The world is witnessing a remarkable surge in the birth of startups harnessing new-age technologies such as artificial intelligence (AI), machine learning (ML), blockchain, the Internet of Things (IoT) and more. This technological revolution is reshaping industries, economies, and societies globally. India, known for its robust IT sector, is no exception to this trend. Despite a considerable dip in funding in 2023, the Indian startup ecosystem continues to flourish with a notable increase in the number of DeepTech startups, collaborations, and patent filings.
According to the latest report by Nasscom, cumulative global VC investments in DeepTech startups reached an impressive $590 billion in 2023. What’s interesting is that the global investments in these deeptech startups totalled $409 billion between 2021 and 2023, a nearly threefold increase from $160 billion between 2014 and 2020. This remarkable growth suggests investors’ increasing confidence in advanced technologies that promise transformative impacts across industries.
Rise in DeepTech Startups in India
However, despite having the world’s third-largest pool of DeepTech startups, India still ranks sixth among the top nine DeepTech ecosystems worldwide (excluding China) as of 2023. This gap can be attributed to funding limitations and a less mature DeepTech support system.
Interestingly, the number of DeepTech startups in India reached over 3600 in 2023. Of these, 481 were founded in 2023 alone, surpassing the 215 new startups that emerged in 2022.
The surge in deeptech startups in India can be attributed primarily to the rapid increase in startups leveraging AI technologies. A whopping 74% of DeepTech startups founded in 2023 are focused on AI, compared to 62% between 2014 and 2022.
Some of these startups are Agnikul, GalaxyEye, HealthPlix, Sarvam AI and Peptris.
The Funding Bottleneck
It is important to note that despite the increase in the number of deeptech startups in India, funding remains a significant challenge, limiting their potential to scale and innovate.
Indian DeepTech startups have raised a cumulative $10 billion in the last five years, with only $850 million raised in 2023. This was a concerning 77% decline from the $3.7 billion raised in 2022. Additionally, the number of deals also declined a notable 25% YoY in 2023.
AI is once again the centre of attraction for investors, with a staggering 86% of the startups that secured funding in 2023 having an AI focus.
So, what are the major challenges faced by Indian DeepTech startups and why?
Funding Challenges for Indian DeepTech Startups
Indian DeepTech startups are grappling with significant challenges in securing funding, driven by several interconnected factors.
A notable issue is the disparity where 70% of these startups face median ticket sizes smaller than their global counterparts across all funding stages. This discrepancy severely hampers their ability to compete on a global scale and effectively scale their operations.
Moreover, median ticket sizes at critical funding stages, such as seed and late stages, have reached their four-year and five-year lows, respectively. Although early-stage median ticket sizes have seen a five-year high, the overall trend underscores a tightening of available funds crucial for startup expansion.
Another significant challenge is the funding preferences of over 70% of seed-stage DeepTech startups, which favour venture capital, private equity, and corporate investors. Due to this increasing selectiveness and elongated timelines, funding deals have failed to close across sectors. This has created a challenging environment for startups seeking capital to innovate and grow.
The absence of mega deals in 2023, compared to nine such deals in 2022, further highlights a notable shift in investor strategy towards smaller and safer investments. This cautious approach reflects investors’ hesitance to commit to large-ticket investments in potentially high-risk ventures.
Adding to these challenges is the significant decline in the total number of investors participating in funding rounds, plummeting by more than 60% YoY in 2023. The absence of influential global investors, who previously played a pivotal role in driving funding, has severely reduced the overall pool of available capital. Consequently, the financial health and growth prospects of DeepTech startups in India have been adversely affected.
Beyond funding challenges, DeepTech startups in India also contend with critical issues such as talent attraction and retention, access to robust research facilities, and adequate computing infrastructure. These factors are crucial for the development and scaling of DeepTech startups.
Stakeholders in the Indian DeepTech ecosystem advocate for targeted government interventions. These include streamlining regulatory frameworks, incentivizing R&D investments, enhancing infrastructure for testing and scaling technologies, and fostering industry-academia collaborations.
India’s DeepTech space is brimming with potential. By addressing the funding challenges and building a more robust support system for DeepTech startups, India can not only bridge the gap with its global counterparts but also emerge as a leading DeepTech powerhouse.