70% of Indian deeptech startups cited funding to scale as their biggest challenge. In India, R&D spending is just 0.7% of GDP
The StartUpIndia initiative has enabled INR 960 Cr of funding for startups
In July, the government released a policy draft to support the country’s deeptech ecosystem, unveiling a common grant framework across government ministries
To date, the central government has built 31 innovation centers, 15 startup centers, 15 technology business incubators, 7 research parks, and 500 Atal Tinkering Labs. The StartUpIndia initiative has enabled INR 960 Cr of funding for startups. Still, 80-90% of startups fail, many of which are because of lack of funding.
This is especially true in deeptech, where commercial viability is equally vital as it is difficult to assess. 70% of Indian deeptech startups cited funding to scale as their biggest challenge. Long gestation periods create costly uncertainty, and reluctant capital at commercialisation becomes the most common reason for failure.
Government funding has historically been necessary to fill the gaps. After all, public funding created the original lithium-ion batteries long before enabling the smartphone revolution. The US government’s Defense Advanced Research Projects Agency (DARPA) developed the GPS system. Yet, venture capital gets scared when government procurement is fundamental to a startup’s value proposition. Bureaucracy, the traditional wisdom follows, is notoriously difficult to navigate, and funds are limited. In India, R&D spending is just 0.7% of GDP.
However, that may be changing in India. Why? We now recognise the role domestic innovation has to play in building smart cities, modernising public transportation, and integrating clean technologies into infrastructure, among other endeavors. Today, the government is expanding its capacity as a first market for deeptech products with public uses, answering the all-important question of many deeptech startups: “Who will we sell to?” startups and VCs would be wise to recognise the moment accordingly.
Learning From Success
Take note of the defense industry. iDEX, established in 2018, aims to increase Indian self-dependence in defense. The program empowers an ecosystem of technologists and innovators making products for the Indian military, expected to spend INR 1.5 lakh Cr (about $18 Bn) a year until 2030 modernising itself. iDEX issues problem statements–pertaining to cyber security to arms transportation–and offers up to INR 10 Cr to winning pitches.
The programme then collaborates with founders, providing infrastructure and support services, and acts as a first market for the product. NewSpace Research and Technologies, an unmanned aerial vehicle innovator, and EyeROV, an underwater inspection robotics startup, are just two success stories to emerge from the program. Such developments have even increased venture funding confidence, with defense-focused funds like MountTech cropping up.
Another industry that has benefited from heavy government involvement is spacetech. Since the 2013 Mars Orbiter Mission, the state has launched 13 high-profile missions, creating new demand from the ISRO for necessary technology. IN-SPACe, an autonomous, single-window, nodal agency for procurement, authorises purchasing, provides infrastructure support, and monitors and facilitates the marketplace for spacetech.
IN-SPACe also offers technical assistance to firms by sharing technologies, best practices, and products. The program has created a “predictable and enabling” regulatory regime, bringing funding from $28 Mn in 2020 to $120 Mn in 2023.
Industry 4.0 in India is similarly primed for growth. An expanding set of industrial Public Sector Undertakings are demonstrating growing openness to integrating IoT and AI, offering a new customer base for industrially oriented DeepTech. Average contract values are still low compared to the Western players, but are rising steadily. The landscape, largely free of incumbents, will prove easier to navigate as these companies face new demand from a public sector looking to adapt for the modern age.
Leveraging The Movement
At 8X, we have been looking to capitalise on this opportunity for some time. In 2020, 8X invested in Solinas Integrity, a robotics and computer vision startup earning government contracts to strengthen public sanitation infrastructure. Approximately 75% of Solinas’s business is B2B2G and B2G sales. When it started, Solinas struggled to find backers for its product. It eventually partnered with municipalities and has since worked with channel partners across South India to provide its services.
Today, our portfolio companies benefit heavily from government procurement. Pantherun, a cyber security innovator, got its first contracts to upgrade systems for BHEL and Indian Railways. They will also work with Bande Bharat this year. XYMA Analytics, an Industrial IoT sensor company that uses waveguide technology, frequently acts as a subcontractor for the government, with roughly 30% of its business B2G.
NDTSP And The Future Of Deeptech Funding
In July, the Government released a policy draft to support the country’s deeptech ecosystem. The policy will correct government fund disbursement’s “slow, fragmented, and siloed” nature. Based on the IN-SPACe model, it will provide a single window throughout the lifecycle of government grants (from disbursal, tracking, and feedback) to streamline and improve transparency for startups.
It also unveils a common grant framework across government ministries that offer INR 200 Lakh for proof of concept and INR 300 Lakh for prototype. This program will continue to open possibilities for deeptech solutions with an array of public applications, from sanitation and water to agriculture.
Deeptech startups are entering a new era of expanded spending, streamlined procurement processes, and robust infrastructure support throughout development. The sooner VCs recognise that opportunity, the sooner these startups can scale and ultimately solve this country’s most pressing problems.
