In recent years, India has emerged as a thriving hotspot for cutting-edge innovations in the deep tech sector, with a surge in start-ups focusing on robotics, drones, biotechnology and artificial intelligence (AI) sectors.
The recent public listing of Celesta Capital's portfolio company, ideaForge, was taken as a totem of the industry's success; especially after it was oversubscribed by over 100 times, providing the investor with a lucrative partial exit opportunity. Other venture capital companies are now looking at this area with renewed interest.
Chennai-based Speciale Invest today manages over $70 million in assets, with several investments in deep tech start-ups focused on aerospace, semiconductors, quantum security, renewable water and green hydrogen solutions. Endiya Partners, which has around $100 million in investment, leans heavily on deep tech, as does Arali Ventures, which also backs several start-ups in this sector. These companies placed their bets on the domain years ago and are reaping the rewards for their foresight.
The Investment Challenge
While the potential for growth in deep tech is undeniable, a myriad of issues continues to cloud its horizon, hindering.
India from realising and unleashing its deep-tech potential. Establishing and maintaining a deep tech start-up in India remains challenging, largely due to obstacles in securing financing and acquiring essential equipment and components.
The ability to solve these challenges will decide the sector's growth trajectory. According to Archana Jahagirdar, founder and managing partner of Rukam Capital, there is a prevalent belief in India that you can't really grow or invest from a VC vehicle in a deep tech company because they need a very long time to mature.
What separates deep tech from traditional start-ups is its high-risk, high-reward nature. This requires substantial time and ongoing financial backing to succeed, which is a key reason many investors have shied away from backing founders in this space.
The question bothering most VCs in India is the financial runway to build a deep tech company in India. "A hockey stick speed is really important for any start-up. Otherwise, how does one return the money to their LP?" she questioned.
A deep tech start-up delves into nascent technologies rooted in scientific or engineering advancements that have yet to be established commercially. This process requires extensive R&D since the technology often requires numerous iterations before a viable Proof of Concept (PoC) can be set up. Moreover, convincing legacy companies to embrace these technologies can be a long-drawn conversation.
Ezhilan Nanmaran, head of product at ideaForge, points out that as with any emerging technology, there is a need for significant customer education as many customers may not be fully aware of the capabilities and limitations of drones. Also, the development of a robust supplier ecosystem needs to take place to help drive wider adoption.
"Given the long incubation period, high technology risks and delivery risks, it's indeed crucial for these startups to adopt a strategic approach to customer segmentation, product development and monetisation. To mitigate financial risks, it's beneficial to identify a customer segment or application where the technology can be monetised quickly," he added.
Also, rapid prototyping is a valuable strategy for deep tech startups to get faster customer feedback and then expand to other market segments through incremental innovation and monetisation plans," he further explained.
Traditional institutional investors look at a five to ten-year horizon for good returns. Jagirdar claimed that from an early-stage investor's perspective, they want to see that the company has a viable future from a capitalisation perspective. This further puts a strain on the start-up since it has to juggle financing with supply chain troubles like sourcing the requisite equipment or components, especially from overseas markets.
Gaurav VK Sanghvi, co-founder at We Founder Circle, states that the main problem with deep tech in India is that it's hard to find investors who are willing to wait for these projects to succeed. "Investing in deep tech in India is not as common as investing in other types of technology. These projects take a long time to develop and show a profit, which makes them different from other tech businesses. In the beginning, they don't make much money, but once they get going, they often grow rapidly," he opines.
Fight For Talent
Founders are well aware of these problems of getting funders and then convince them to double down on their investments.
This is further reflected by the lack of good talent and difficulty retaining them in a competitive landscape. "However, the paradigm is gradually shifting, and freshers are increasingly looking at a high-potential career path in deep tech. Furthermore, accepting new technology has also been a hurdle we are dedicatedly mitigating through educational and awareness-oriented content and business benefit-focused use cases." states Peeyush Singh, co-founder and director at Appinventiv.
The Nasscom-EY' Breaking Ground: Unraveling the deep tech potential in Indian B2B SaaS' report also noted that "deep tech requires specialised expertise, finding and retaining skilled professionals is a challenge due to high demand and limited supply."
However, as funding and awareness increase, more individuals are reconsidering their career options, drawn by the promising opportunities in this sector. As the demand for experts in fields such as artificial intelligence, biotechnology, and quantum computing continues to surge, start-ups often find themselves engaged in fierce competition for the limited pool of specialised individuals.
The Government's Role
Given their constant struggle to get financing to support their innovations and manage talent, deep tech players hope the government's intervention will streamline matters. They demand better tax policies and R&D incentives to foster innovation and build a robust ecosystem.
Moreover, considering the fluctuating valuations of start-ups, these new-age companies believe that issues like angel tax make things more contentious. The high-risk and research-intensive nature of deep tech endeavours can lead to valuation volatility, posing challenges in complying with angel tax regulations.
Swayam Agrawal, founder and CEO of Aarika Innovation, believes the National Deep Tech Start-up Policy is a positive step in this direction. However, he reiterates that there is a long way to go to make things easier, especially in dealing with multiple government entities and getting permission quickly for research projects.
"While the government has taken positive steps to support R&D in the tech sector, some regulations can be cumbersome, leading to delays in approvals and compliance issues. Streamlining regulatory processes and providing more clarity on intellectual property rights, especially for emerging technologies, would greatly enhance our ability to conduct R&D easily," he explained.
Satish Shukla, co-founder at Addverb, claims that his robotics company received great support from the government while setting up its manufacturing facility in Noida. "Everybody was interested in having a robotics facility; we were able to commission and operationalise the factory within one year of land allotment. However, the policy can do much more to encourage innovation so that more start-ups have good experiences like us," he added.
Another way that the government can give deep tech start-ups a leg up when they are starting is by giving venture capitalists strong mandates for backing this sector and setting up a 'Fund of Funds'. This nudge would help since deep tech is not necessarily a significant focus area for most institutional investors, Vinay Rao, partner at VenturEast, stated, and especially get them the much-required long-term capital.
According to Nasscom, India's deep tech start-up landscape has witnessed a remarkable 40 per cent CAGR from March 2017 to March 2021. During this period, the funds raised by these start-ups doubled, with AI and the Internet of Things (IoT) contributing to two-thirds of these ventures.
There is no denying that the interest in deep tech endeavours is growing, which is a positive trend. As more venture capitalists acknowledge the country's potential to foster deep tech innovations, this will only accelerate, and hopefully, the present-day challenges will look like a distant memory.
