Why VCs Are Still Betting Big on India’s AI Startups Amid Funding Dip
“This year, we witnessed a wave of companies creating specialized AI applications by harnessing more robust platforms,” shares Ravi Srivastava, a partner at Leo Capital, a prominent early-stage investment firm.
Let’s break it down: there are three main layers in the AI ecosystem—foundational models, enabling technologies, and vertical AI applications. Leo Capital has been busy closing deals in this thriving arena, backing trailblazers like Zeplyn, an AI copilot for financial advisors, Arch0, a security startup for cloud infrastructure, and DecoverAI, a platform tailored for the legal industry.
Interestingly, many of these innovative AI startups are not just targeting the local market; they’re building their solutions with the US audience in mind. Harshjit Sethi, managing director at Peak XV Partners, emphasizes that these AI ventures are likely to follow the successful path carved out by enterprise software companies that primarily serve US customers.
“What we should expect to see, and my hope for next year, is a surge in intriguing application-layer opportunities,” Sethi continues. “The challenge is translating AI capabilities into something impactful for various roles. This is a gap that companies, especially in India, will strive to bridge.”
According to industry tracker Tracxn, Peak XV Partners has supported 13 startups in the AI realm this year through various initiatives, including Enterpret, RapidCanvas, OrbitShift, and Brainfish. They also joined a $105 million funding round for Atlan, a SaaS startup positioning itself to help large corporations optimize their databases for artificial intelligence.
Big-ticket AI deals
The year has been bustling with both small and significant investments in AI. Some standout deals include Nurix AI, an enterprise AI assistant platform founded by Mukesh Bansal, Neysa, a cloud and platform-as-a-service startup, and Krutrim AI, led by Bhavish Aggarwal, which recently celebrated unicorn status—a valuation exceeding $1 billion!
Industry leaders believe that India’s future in AI lies not just in application but also in infrastructure. While foundational models are primarily being developed in the US by giants like OpenAI, Meta, Google, and Anthropic—who are raking in billions—India has the chance to carve a niche in the infrastructure layer.
Neysa is a prime example, offering generative AI platforms and services to help clients navigate their AI projects. The founder, Sharad Sanghi, highlighted that while building this infrastructure is challenging for newcomers, his experience with Netmagic gave him a unique advantage in accessing data center space and power. He emphasizes the need for capital and skilled engineers, which while available, are not easy to attract in today’s competitive landscape.
Computing infrastructure key
On a positive note, the Indian government has made a significant move by allocating Rs 10,372 crores for the India AI Mission over the next five years, focusing on enhancing computing infrastructure through public-private partnerships.
However, venture capitalists caution that the explosion of interest in AI may have led to an over-saturation at the inception stage, particularly in the applications layer. “Technology is evolving so swiftly that the definition of ‘problem’ and ‘value’ is shifting every quarter,” remarks Alok Goyal, partner at Stellaris Venture Partners. “What seems to stand out today may not be relevant tomorrow. Plus, the barriers to entry have lowered dramatically, resulting in a crowded field right from the outset.”
