India Urgently Needs A Mission Critical VC Fund For Defence Technologies

The entrepreneur community must be smiling these days—the Government of India has been announcing several “Fund-of-Funds” over the last few months, through vehicles like SIDBI (Technology Innovation Fund ~ 2000 Crores), Canbank Ventures (Electronics Development Fund ~ 2200 Crores) etc. in the interest of promoting a broad-based eco system . Over and above this, the Government of India recently announced yet another fund for infrastructure projects, the National Investment and Infrastructure Fund (NIIF), chaired by the Finance Minister Mr.Arun Jaitley.

While acknowledging the role and initiative of the Union Government in fostering an ecosystem across multiple areas, this author feels that a mission critical venture capital (VC) fund, specifically meeting the needs of entrepreneurs focused on defence and security-related technology still merits attention. It can probably be in the form of a joint effort between the Ministries of Defence and Home Affairs.

India accounted for about 15% of the total volume of global arms imports in the last 5 years, more than three times that of China, according to a new data on international arms transfers published by Stockholm International Peace Research Institute (SIPRI). India’s obsessive spending on defense ranges from big ticket items like combat aircrafts to multi-million UAVs. Though successive governments have been talking about cutting down defence imports, developing a domestic defence industry as an alternative requires expedition of a broad-based defence indigenization as the only way forward.

Developing any new technology eco system, especially one like defence technology, takes sustained effort at multiple fronts—university-level research, government-funded R&D houses like DRDO, technology transfer from other countries and most importantly, a favourable entrepreneur eco system encouraging entrepreneurs to explore a particular area.

If we trace the origins of private equity (PE)/VC investments in India, it started with big ticket PE investments into infrastructure. As the investor confidence grew over time, Business-to-consumer (B2C) sector firms like the FlipKarts of the world attracted investments and of late, the enterprise focused business-to-business (B2B) technology startups from India have been noticed even by the Silicon Valley VC community. Though the steady flow of PE/VC funds into Indian market is definitely an encouraging signal, the defence and security focused start-ups have been left out.

Globally, defence/security related start-ups, unlike their counterparts in the consumer or enterprise sector, have lesser appeal in the mainstream PE/VC community. Defence/security products have to go through months and years of qualification process to meet military grade standards resulting in a long gestation period which does not fit the time constraints of a typical fund term. Certain materials used in the defence sector require deeper research and less development in the initial stages. Also, unlike consumer or enterprise sectors, defence/security products are needed in limited volume, whereas the VC community looks for volume scaling to assess market potential.

So, globally, the VC community perceives investment in defence/security start-ups to be high-risk and low-reward game. The author of this article has himself come across many entrepreneurs focused on defence/security related start-ups experiencing difficulties in getting funding from mainstream PE/VC community.

Not only India, many other countries have experienced this issue, namely the reluctance of entrepreneurs and VC community to invest in defence or security related start-ups. As a result, governments like that of the US have setup a not-for-profit venture capital fund meeting the needs of strategic national interests. “In-Q-Tel” is an intentional reference to Q, the fictional inventor who supplies technology to James Bond. Organizations like “In-Q-Tel” market themselves as an innovative way to leverage the power of the private sector— by identifying key emerging technologies and providing companies with the funding to bring those technologies to market.

In the wake of increased security concerns, continued cyber security attacks and with a need to speed up our defence indigenisation programme by pulling in private organizations as part of the expedition strategy, ministries like Defence, Home Affairs and agencies like NSA should seriously consider an equivalent of “In-Q-Tel” VC fund for India. Apart from meeting our strategic national security interests, cross-pollination of defence lab scientists participating into the growing India’s entrepreneur ecosystem will strengthen our overall entrepreneur ecosystem .