The world is witnessing a surge in the emergence of startups leveraging new-age technologies such as Artificial Intelligence (AI), Machine Learning (ML), Blockchain, and Internet of Things (IoT). This technological revolution is transforming industries, economies, and societies across the globe. India, known for its robust IT sector, is no exception to this trend. Despite a significant drop in funding in 2023, the Indian startup ecosystem continues to thrive with a notable increase in the number of DeepTech startups, collaborations, and patent filings.
According to Nasscom’s latest report: Cumulative global VC investment in deep tech startups is set to reach a staggering $590 billion in 2023. What’s interesting is that global investment in these deep tech startups is expected to reach a total of $409 billion between 2021 and 2023, nearly tripling from $160 billion between 2014 and 2020. This impressive growth suggests growing investor confidence in emerging technologies that have the potential to transform entire industries.
The rise of deep tech startups in India
However, despite having the third-largest pool of deep tech startups in the world, India ranks sixth among the top nine deep tech ecosystems globally (excluding China) as of 2023. This gap is due to limited funding and less mature deep tech support systems.
Interestingly, The number of deep tech startups in India is expected to cross 3,600 by 2023. Of these, 481 were founded in 2023 alone, surpassing the 215 new startups launched in 2022.
The surge in deep tech startups in India is mainly due to The number of startups using AI technology is rapidly increasing. 74% of deep tech startups founded in 2023 will be focused on AI, up from 62% between 2014 and 2022.
Some of these startups include Agnikul, GalaxyEye, HealthPlix, Sarvam AI, and Peptris.
Funding bottleneck
It is important to note that despite the growing number of deep tech startups in India, funding remains a major challenge, limiting their potential to scale and innovate.
Indian deep tech startups have raised a cumulative $10 billion in the last five years, but only $850 million is expected to be raised in 2023. This is a cause for concern 77% decrease That’s down from the $3.7 billion raised in 2022. Additionally, the number of deals in 2023 was also down 25% year-over-year.
AI is once again garnering investor attention, with a staggering 86% of startups securing funding in 2023 focusing on AI.
So, what are the key challenges facing deep tech startups in India and why?
Funding challenges for Indian deep tech startups
Deep tech startups in India face significant challenges in raising funds due to several interrelated factors.
The issues to note are: 70% of these startups face smaller funding sizes on average than other startups globally at every stage of fundraising. This inconsistency severely impedes our ability to compete globally and expand our business effectively.
Additionally, average ticket sizes at key funding stages such as seed and later stages have hit four- and five-year lows, respectively. While average ticket sizes at the early stage are hitting a five-year high, the overall trend highlights a tight supply of available capital, which is essential for startups to scale.
Another major challenge is Over 70% of seed-stage deep tech startups are backed by venture capital, private equity, and corporate investors. This increased selectivity and longer durations have resulted in funding deals falling through the cracks across the board, creating a challenging environment for startups seeking capital to innovate and grow.
The absence of any large deals in 2023, compared with nine in 2022, further highlights a significant shift in investor strategies toward smaller, safer investments. This cautious approach reflects investors’ hesitation to commit large amounts to potentially high-risk ventures.
In addition to these challenges, The total number of investors participating in funding rounds is expected to fall by more than 60% in 2023 compared to 2017. The absence of influential global investors, who have played a key role in driving fundraising so far, has significantly reduced the overall pool of available capital, thereby adversely impacting the financial health and growth prospects of Indian deep tech startups.
Apart from the challenge of raising funds, Indian deep tech startups are also grappling with key issues like attracting and retaining talent, access to strong research facilities, adequate computing infrastructure etc. These factors are crucial for the development and expansion of deep tech startups.
Stakeholders in India’s deep tech ecosystem have been advocating for targeted government intervention, including streamlining the regulatory framework, encouraging research and development investments, strengthening infrastructure for testing and scaling technologies, and fostering industry-academia collaborations.
India’s deep tech sector is brimming with potential. By addressing funding challenges and building stronger support for deep tech startups, India can not only close the gap with its global peers but also emerge as a leading deep tech powerhouse.
