What It Takes To Grow A Deep-tech Startup Ecosystem in India

India has more than 3,600 deep-tech startups working on innovative solutions in sectors like biotechnology, life sciences, climate change, cybersecurity, and AI, among others.

India has the sixth-largest deep-tech ecosystem in the world.

Vishnu Rajeev, investment principal at Speciale Invest, one of the top seed and pre-seed investors in deep-tech startups said that he meets dozens of founders every month who surprise him with their projects.

“I love my job,” he told The Content House in an interview.

Speciale Invest is an early-stage deep-tech fund founded by Vishesh Rajaram and Arjun Rao in late 2017. The fund made its first investment in early 2018.

Vishnu said, for India to become a manufacturing hub and a global industrial powerhouse, we need to do a lot more in this space and venture capital is the way to accelerate the rate of innovation. He believes deep-tech startups need support at the initial stages.

Speciale Invest typically writes cheques upto a million dollars in deep-tech companies.

The Content House spoke with Vishnu at length about the innovations deep-tech startups are working on, the challenges they face, and the role of VCs in making these innovations come to fruition.

The interview is edited for clarity and brevity.

The Content House: Can you tell us a bit about Speciale Invest and its investment thesis?

Vishnu: We invest in startups with products or solutions that are heavily rooted in science and engineering. We traditionally invest across five thematic areas and multiple subsectors within that.

The first is climate tech and its various subsectors such as energy transition, mobility, agri-tech, circular economy, and so on.

Second is space tech, and we have the largest space tech portfolio in the industry. We have made five investments in space tech companies.

The third one is industrial technologies and advanced manufacturing. We have a robotic startup and two semiconductor startups in our portfolio in this space.

Then there is life sciences, biotech, and health tech. We have invested in two such companies. One makes biomaterials and the other uses artificial intelligence to improve the probability of success in the drug development process.

Lastly, the fifth one is what we call advanced software and computing. We have invested in a quantum cyber security company that works in the defence sector, and another that has built advanced generative AI infrastructure layers. We look at areas like quantum computing, cyber security and so on.

We look for companies that are way ahead of the market. We are one of the earliest investors in a lot of our investments. Take the space tech category for example. We prioritised it even before the government took a policy stand on it. One of our earliest investments was in Agnikul Cosmos which builds engines for rocket launchers. Similarly, we invested in Newtrace, a green hydrogen electrolyzer company. We invested in them in 2022 and the government policy started coming only later.

The Content House: How do you deal with the long gestation period deep-tech companies require to reach the commercialisation stage?

Vishnu: There is no workaround.

The initial gestation periods are very high for most deep-tech startups. They need one to two years of extra support. Having said that, once the product hits the commercialisation stage, the revenue growth of deep-tech startups is much faster.

One of the risks that is very high for a deep-tech startup is the science and engineering risk. We try to underwrite the science part of it during the gestation period.

If we can resolve the science risk it really helps founders in solving some of the engineering risks, which is crucial in scaling up. That is where we provide support to our startups.

If investors can recalibrate their expectations and move in to help with the next stage and see what exactly could be the milestones a deep-tech startup needs to achieve at Series A, many of these problems related to the long gestation period can be avoided.

I don't think any investor should see deep-tech differently. And if they don't start doing that, then it's a problem.

The Content House: Generally speaking, how long does it take for a deep-tech startup to reach from the idea stage to the product stage and do you remain invested in it?

Vishnu: The answer depends on which sector within the deep-tech we talk about because it’s not homogeneous.

I'll give you an example. Biotech has a huge gestation period. Right now, my pipeline has a lot of biotech and life sciences companies. Do you know why it didn't happen earlier? Because in 2016-17, the government started giving grants through this biotechnology agency called BIRAC. And all those grants worth one and two crores, which were awarded seven to eight years ago, started getting released now.

So that gestation period for biotech could be as long as five to six years and they would still be just at a seed stage for a venture investment. But that initial grant money has made their lives a lot easier for some of the biotech researchers.

Talking of long gestation periods, startups can very well generate revenue while they are in the development stage. One of our portfolio companies that uses an electrolyser to produce green hydrogen cracked a pilot project with two major utility oil companies in India.

After the pre-seed funding, they earned USD 65,000 in revenue in less than 10 months. So for anyone asking if deep tech gestation is longer, I show them this example.

The key is that the founders need to be smart about the money and their research.

The Content House: What do you look for in a startup when you evaluate them?

Vishnu: We don’t expect companies who approach us to have revenue. But if you say that you will reach commercial viability in seven to eight years, that becomes a bit challenging.

I'm not saying we don't invest in such companies, we do, Anubal Fusion is one example of that. But if we see a path to commercialisation early on, we are excited about it.

If you come to us with an idea in biotech, we would want to see some validation. Biotech is a much easier sector to evaluate since it has clearly defined milestones that are standard across the globe.

But say you are in a little more uncertain industry, like in battery. We’d be ready to give you money if you can show us some proof of concept at the lab scale, some sort of commercial prototype, and a plan to scale it at a commercial stage.

The next factor we look into is the team. If your technology is still unproven, we need to have a really strong conviction in the team. Your team must have someone who owns the tech and knows it from within. One of the founders must be a great salesperson who can tell stories in a way that can convince others about their idea.

The third factor would be the market size. We don't invest in small market opportunities. An exceptional team, a strong technology-led moat, and a large market is the trifecta we aim for.

Vishnu Rajeev, Investment Principal at Speciale Invest

The Content House: Do you have the domain expertise to assess the technology?

Vishnu: We are not experts. But I have invested in a wide array of deep-tech companies—right from a nuclear fusion company to a company that is making electric flying taxis and then one which is making the first reconfigurable semiconductor chip in the world.

One person can't possibly have knowledge about all of this. And as a venture capitalist, I don't want to pretend to have knowledge about any of these things. What we do have is the basic toolkit to understand how the technology and science behind these products work.

We spend an extraordinarily large amount of time with the founders to understand what they are building.

For example, I recently invested in a company that uses AI for drug discovery and I don't have a deep knowledge about AI or pharmacology. I don't know anything about computational biology either. But I learned the basics of each of these via different learning resources online.

We raise questions from the first-principles perspective. If we really don't understand certain things, we bring in domain experts to talk to these founders and try to understand what they are building.

The Content House: What are the qualities that you look for in a founder and the initial team?

Vishnu: We encourage companies to have at least two or three founders so there is a balance of skill sets. We typically look for complementary skill sets in the founding team. One of the co-founders should be a technology person with substantial stakes in the company. It can’t be a token stake of 5-10%. The technology founder must have their skin in the game.

The larger question is can we bet on the team?

We want people who can sell. You need to either sell to your customers or sell your company’s vision to your future investors. Even to hire well, you need to tell a compelling story to your potential employees. Successful founders are typically excellent storytellers.

We underrate this quality a lot in India. It doesn't matter what language you speak but can you communicate the idea that you're working on and make others as excited about it as you are?

We also look at how founders tackle company culture and where they stand with things like integrity, ethics, and morality. We don't expect them to know all the answers, but this should be one of their priorities as part of the company formation practices and needs to be implemented as well.

Lastly, we need someone who can step up to create a long-term vision for the company. So one of the two founders or at least a third founder should do the operations heavy pulling as well.

We do look into the dynamics between the founders, what their decision-making process is like, how they deal with conflict, and things like that.

The team needs to be adaptive and agile. If something does not work, are they going to work on a new idea based on the market’s demands or are they married to their initial idea?

Knowing how to commercialise your technology is the most difficult nut to crack. Because deep-tech founders can crack technology, but how to turn it into a commercial product and create a sustainable business around it is what we need.

The Content House: What are the few challenges the industry faces right now?

Vishnu: From an early-stage, deep-tech startup perspective, we don’t have enough people backing these companies.

Capital is coming in, but that’s not enough. We have institutions like IITs and IISC that give grant money, and other tech institutions are opening up their lab spaces for folks to come and work. But that needs to go up if we want this ecosystem to be big enough to build great companies.

We need to develop the ecosystem around high-grade equipment so that they are readily available for startups to use. The Indian government must work in this direction. We have certainly become better compared to the previous five years, but we are still at an early stage.

We need to have more non-dilutive capital like grant money to help founders solve science and tech-related issues and conduct their experiments. Ideally, equity investment should not solve that, because equity is expensive. 

Seed-stage funds are warming up to the idea of investing in deep-tech companies. But then they won’t be able to back startups that don’t have their technology ready for commercial deployment. Who will take that risk at that stage? 

This is the major challenge for the ecosystem.

It's also important for corporations that are a huge part of the deep-tech ecosystem to engage with these startups. They could become their early partners for running their pilot demonstration. They can call for open challenges asking startups to fix a specific problem that they are not able to. They could be their first customer.

A lot of global companies have identified India as a potential breeding ground for deep-tech innovation. Giants like British Petroleum, Shell, Hitachi, Qualcomm, and Schneider Electric Ventures, all of them have their operations here.

So global corporations see the potential here, but Indian corporations still have a mindset of acquiring deep-tech companies instead of working with them.

The Content House: In a tweet last year, Speciale Invest said India’s investment into R&D was less than 1% of the GDP. What would be the ideal number according to you?

Vishnu: China invests close to 2% in R&D, and the US invests 2.5 to 3%. There are economies like South Korea and Singapore which put close to 6% of their GDP into R&D.

We are not saying we should do that.

We realise that for a developing economy like India, this is a challenge. We have millions of people still in poverty. So it's not easy to just divert funds into futuristic things. I don't think we will get to 1.5 to 2% anytime soon, but that’s what we need if we want to see some substantial change happen in this space.

The Content House: What are the trends that you are excited about in the deep-tech space?

Vishnu: Two particular sectors are gaining traction. One is semiconductors. We have invested in two companies in this space and are seeing a lot of action here. We believe this is the coming-of-age period of the semiconductor industry.

The other one is biotech, life sciences, and health tech. Lots of money has gone into this space as grant capital. There are two amazing incubators in Bangalore—C-Camp and Bangalore Bioinnovation Center. They have great startups sitting over there. There are a few success stories that are allowing startups to seek out mentors and role models.

India is also investing on the hardware side of things for AI because it's not enough to just work on AI applications. We need to innovate and develop the infrastructure layer as well as the hardware side of AI.

In the later half of 2025, we believe companies associated with AI data centres will come up. Because these data centres will need innovative solutions related to software, energy saving, etc.

A lot of action is happening in the climate-tech space as well. I am hoping more startups will come up with innovative solutions there. I am very excited about long-duration energy storage. Right now lithium-ion is very much focused on mobility. So additional storage capacity needs to come in and we don't have credible players in that market. I'm assuming some good companies will come in that space as well.

We'll see some traffic in the material space also. It could be something like making lighter metals (made of sustainable materials) for aircraft or ships. So, materials is a huge opportunity that will come soon.

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