building with a garage mindset and competing with giants. While it’s commendable, this cannot be done on a small pool of capital that demands an exit in six to seven years.
But at the same time, there is a bit of a chicken and egg problem. As one fund manager who has backed companies like LLM maker Sarvam AI, semiconductor IP company InCore and other startups in the deeptech space told us, “Till there is a big outcome from India, all deeptech bets will seem small. Just like till Flipkart, Indian ecommerce was just an India story.”
What about VCs that are very bullish and long on deeptech. The likes of pi Ventures, Bharat Innovation Fund, Exfinity Ventures, Speciale Invest, Bharat Innovation Fund among a host of other funds are specifically looking at deeptech sectors. BIF’s Ashwin Raguraman is one of the most optimistic investors when it comes to deeptech in India.
He told Inc42 that startups are more than capable of resolving some of the most pressing problems in India — from access to healthcare to agriculture to education to social welfare and governance. So far they have not been given the foundation that is needed. With the introduction of the India AI Mission, which promises compute capacity, besides access to data and network, some of the foundation is being taken care of.
“As civilisations evolve, things are bound to become complex. The more complex the problem, the deeper the technology you need to resolve them. I’m certain that the deeptech built by talent from India is going to play a big role in solving complex global problems,” Raguraman, one of the founders of the $100 Mn deeptech focussed fund, said.
Patient Capital In The Age Of Exits
This group of investors, which has put the wagon behind deeptech, surprisingly believe that deeptech investments will outlast and outperform consumer-facing sectors in the long run. These are the models that are creating foundations — both hardware and software — for the future.
“When a deeptech startup goes past the initial stage of product creation and achieves product market fit, follow-on generalist investors are willing to come in because there’s tech acting as a differentiator, thereby offering strong moats and better opportunities to scale,” BIF’s founding partner added.
But he also acknowledges that getting there is not for every deeptech startup. Finding the product-market fit is hard in the deeptech space because these companies are creating the very technology that is rapidly evolving all the time. So deeptech is not for investors without the tenacity to last this course.
Unfortunately, the current attention of most of the VC ecosystem is on outcomes such as public offerings and exits through secondary. Over the past two months, we have written about this movement, which has been necessitated by the upcoming fund closure deadlines of some of the most prominent funds in India.
Exits through IPOs are also being heralded for multibagger returns and vindication of investment. Zomato is one example, but ask any deeptech VC and they will tell you the opportunity is larger on the IP and tech innovation side than what most investors even understand.
The narratives around exits and IPOs will not be seen in deeptech for at least a decade. Do investors have the patience to endure another decade of limited outcomes, just as they are reaping the fruits of the past decade?
