India's deep tech industry has experienced significant growth in recent years, as an increasing number of entrepreneurs are eager to embark on new ventures. However, despite the availability of initial funding, securing investments for subsequent funding rounds remains challenging, according to Indian venture capital firm Java Capital.
In a recent interview with DIGITIMES Asia, Vinod Shankar, Co-founder and Partner of Java Capital, shared his thoughts regarding this issue. He emphasized that while there are more opportunities and entrepreneurs keen on establishing companies in areas such as deep tech and climate than ever before, the challenge of obtaining investments persists.
"For many investors, this is still a nascent area," Shankar said. "Pre-seed and Series A funding is available in India, but for deep technology companies, it's uncertain whether there is adequate funding in the later stages such as Series B, C, and D. This difficulty in obtaining capital has been a persistent challenge for the past few years."
Between 2016-17, there was some growth in seed and pre-seed investments, but post-Series A investments have not kept pace. This is one of the major challenges faced by technology companies. Another aspect to consider is that these companies often take longer to grow compared to those in consumer or B2B spaces. Technologies, particularly hardware, require more time to be proven, necessitating greater patience from investors compared to traditional consumer internet or software investments.
"The source of capital is also crucial, as more patient funding is often required," Shankar continued. "Sometimes, funds may need to be provided for longer durations due to the nature of the technology involved. This differs from the typical investment process, especially in India."
Despite these challenges, the ecosystem must improve to support Indian technology companies in proving their potential. This has begun to happen, with a few companies gaining traction and encouragement from various sources. Initiatives like incubators established across IITs are promoting positive change. Addressing the challenges will be crucial for the continued growth of the deep technology industry in India.
An evolving interest in hardware
Prior to 2017, there was little investor interest in the Indian deep tech sector. This was worse for hardware companies, which had had to prove themselves a lot more than other sectors. But this changed now, with a lot of companies in the venture side and startups, according to Shankar.
"Numerous deep technology and hardware players have emerged, and fundamental IP is improving, with significant innovation occurring in fundamental and applied sciences, as well as material sciences," Shankar said. "It seems we are in the early stages of a potential deep tech wave, following the initial consumer internet wave. At present, there is a considerable amount of interest, particularly at the seed stage, in supporting deep technology companies. Early-stage investment interest from VCs and investors is also notable."
Java Capital's investment thesis focuses on three key areas: deep tech, SaaS, and climate sustainability. There is a strong synergy observed between deep technology and climate control, as addressing climate change often involves hardware innovations and the manipulation of the physical world to reverse or mitigate its effects. Innovations in areas such as renewable energy, batteries, and material sciences present numerous opportunities for progress in this field.
Java's focus and strategy
Java has invested in various deep technology ventures, including a machine vision company, a water pollution remediation enterprise, and an Industry 4.0 startup, all of which exhibit innovation. The company also invested in an electric flying taxi technology. Shankar explained that they focus on projects with strong fundamental IP. If there is no intellectual property, they are less inclined to invest. The technology can even be software-based, but the presence of IP is essential.
"For example, one of our recent investments was in a company called Pre-Image, which creates 3D models of physical infrastructure," Shankar said. "They can combine thousands of images to produce a digital twin of a city's infrastructure. This process involves significant technology in image stitching, efficient classification, and more. We are open to investing in projects where IP is a central component, and that is how we define our direction in the deep tech space."
Java is also interested in ventures that may outperform existing options. For instance, the company recently evaluated a venture that extends the shelf life of fruits and vegetables. In India and across the world, a significant amount of produce goes to waste before reaching the end consumer. If technology can extend their freshness by two or three weeks, it could result in substantial savings in the agricultural sector.
Optimism amid funding slowdown
Apart from the challenges that Shankar mentioned, there is also the broad shortage and slowdown of funding that industries across the board are witnessing now. Many investors are rethinking their strategies, after having been extremely generous over the past two years. While Java Capital expects this situation to continue for another 15 months or so, Shankar is quick to point out that the good companies are still getting money.
"We may have another 15 to 18 months before things start to clear up," Shankar said. "However, the truly exceptional companies are still receiving funding, and there's no doubt about that. Companies at the pre-seed and seed stages are also seeing investments, albeit perhaps at more moderate valuations. It's not as if the investment landscape is completely dry. In fact, we ourselves have made around four new investments recently."
Conclusion
The deep tech industry in India has been experiencing remarkable growth, with an increasing number of entrepreneurs entering the market. Although these startups face challenges in securing post-seed funding, there is a sense of optimism, as many exceptional companies continue to receive support from investors.
Java Capital, among other venture capital firms, is committed to fostering the growth of this industry by investing in innovative projects with strong intellectual property. As the ecosystem evolves to better support these deep tech ventures, India's potential to become a global leader in this sector will only grow. Patience and strategic investments will be key to unlocking the full potential of the country's deep tech scene, ultimately benefiting both investors and society at large.
Vinod Shankar, Co-founder & Partner, Java Capital. Credit: Java Capital.
