In the recent past, a sharp decline in investment in the deep tech sector has raised concerns across the startup ecosystem. Funding for deep tech startups decreased from USD 3.7 billion in 2022 to just USD 850 million in 2023, as per a report by Nasscom.
This trend has cautioned the entrepreneurs as the frenzy trend of the pandemic era ghosted and a bed of thorns is waiting for their route to fundraising with a more cautious approach driven by inflation and economic uncertainties, even for investors to invest.
In an insightful conversation, Mayuresh Raut, Co-founder, Seafund, and a seasoned venture capitalist, shared his thoughts on the current state of deep tech investments and the future landscape for startups.
The Pandemic Investment Boom Bubble Burts
There was a positive investment scenario for deep tech from late 2020 to mid-2022. However, this rapid growth attracted drawbacks. Many deals were done with minimal due diligence, over a call or virtual interaction without having a proper level of scrutiny. It led to potential threats as the market began to stabilise.
As economic conditions recovered and supply chains stabilised, the repercussions of this accelerated investment cycle became obvious and led to decreasing investors' trust in returns.
Mayuresh Raut explained, "The pendulum swings completely the other way and in a sense that is how deals have historically been conducted right so where in the pandemic deals were struck online the downside of that is the adequate filtering that is required the adequate due diligence that was required that went out of the window and we see we saw an enormous number of deals that were done with these lowered filtered and after covid all that went out of the window that again started getting the due attention that is required.”
Patience: The Fundamental Of Deep Tech Investments
Investing in deep tech requires a patience mindset as technological advancements require time. While deep tech founders understand their innovations and their economic potential, they often lack knowledge of the venture capital ecosystem and how funding works. Venture capitalists typically seek returns within three to five years.
Raut also told the importance of patience, noting that deep tech startups generally take 10 to 15 years to give returns. He said, "You make investments in these only have if you have the appetite to stay with these investments for those 10 years 11 years or even longer.”
Despite the current economic, inflation and compliance challenges, Mayuresh Raut remains optimistic. He said that the surprising news is that deep tech startups give you as much returns as the software startups so founders are working in this area should not be worried that are they getting into an area where they will not be able to provide enough returns to investors that is not the case the only thing is that these take a longer time.
Government Initiatives To Boost Deep Tech
The government of India came up with the draft National Deep Tech Start-up Policy 2023 aims to accelerate technological growth and enhance global competitiveness. The Anusandhan National Research Foundation, with its Rs 1 lakh-crore fund, is investing heavily in research across various fields. Even several state governments are implementing various measures including tax incentives to infrastructure support, to nurture the startup ecosystem.
Mayuresh Raut acknowledged the efforts of the Indian government to bolster the deep tech sector, and said, “There are always issues in translation from policies on paper to execution. The government can do in terms of making sure that all the promises that are being made are translated into actions and money reaching in the back of the startups whether it be grants whether it be tax incentives all of those will only help startups.”
The Role of AI
Artificial intelligence (AI) is the top focus for founders and investors, with 74 per cent of new deep tech startups in 2023 centred on AI and 86 per cent of funded startups having an AI focus. With the rapid advancement of AI technologies, one question is vividly being discussed. How will AI, especially generative AI impact the job market?
Mayuresh Raut noted, “When you have such disruptive technologies in the short term the impact is always not the best. You have seen that when we move from horses to automobiles, from big workstations to having a mobile phone in our pocket.” He added that in the short term, there will be a negative effect but in the long term it will create jobs
The Way Forward
Looking to the future, Mayuresh Raut expressed a consolidated belief in the potential of India’s deep tech landscape. He pointed to the shifting global dynamics, particularly the realignment of business interests away from China, as a unique opportunity for Indian startups. "For the first time in 200 years, our self-interest aligns with that of the developed world," he remarked.
As sectors like semiconductors, AI, and manufacturing gain focus, the deep tech ecosystem stands poised for growth with its challenges. That needed establishing deep tech clusters, regulatory sandboxes, deep tech education initiative¸ and deep tech commercialization funds.
To address evolving challenges and accelerate growth, Nasscom recommends a multifaceted strategy of strengthening innovation clusters, enhancing access to patient capital and computing infrastructure, improving intellectual property frameworks, and developing a robust talent pipeline.
