India saw a significant surge in deeptech start-ups in 2023 with 480 new ventures emerging, making it the third largest pool globally, a report said.
However, the report by technology industry body Nasscom and global consulting firm Zinnov highlighted the worrying trend of a funding winter, posing a major challenge for these start-ups.
'India's DeepTech Dawn: Forging Ahead' report also 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 start-ups, out of which 480 were established in 2023 itself, nearly 2X more than the number of deep tech start-ups established in 2022," the report said.
But India's deep tech promise is stunted by a funding gap. "Compared to start-ups across some other leading deep tech ecosystems, Indian deep tech start-ups receive a fraction of the median investment at every stage. This lack of funding restricts the ability of some promising deep-tech start-ups to scale, thus hindering India's ability to compete in the global deeptech race," it said.
Read: DPIIT Likely to Enhance Start-Up Funding in 100-Day Action Plan: Report
Indian deep-tech start-ups raised about $10 billion in the last 5 years. Total $850 million was raised in 2023 itself -- this is a 77 per cent decline over $3.7 billion raised in 2022. The number of deals, meanwhile, declined by 25 per cent 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 commercialisation."
Artificial Intelligence (AI) emerged as a founder's favourite, with 74 per cent of deep tech start-ups established in 2023 driven by AI. AI was also an investor favourite, with 86 per cent of the start-ups who raised funding in 2023 having an AI focus.
AI takes the center stage in patent filings with 41 per cent 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 programmes and government-backed instruments are necessary initiatives to be taken by the government to make the landscape more favourable to invest in," the report said.
The number of investors participating in funding rounds for India's deep tech start-ups dropped by over 60 per cent 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 start-ups with low ticket sizes and relatively lower risk, further declining the funding volume.
Nasscom recommended the government to "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 start-up involves early-stage technologies based on scientific or engineering advancements, to create and own Intellectual Property (IP).
These start-ups are characterised 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 deeptech startups in India are Clairco, Ishitva, GetVu, UptimeAI, HealthPlix, Cloudphysician, and Veative Labs.
