Table of Contents

1. Key Highlights:
2. Introduction
3. The Generalist Revolution
4. Bridging the Funding Gap
5. The Role of Government Support
6. Funding Landscape: A Comparative Analysis
7. Evolving Strategies for Generalist VCs
8. Fostering a Supportive Ecosystem
9. Successful Case Studies: Pioneers in DeepTech
10. Future Outlook: Anticipating the Next Decade

Key Highlights:

• Generalist venture capital funds are increasingly engaging in deeptech investments, expanding funding opportunities for startups across various stages.
• Specialist funds are adapting their strategies to include growth-stage investments, facilitating the transition of deeptech innovations to market-ready products.
• Government support, alongside the influx of capital from diverse sources, positions India to become a significant player in the global tech arena.

Introduction

The landscape of venture capital is experiencing a notable shift as generalist funds begin to recognize the immense potential within deeptech sectors. Defined broadly as industries focused on advanced scientific discoveries and innovations—including robotics, quantum computing, and biotechnology—deeptech traditionally struggled to attract substantial investments, given its longer maturation cycles and high capital requirements. However, as competition mounts globally, particularly between the US and China, India is seizing this moment to differentiate itself as a burgeoning hub for deeptech innovation and investment. With the government actively supporting initiatives and generalist venture capital firms pouring funds into this sector, a new era of deeptech is unfolding.

The Generalist Revolution

Historically, venture capital funding in India was largely concentrated in various tech sectors such as fintech and SaaS. However, with an increasing number of firms like Peak XV Partners, Accel, and Elevation Capital shifting their focus towards deeptech, the tide is changing. These firms are not only participating in early-stage investments but are also offering vital growth-stage capital—essential for startups poised to transition from concept to commercialization.

Peak XV Partners has ventured into the deeptech domain with several stealth investments announced early this year, reflecting a broader commitment to supporting innovation across multiple scientific disciplines. Accel has actively signed multiple deals across diverse niches—from aerospace to advanced materials—investing strategically in both seed and Series A and B stages. Such commitments culminate in significant funding amounts, exceeding $63 million collectively among its portfolio companies this year alone.

Elevation Capital, while taking a more gradual approach, has also acknowledged the potential within deeptech, allocating resources and senior team members to focus on this area. Their recent investments include a notable Series A deal with aerospace component maker Jeh Aerospace, highlighting their long-term vision.

Bridging the Funding Gap

Deeptech startups face unique challenges due to their need for extensive resources and longer timeframes to achieve market viability. Specialist venture capitalists like Speciale Invest, which has been championing deeptech since 2008, emphasize the necessity for longer-term investments. Their third fund, amounting to $70 million, plans to primarily target growth-stage startups, thus filling a vital gap in the funding lifecycle that has historically hindered competitiveness.

Yali Capital and GrowX Ventures represent other notable players charging into this dual-stage strategy. Yali Capital, with its recent $104 million debut fund, plans to allocate a portion of funds towards mature companies requiring Series D and beyond investments. Similarly, GrowX Ventures has shifted its focus to provide significant growth capital through their $50 million second fund, underscoring a growing trend among VCs—transitioning firmly into deeptech.

This movement towards deeper investment strategies reflects a crucial understanding that emerging technologies require patience and significant financial backing to cultivate fully and turn them into viable products.

The Role of Government Support

India's deeptech ecosystem has also benefited from supportive government policies aimed at fostering innovation. Initiatives such as the ₹10,000 crore Fund of Funds promise to channel significant capital into deeptech ventures, paving the way for an enriched entrepreneurial landscape. Additionally, the research, development, and innovation scheme announced recently serves to incentivize both startups and VCs to engage more earnestly with deeptech sectors.

The National Quantum Mission exemplifies the government’s commitment, with funding directed toward startups pushing the boundaries of quantum technologies. These ambitious government-backed initiatives are essential as they lay the groundwork for startups seeking credibility and validation in the investment community.

Funding Landscape: A Comparative Analysis

As venture capital investments globally soared to approximately $430 billion between 2021 and 2023 in deeptech, India's contribution of $7.1 billion signifies both a challenge and an opportunity. The community must assess the alignment of available funding with the ambitious goals of deeptech entrepreneurs.

A sustainable venture capital ecosystem requires a concerted effort from both specialist and generalist funds. The tendency for generalist VCs to scale back on investments if immediate profits aren’t visible is a concern. While the inherent risks of deeptech investments are substantial, the potential for transformative breakthroughs offers an immensely rewarding payoff—if backers are willing to sustain support through the lengthy development periods.

Evolving Strategies for Generalist VCs

For generalist funds diving into deeptech investments, adapting traditional strategies is essential. Deeptech ventures lack the rapid turnaround typically associated with fintech or consumer tech startups. Instead of looking for quick returns, VCs must view their investments within these frameworks as long-term bets. The competitive landscape now highlights the synergy possible between the robust financial resources of generalist funds and the specialized knowledge of deeptech.

Moreover, the concern regarding overvaluing deeptech companies must be addressed. Specialist funds warn against generalists who may misjudge the valuation of companies and retract funding before their potential becomes apparent. Recognition of a startup’s fundamental value—a process that often takes years in the deeptech domain—is crucial for sustaining investment and entrepreneurial growth.

Fostering a Supportive Ecosystem

To transition from potential to viable product, deeptech startups benefit from well-structured funding networks that support them across their development stages. Government initiatives, coupled with a robust network of generalist and specialist funds, must work in tandem to create a nurturing environment conducive to innovation.

Programs like the Innovation for Defence Excellence (iDEX) initiative offer an avenue through which startups can validate their technologies and garner government contracts. Successful participation in such programs not only enhances credibility but can also serve as a crucial financial boost.

The emerging conclusion among industry experts is that while foundational efforts are underway, a unified and comprehensive approach must evolve to facilitate the nascent yet promising deeptech sectors in India.

Successful Case Studies: Pioneers in DeepTech

Several startups exemplify the potential of the deeptech ecosystem in India. For instance, Pixxel, a company specializing in hyperepectral satellite imagery, achieved significant recognition when selected by NASA to be part of its Commercial SmallSat Data Acquisition Program, valued at $478 million. Such milestones serve as proof points reflecting the viability of deeptech investments, creating a ripple effect encouraging further funding.

GrowX Ventures' early backing of Pixxel with seed funds has resulted in a 17x return on investment, showcasing the rewarding potential of deeptech entrepreneurship. This case underlines not just the fledgling nature of this space but also the solid investment opportunities available for discerning venture capitalists.

Future Outlook: Anticipating the Next Decade

Looking ahead, the integration of deeptech within India's broader economic fabric appears promising. Given the immense scope for technologies that lie on the cutting edge, the next decade could herald an explosive growth phase akin to the software boom witnessed a decade ago.

As experts project a trajectory for deeptech that mirrors the early days of SaaS, a comprehensive understanding of the ecosystem will be vital. Continued government support, combined with the engagement of both generalist and specialist VCs, will determine how effectively India can carve out its niche in the global tech arena.

FAQ

What is deeptech?

Deeptech refers to startups and companies focused on developing advanced scientific technologies, such as quantum computing, robotics, and biotechnology, characterized by lengthy development cycles and heavy initial capital requirements.

Why are generalist VCs investing in deeptech now?

The competition for technological leadership, particularly between the US and China, and increasing government support in India have prompted generalist venture capital funds to diversify their investments into deeptech.

What challenges do deeptech startups face?

Deeptech startups typically encounter significant obstacles, including longer time frames for product development, substantial upfront capital requirements, and market readiness. Support through various funding stages is crucial for their success.

How does government support influence deeptech funding?

Government initiatives provide the necessary financial backing and validation sought by deeptech ventures, enabling access to a more extensive range of funding opportunities while mitigating regulatory risks.

What is the future of deeptech in India?

The future of deeptech in India appears bright, with growth projections indicating accelerated development akin to other technology sectors. Sustainable funding strategies and government collaboration will play a pivotal role in this evolution.