Increasing Patient Capital to catalyse the development of Emerging Technologies: A call to action for Indian venture capitalists

The development of emerging technologies (also referred to as Deep Tech) is accelerating across the world. Disruptive technologies such as Artificial Intelligence (AI), Machine Learning, 3D Printing, Advanced Materials, Internet of Things (IoT), Blockchain and Augmented & Virtual Reality are being adopted at increasing rates by large companies, new ventures and even governments. These technologies have yielded a litany of economic, societal, and environmental benefits. For example, AI is being applied to determine the right schedule for farmers to apply their anti-pest solutions based on localised advice, which helps improve their yield and income. 3D Printing techniques are being used to build prosthetic limbs, and Blockchain is being used to collect feedback digitally to track meal distribution operations of large charities.

At the forefront of developing such disruptive technologies are startups themselves. However, developing successful Deep Tech solutions can be highly challenging and are often capital and time intensive, with unique circumstances that differ from ventures leveraging mainstream technologies. Venture Capitalists (VCs) play a key role in the startup ecosystem as both capital providers and capacity builders for innovators. Despite India’s position on the cusp of global leadership in the space, many of the startups pioneering the field remain stunted by a gap in access to patient capital. Accordingly, VCs should simultaneously expand their investment risk tolerance as well as their capacity to assess emerging technologies in the interest of making a greater number of investments in Deep Tech that will serve to unlock the value of India’s innovative potential.

Disruptive technologies such as Artificial Intelligence (AI), Machine Learning, 3D Printing, Advanced Materials, Internet of Things (IoT), Blockchain and Augmented & Virtual Reality are being adopted at increasing rates by large companies, new ventures and even governments.

Boasting one of the world’s most dynamic contemporary technology ecosystems, the Indian VC community has made enormous strides in the past decade, as measured by sustained increases in fundraising, deal flow, and active VC funds. However, of the approximately 110,000+ startups in India, only 9 percent are funded. Insiders profess there is an extremely low tolerance for risk compared to ecosystems like Silicon Valley, with investors generally directing their funding to startups that are able to clearly demonstrate proof-of-concept and commercialisation viability in well-precedented sectors. Consequently, earlier stage innovators are frequently unable to access the capital required to go from ideation to prototype, effectively bottlenecking the pipeline of innovation.

This dilemma is compounded in domains of Deep Tech like AI, which requires a significantly longer amount of time and cost for research and development than generic software. Innovators in AI require patient capital—investment without expectation of turning a quick profit, in the interest of a potentially significant, long-term return. Furthermore, most VCs in India are currently oriented towards ventures involving proven mainstream technologies like FinTech, Media, and Gaming, hence their expertise in Deep Tech may be lacking. Without in-house technical acumen, VCs often struggle to effectively assess an AI solution’s technical viability and commercial potential in the market. Ambiguities and information gaps of this nature are common throughout other sectors of Deep Tech and act as a further disincentive to investment, particularly in the early stages.

The latest publicly accessible information, reported in July of 2021, indicates that India is home to 2,700+ startups that leverage AI. Meanwhile, Indian AI-enabled startups attracted funding of US $830+ million in 2020. While an impressive sum, testimonials from startups and VC executives indicate that the majority of funding is directed to a fairly small number of growth-stage startups. Moreover, US-based investment firms, such Sequoia, Accel, and Tiger Global, as well as Japan’s SoftBank, are responsible for a significant portion of such investment. Meanwhile, early-stage Indian AI startups often struggle to secure capital, and Indian VCs remain far more risk averse than their counterparts in the West as well as in East Asia.

Insiders profess there is an extremely low tolerance for risk compared to ecosystems like Silicon Valley, with investors generally directing their funding to startups that are able to clearly demonstrate proof-of-concept and commercialisation viability in well-precedented sectors.

This market gap may be the biggest hindrance preventing India from reaching its aspiration of hosting a world-leading AI and Deep Tech ecosystem. On Github, the world’s leading code-sharing platform, Indians contribute ~30 percent of code to public AI-related repositories—more than any other nation—indicating the immense depth of talent in the country. If there was a large, liberal pool of patient investment capital, like in Silicon Valley, it is highly probable that there would be tremendous scope for a greater number of Indian innovators and startups to develop, test, and enhance AI and Deep Tech-enabled products and services. 

It is critical that VCs recognise the unique features of Deep Tech ventures compared to generic software companies. Deep Tech tends to have longer research and development life-cycles, hence, requiring investment without an expectation or pressure to yield a short-term return. Precedents demonstrate that firms with technically-skilled leadership are more effectively able to exploit future technological trends. For example, Nokia, once the world’s leading cell-phone company, contained few managers with technical skill sets, as opposed to Apple and Microsoft, the creators of the iPhone and Android smartphones. Likewise, Indian VCs should invest in expanding their own internal technical capacities.

Most critically, VCs must bring on Partners with experience in the development of emerging technologies who can set an informed vision for the fund’s operations. Principals, Associates, and Analysts should be in constant contact with the R&D ecosystem, via events as well as consultations, in order to keep abreast of the latest developments. Simultaneously, staff should invest in enhancing their own ability to understand the nuances of up-and-coming technologies. VCs can then apply this knowledge in their evaluation frameworks for selecting investees as well as in developing their end-to-end strategy from capital allocation to portfolio management. According to Pranav Koshal at Kalaari Capital, an early-stage, Bangalore-based VC firm with investments in Deep Tech, “Part of our job is developing an understanding of these technologies. It requires a deep understanding of the core technology to have the foresight of possible applications across industries which may not exist today. However, having leaders experienced in developing such products helps us set the right vision and follow the right approaches towards assessment & enablement of these ventures.”

If there was a large, liberal pool of patient investment capital, like in Silicon Valley, it is highly probable that there would be tremendous scope for a greater number of Indian innovators and startups to develop, test, and enhance AI and Deep Tech-enabled products and services. 

Meanwhile, VCs should enhance their alternative capacities, such as their ability to support portfolio companies with functions like product testing and localisation, navigating intellectual property challenges, regulatory uncertainties, fraud, interpersonal dysfunction, marketing, and personalised advertising. While investment is critical, other variables play a significant role in contributing to precluding the advancement and maturation of Deep Tech ventures. For example, AI-enabled applications require high-quality, sector-specific annotated datasets as an input in order to operate effectively. Regulatory ambiguities, like the status of penalties for erroneous outcomes, can act as an additional disincentive. Alongside increasing access to early stage capital, the resolution of such challenges by VCs, civil society organisations, and municipal, state, and the Union governments will serve to foster the advancement of India’s Deep Tech innovation ecosystem. Given India’s role as a de facto leader of the Global South, the precedent of the nation’s success in the domain could act as a blueprint for other emerging markets with similar socioeconomic and demographic features, like Pakistan, Bangladesh, Indonesia, Nigeria, and Brazil.

• Cyber and Technology
• India
• AI
• blockchain
• Deep tech
• Emerging Technologies
• VC

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