The Valley Of Death: Why India's Most Promising Deep Tech Startups Struggle At Series A And Beyond

The evolution of deep science and technology — more simply deep technology, or “deep tech” — in India is undeniable.

Yet the abundant funding that propelled it forward, particularly since the 2010s, has slowed over the last couple of years.

While India's deep tech ecosystem continues to grow in terms of startup numbers, a concerning funding gap has emerged, particularly for companies seeking growth-stage capital.

A deep tech company typically develops novel, globally unique products or solutions based on years of research and development (R&D). At its core lies genuine innovation aimed at solving complex, large-scale problems. This innovation requires long development cycles, high-risk capital, and patient investment.

The deep tech umbrella covers artificial intelligence (AI), semiconductors, drones, space technology, climate tech — including electric vehicles, clean energy, and battery technologies — defence systems, and biotechnology.

India: From Outsourcing Hub to Innovation Centre

In the decades surrounding Y2K, following economic liberalisation in the early nineties, India emerged as a global powerhouse for call centres and information technology (IT) outsourcing. While software exports flourished, deep tech innovation remained largely confined to government research laboratories.

During this period, venture capital for deep tech was virtually non-existent, and private sector investment in research remained negligible. The brightest talent in science and engineering often felt compelled to leave India to maximise their potential. Homegrown deep tech startups were rare specimens in an ecosystem dominated by services and outsourcing.

Today, in the third decade of this century, India's deep tech landscape has blossomed beautifully, transforming the country from a mere outsourcing destination into a vibrant hub of technological innovation.

Vishal Katariya and Suraj Nair, part of the investment team at Ankur Capital (early-stage investors in digital, climate, and deep science tech companies), documented the rise of deep tech in India in their early 2024 report, 'The India Deep Science Tech Report.'

From 2010 to 2023, investments in India's deep tech had consistently doubled or more every three years, surpassing $1 billion in the 2021-2023 period, as per the report. Investments were projected to exceed $10 billion by 2029, with steady investment activity and exponential growth in funding rounds over $5 million.

This transformation, however, has hit funding challenges of late.

Current Landscape: Growth in Numbers, Decline in Funding

The statistics tell a compelling but paradoxical story.

Of the over 31,000 tech startups in India today, more than 3,600 — nearly 12 per cent — are deep tech ventures. Approximately 500 of these startups are truly inventive in nature, built on fundamental scientific breakthroughs and involving significant intellectual property (IP) creation.

In 2023 alone, India witnessed the birth of over 950 new tech startups. Of these, more than 450 were deep tech ventures, including over 100 of the inventive kind, according to data presented at the Nasscom Future Forge 2024. Nearly a billion dollars flowed into deep tech startups, cementing India's position as the sixth-largest deep tech ecosystem globally.

Yet beneath these encouraging numbers from 2023 lies a troubling trend.

Despite the surge in Indian deep tech startups, funding is said to have plummeted by a staggering 77 per cent in 2023. Though the second half of 2024 has shown signs of recovery with investments picking up pace, the overall funding climate remains subdued.

The reality since the release of Katariya and Nair’s report has been less optimistic. "Overall, ecosystem-wise, while funding rebounded in 2024 as compared to 2023, deep tech investments do still seem muted," Katariya tells Swarajya, though noting that deep tech funding hasn't been "abnormally low compared to the ecosystem."

The Funding Journey: Understanding the Growth Capital Gap

A typical deep tech venture progresses through a funding journey that begins with grants and moves through pre-seed, seed, Series A, Series B, and beyond.

While reporting the accelerated growth of India’s deep tech sector in their report, Katariya and Nair had identified a critical bottleneck: while seed-stage capital was readily available for deep tech in the early part of this decade, later-stage capital at Series A and beyond remained limited.

"Lack of this diversified growth capital is a roadblock for ventures as they aim to mitigate their engineering and manufacturing risk," they cautioned.

This prediction has proven accurate.

"Seed funding and maybe pre-Series A funding is relatively available if the startup is high quality; there are two, three funds competing for the deal," Katariya explains. "However, when you are looking for that Series A round and beyond, that is really challenging."

Middle- and late-stage funding fell by as much as 66 per cent and 92 per cent, respectively, in 2023, according to this Economic Times report.

This funding gap is forcing many Indian deep tech founders to look overseas for investors or consider unconventional financing options.

Vinod Shankar, Founding Partner at Java Capital (deep tech and climate-focused pre-seed/seed stage fund), confirms this pattern: "I think deep tech has gathered a lot of momentum. There are a lot more funds. It's been positive. There is more capital, especially at the seed stage and early stage. What is missing is the Series A+ capital in deep tech; that is still not quite there. At the growth stage, say, for a round size of more than $20-30 million, the growth stage capital is completely missing."

This “valley of death” — where companies need substantial capital to complete development and begin commercialisation but haven't yet achieved significant revenue — is where even promising deep tech ventures can struggle.

As Sonal Saldanha, a vice president on the investments team of 3one4 Capital (an early-stage venture capital firm based in Bengaluru), notes, "It's the middle ground that creates the most friction," highlighting why many potential breakthroughs never reach the market.

Key Challenges: Beyond Capital Constraints

The funding gap represents just one of several interrelated challenges facing India's deep tech ecosystem. These challenges can be broadly categorised into investor limitations, startup quality issues, and structural ecosystem problems.

First, investor limitations. "Deep tech is inherently challenging for investors because it's highly technical, with milestones that aren't always obvious from the outside and next steps that can seem opaque," says Saldanha. This knowledge gap makes it difficult for non-specialist investors to properly evaluate deep tech startups.

Further, the commercialisation of deep tech innovations presents significant hurdles, including the technical complexity of these innovations and the non-trivial challenge of bringing IP to commercial readiness. Deep tech startups must also demonstrate market development potential and timing — skills that go beyond technical expertise.

Perhaps herein lies the importance of patient capital. "Generally, the longer a company goes without generating revenue, the harder fundraising becomes. For example, our portfolio company ToneTag had been working diligently for nearly a decade before their big breakthrough in their contactless payment technology adoption," Saldanha explains.

However, Shankar challenges the conventional wisdom that deep tech requires especially patient investors.

He points to data from the United States (US) suggesting that deep tech companies can actually move faster than their counterparts in other sectors because of their IP assets, which they can quickly sell if they are unable to grow as a business themselves.

The second major issue holding back deep tech in India is the quality of the startups themselves.

Professor Ashok Jhunjhunwala, the visionary behind the Indian Institute of Technology (IIT) Madras Research Park, offers a sobering assessment.

"What is happening is, (there is) so much hype around startups. Ninety-eight per cent of the startups are false startups. When you create so much (the quantity of startups) and people invest in many of them, then, of course, they (deep tech investors) become very reserved."

Prof Jhunjhunwala attributes IIT Madras' success in incubating startups to their highly selective approach. "We are very strict on how to screen (startups) and only allow those startups which are real," he says.

His warning is clear: "Those hype-created companies won't scale. Initially they may get funding. But they will never scale. They will not survive."

Katariya also identifies startup quality as a "bottleneck," particularly in the climate tech space.

In his experience, many startups also fail to present a coherent roadmap for translating ideas into products. "I think (for) a lot of companies in India — there is an idea, there is a tech, but the story of how to flesh that out into a concrete (output), or at a high level, at least, can you tell me what the next five years are going to look like? Many people are not well prepped with that," he observes.

Bright Spots: Sectors Gaining Momentum

Despite the overall funding slowdown, certain sectors within India's deep tech ecosystem continue to attract investor interest and show promising growth trajectories.

Semiconductors and Chip Design

"Semicon is in a critical phase now, where we have maybe 10 companies that have raised some funding and are gearing up for the larger rounds," Katariya notes.

"When Mindgrove raised $10 million, that's a good sign for the ecosystem, that there are companies that are able to raise that large a cheque. Now other companies like Morphing Machines, Netrasemi, InCore, Silizium Circuits, and FermionIC — are they going to raise that larger $10-15 million round? That remains to be seen."

Space Technology

Space tech has emerged as a particular hotbed of activity, catalysed by AgniKul Cosmos's milestone achievement in May 2024 — the launch of its single-stage technology demonstrator rocket, powered by the world's first single-piece, 3D-printed engine designed and built indigenously. The rocket took off from Agnikul's own, and India’s first and only private, launchpad, situated within Satish Dhawan Space Centre, Sriharikota.

Since then, there's been widespread investment interest in space tech, as evident from multiple space tech events held in Bengaluru. Areas like satellite technology, payload development, and space-based biological experiments in particular have been a draw, and investors feel a sense of pride backing India's space tech sector.

"Space tech, I believe, is on its stage 2 of investment," Katariya says.

Energy Transition and Sustainable Technologies

"We're particularly excited about opportunities in energy transition, semiconductors, and the future of production (materials, food, bio, etc) as areas with significant investment potential. These sectors align with India's strategic priorities as we build toward a $5-7 trillion economy," Saldanha says.

Java Capital has been "looking very closely at space technologies," according to Shankar, along with electric vehicle technologies such as motors, energy management systems, and battery management systems, as well as advanced materials.

The Path Forward: Building a Sustainable Ecosystem

Addressing the challenges facing India's deep tech ecosystem will require coordinated efforts from investors, entrepreneurs, industry, and policymakers. Based on insights from industry experts, several key strategies emerge:

Focusing on Quality Over Quantity

Following Prof Jhunjhunwala's philosophy that "easy money hurts," a more selective approach to funding high-quality startups with genuine innovation could yield better returns than spreading investments thinly across many ventures. This approach has helped the celebrated academic create 25 companies at IIT Madras that now exceed Rs 1,000 crore in value.

Bridging the Growth Capital Gap

To address the “valley of death” in Series A and beyond funding, India needs more investors willing to make larger bets on deep tech companies approaching commercialisation. This could involve educating traditional growth investors about deep tech or attracting specialised international funds with experience in scaling such ventures.

Increasing Private Sector Participation

"Ideally, people who made money out of technology eventually should come back and invest more in innovative technology. They don't do that," Shankar laments. The private sector's contribution to R&D funding in India pales in comparison to countries like the US, China, and Europe.

Shankar suggests that acquisitions could help create momentum in the ecosystem: "Even if we acquire a few of these (deep tech) companies, that will send the right signal, saying, 'Look, there is a possible exit outcome.'" This could potentially unlock more funding by demonstrating viable exit paths for investors.

India can learn from major deep tech ecosystems around the world. "They have integrated networks of buyers (private industry, government, defence), research institutions with decades of substantial investment, technology incubators, and a broader appreciation for R&D. These elements create an effective pipeline for talent and IP development, and these advantages compound over time," Saldanha says.

So where will deep tech in India go from here?

While the proliferation of innovative startups demonstrates the country's vast potential for technological leadership, the current funding landscape — particularly the growth capital gap — threatens to pull back this momentum.

"In many ways, this is about learning cycles: investors are still relatively new to this space and have seen limited exits and later-stage success stories in the Indian market. However, we believe the next five to seven years will bring a substantial transition as more deep tech companies demonstrate sustainable growth and returns," Saldanha says.

The path forward requires a more mature approach from all stakeholders: investors must develop deeper domain expertise and longer-term perspectives; entrepreneurs must focus on quality innovation with clear commercialisation strategies; the private sector must increase R&D investment and consider strategic acquisitions; and policymakers must continue to build supportive frameworks for innovation.

If these challenges can be addressed, India's deep tech funding may not only recover but flourish, enabling the country to fulfill its potential as a global hub for technological innovation.

The decisions made today by investors, entrepreneurs, and policymakers will shape India's technological landscape — and its position in the global innovation ecosystem — for decades to come.