The deep tech sector is set for an exciting phase in India, especially in the backdrop of industries and the internet economy being poised for disruption by climate change and the metaverse. To set context, deep tech refers to technology (be it in software, manufacturing, biotech, life sciences, etc) that is disruptive, hard to replicate and with significant IP.
Through the dual lens of bits (software-engineering-led) and atoms (the physical world), it covers the entire gamut from applied research in aerospace to advanced gene therapy to artificial vision, robotics and conversational artificial intelligence (AI) platforms.
The sector dovetails nicely into impact, addressing hard-to-solve problems through the bleeding edge of innovation in climate change adaptation and mitigation, healthcare, agriculture and the like – e-mobility, best-value advanced prosthesis, sustainable dyes, waste-to-wealth, low-cost medical devices, AMR solutions, precision agriculture, plant-based proteins and agri-products, etc.
Globally, VC investments in deep tech solving for the hardest challenges is expected to have crossed $115 billion across ~6K transactions last year, with climate change and healthcare constituting the bulk of those in volume.
This follows a 48.7 percent y-o-y increase between 2019 and 2020 itself. Pre-money valuation in late-stage has seen a new high with a median of $80.7 million.*
The Indian deep tech startup ecosystem
India’s deep tech startup ecosystem has come a long way in the last few years, setting itself apart through its proximity to a large problem space, inputs and big data, with many bright minds working on globally competitive disruptive tech in stellar university labs and startups.
Government support in the very early stages is a key enabler (notably through BIRAC {Biotechnology Industry Research Assistance Council}, Department of Science and Technology, and facilities such as C-CAMP that are building an excellent pipeline), as are Nasscom and niche private players that have been increasingly active.
Domestic private capital investments had by and large favoured bits over atoms, due to the latter’s relatively longer journey towards revenue and an exit. That’s beginning to change, as investments in non-software areas are demonstrating massive returns, Moderna and Tesla for example, and represent a unique opportunity.
This opportunity conventionally attracted global investors who are more experienced and risk-willing, however there is growing interest in both generalist as well as specialised domestic funds. Data from Venture Intelligence shows that overall Indian deep tech VC investing in 2021 exceeded 130 deals and $1.4 billion, an increase of approximately 24 percent and 180 percent respectively from 2020.
Founders who do well have roped in an excellent advisory board, built a team that is comfortable both in the lab and market, and are able to access global infrastructure and capital pools. Home-grown winners who are able to demonstrate gains through the export of IP will draw entrepreneurial talent to the sector, like Flipkart did for ecommerce.
Some examples of impact-creating deep tech companies are Agnikul, CropIn, Bugworks, KBCols Sciences, WeInnovate, Sea6 Energy, Axio, Niramai, Aether Biomedicals, String Bio and DreamVu.
Health tech and Climate tech are amongst the most impactful areas in the current context, and the latter deserves a special mention here due to the sheer scale and urgency of the problem space.
Climate tech is a significant market opportunity
The quantum and pace of technological change required to stem warming is mind blowing, complex and vast – everything about the way we live, consume, manufacture and trade needs to be reimagined for a lighter footprint on the planet, and that has the potential to create many more billionaires than the dot com era.
De-carbonisation will require intense coordination and collaboration, to target and go deep in hard-to-abate areas. Towards this, the pandemic has given stakeholders the experience and confidence for a global co-ordinated effort and momentum to address climate change which can impact the economy 1000x in comparison.
Some collectives have taken this approach – of identifying the biggest needle-movers and crowding in funding to those, eg Breakthrough Energy Ventures & Catalyst, First Movers Coalition (counting Mahindra Group, Dalmia Cement amongst its corporate signatories) and Glasgow Breakthrough (to which India has signed up).
While renewable energy and mobility (EV) are benefiting from coordinated effort thus far in India in terms of public-private alignment and traction, other crucial areas are direct air capture, green hydrogen, green steel, transportation, long-duration energy storage, sustainable aviation fuel and climate-smart agriculture.
The Industry itself is yet to develop its understanding of a low carbon future and ways to green the supply chain – they have to now collaborate with innovators for addressing their carbon footprint. This creates both the environment and the business opportunity in new materials and technology, carbon pricing, etc, and calls for a lot of capital to unlock that.
What will it take for deep tech to be the next Indian startup revolution?
While 2021 has seen the sector growing strongly in India, deep tech investments represented a smaller share of the pie at 4.5 percent (Venture Intelligence), and more is required of the ecosystem, for deep tech based on both science and engineering to flourish.
The government has an outsized role through clear signalling and action, to incentivise the private sector and smoothen transition risk through tax breaks, subsidies, contracts, off-take agreements, sweat equity, etc, looking at examples of such initiatives that have been implemented effectively in other countries.
A conducive policy, regulatory and operating environment can allow for competitiveness on the global stage as well.
Corporates play a role through purchase agreements, which can be transformative, especially for signalling adoption of climate-tech innovations and helping lower the green premium.
Tesla is a great example of early government backing and recent corporate purchase orders boosting the EV space overall. To complement that, corporate venture capital and industrial family offices are increasingly looking at synergistic investments into deep tech.
The sector needs more domestic capital in this space, and investors can look at de-risking their deep tech investments through a combination of measures: investing after patents are secured, tapping into the scientific community’s domain expertise for due diligence and advisory, balancing the portfolio with investments that can generate early revenue, and spacing out exits.
Having clear mechanisms to protect and value IP, smoothing exits (especially IPOs on the domestic exchange), and traction around domestic M&A will be welcomed.
Overall, a continuum of capital has to be established through early risk and growth, where the path to scale is enabled, ie, a combination of grants, patient capital, blended finance, targeted project finance, government support and mainstream capital. Especially in areas that have seen regulations open up (drones, space, geo-spatial technology and data access), there is scope for the government to de-risk venture capital investments through sweat equity and funding.
There is also great potential in a new innovation architecture built as a public good, that can accelerate private innovation on deeptech rails, and do for the sector what India Stack, UPI, Aadhar verification did for fintech, and GSTN data for unlocking credit to small businesses.
On the collaboration front, it is exciting to see initiatives such as the first ‘country partnership’ of the Climate Finance Leadership Initiative (CFLI), launched by the Indian government in September 2021.
It brings together local industry, banks and international MDBs, to enable private capital mobilisation through a co-ordinated, sector-targeted approach (not just for power, electric mobility, etc, but also for hard-to-abate sectors). Such developments are a very timely catalyst for the domestic deep tech ecosystem.
Local innovation, global markets
With the depth and range of talent solving for a large problem space, increased participation from domestic funds, and an enabling government, the startup ecosystem is poised to tap into the immense business opportunities and non-linear returns that present themselves in retooling for a better future.
India, in turn, can reap the benefits of this startup revolution, while being more self-reliant, and emerging as a global powerhouse and exporter of deep tech innovation.
References:
*Tough Tech Landscape Report 2021 (data by Pitchbook)
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YS.)
