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The universal VC playbook for mitigating risk is based on an ‘investment thesis’ at the intersection of external opportunity and internal core competence, and real ‘deep tech’ businesses are not a part of the investment thesis of most Indian VCs.
This is as much a reflection of the infancy of the ‘deep tech’ ecosystem in India as it is of the high uncertainty and long gestation involved in finding the appropriate product-market fit for a deep-tech idea.
To understand why VCs in India have yet to enthusiastically embrace deep tech, it is helpful to understand the history of VC investing in India.
India’s tryst with new-age technology began in a small way, when, for the first time, first-generation entrepreneurs with no family background of business grabbed opportunities that showed up through a chance confluence of events and past decisions to create a global technology services industry on an unprecedented scale.
While the nature of work was nothing to write home about, it slowly but surely created a large talent pool of engineers that would provide the capability to steadily move up the value chain.
While VC did play a role in creating what would prove to be India’s identity on the world stage as a startup hothouse, it was limited, largely because the global tech services business model was profitable from day one and could be scaled through internal accruals.
Another chance confluence of events sometime in 2008 would offer Indian startups an opportunity to solve some of India’s biggest problems around payments, e-commerce, mobility and financial inclusion, among others.
Solving these problems needed boatloads of VC money because these business models mostly involved creating markets by altering consumer behaviour.
Scaling was rapid because the problems being addressed were real and the talent pool created in the previous phase was in place to make the best of this new revolution.
Additionally, rapid scaling was enabled by high conviction among global VCs in the India Story. Their optimism proved to be justified, and this new wave of startups created a string of huge success stories. This spawned an altogether different kind of engineering talent that could potentially power the next wave of deep-tech startups.
However, startups in India working on deep-tech ideas have had much more uncertainty and scaling risk than those solving problems that were more immediate and well-defined, which could be addressed simply by enhancing ‘discoverability’, ‘accessibility’, ‘connectivity’ and ‘transactability’.
It is therefore not surprising that VCs have continued to chase startups that are solving problems through ‘not-so-deep-tech’ solutions, even if it meant having to go deeper into less attractive customer segments (serving less well-off Indians, i.e.) and markets, rather than investing in deep-tech ideas.
For deep tech to take off and bloom in any country, there needs to be a commitment to pursuing new ideas in science and technology at multiple levels, including building and nurturing institutions of excellence like Stanford or MIT.
While some of the knowledge uncovered in the process results in merely pushing the frontiers of knowledge with no guarantee of any immediate or near-term application, the role this plays in uncovering the next set of big ideas is immense.
Industry commitment to investing in research and development (R&D), another critical component of an ecosystem conducive for deep-tech success, is missing.
Industry expenditure on R&D in India has been notoriously low. The outcome of these missing pieces is an ecosystem that is inadequately prepared for supporting and scaling deep-tech startups.
Another unintended outcome of Indian successes in leveraging internet technologies to address large problems has been that the idea of ‘engineering’ was subconsciously defined in our collective psyche very narrowly to mean ‘coding,’ while deep tech is all about artificial intelligence (AI) and machine learning (ML). The excessive hype around AI has not helped the cause of furthering progress in other technologies.
Human progress continues to depend on breakthroughs in manufacturing technologies, materials science, biology and green technologies, among others.
However, it is heartening to see some passionate and audacious startups attempting to solve difficult problems in domains as varied as space technologies, sustainability, manufacturing, new materials, green energy and many more. Hopefully, this will trigger relevant capability creation in academia as well as within corporates.
The speed with which Indian Space Research Organisation (ISRO) has embraced and supported startups working on space technologies is a sign of things to come. Large companies in several sectors, both domestic firms and multinational corporations, have created venture arms to incubate ideas that would prepare them for the future.
And finally, as the ecosystem evolves, it’s just a matter of time before VCs in India realize that deep-tech bets are no longer as risky, and that they are probably better off with deep tech than going after less risky ideas on a path of diminishing returns.
A new generation of VCs, whose partners come from deep science or tech backgrounds, is likely to emerge and help set off the next wave of tech entrepreneurship in India.
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