NASSCOM: India’s DeepTech startups face fund crunch

Virendra Pandit

New Delhi: Although the number of India’s DeepTech startups surged significantly in 2023, funding dropped by 77 percent, according to the National Association of Software and Service Companies (NASSCOM).

The report, “India’s DeepTech Dawn: Forging Ahead”, drawn up by NASSCOM and global consulting firm Zinnov, highlighted the worrying trend of a funding winter, posing a major challenge for these startups.

It said funding for scaling, talent attraction and retention, and global expansion are the top 3 challenges faced by startups in deep-tech innovation.

“India currently has 3600+ deep-tech startups, of which 480 were established in 2023 itself, nearly 2X more than the number of deep-tech startups established in 2022,” the report said.

But India’s deep-tech promise is stunted by a funding gap.

“Compared to startups across some other leading deep-tech ecosystems, Indian deep-tech startups receive a fraction of the median investment at every stage. This lack of funding restricts the ability of some promising deep-tech startups to scale up, thus hindering India’s ability to compete in the global deep-tech race,” it said.

Overall, Indian deep-tech startups raised about USD 10 billion in the last 5 years. In 2022, they raised USD 3.7 billion but only USD 850 million in 2023, a decline of 77 percent. The number of deals also declined by 25 percent in 2023 over 2022, it said.

“India needs a multi-pronged approach: increased funding at early-stage, supportive market ecosystem for scale-ups, and robust initiatives to aid commercialization.”

Artificial Intelligence (AI) emerged as a founder’s favorite, with 74 percent of deep-tech startups established in 2023 driven by AI. AI was also an investor favorite, with 86 percent of the startups that raised funding in 2023 having an AI focus.

Also, AI takes center stage in patent filings with 41 percent of all patent filings in deep-tech, followed, with a large gap, by IoT and Neurotech, the report said.

According to venture capital firms, long gestation periods are the biggest challenge facing them while investing in deep-tech.

“Co-investment programs and government-backed instruments are necessary initiatives to be taken by the government to make the landscape more favorable to invest in,” the report said.

The number of investors participating in funding rounds for India’s deep-tech startups dropped by over 60 percent in 2023, compared to 2022. The absence of many large global investors, who had previously driven funding, also contributed significantly to this decline.

“Median ticket size across seed-stage and late-stage reached their 4-year low and 5-year low, respectively. Although early-stage median ticket size reached a 5-year high, it was not enough to offset the overall decline in funding. The absence of mega deals in 2023 as compared to 9 mega deals in 2022, underscores a declining investor emphasis on large-ticket investments,” the report noted.

Investors preferred investing in seed-stage deep-tech startups with low ticket sizes and relatively lower risk, further declining the funding volume.

NASSCOM recommended the government “identify and strengthen innovation clusters, facilitate the availability of patient capital and robust compute infrastructure, fast-track the implementation of the National Deep-Tech Startup Policy (NDTSP), improve the IP framework, and strengthen the overall supplier ecosystem (including talent pipeline).”

A deep-tech startup involves early-stage technologies based on scientific or engineering advancements, to create and own Intellectual Property (IP). These startups are characterized by extended development timelines and high capital intensity and also carry large technical uncertainty which presents a large opportunity or risk depending upon whether or not it succeeds.

Some deep-tech startups in India are Clairco, Ishitva, GetVu, UptimeAI, HealthPlix, Cloudphysician, and Veative Labs.