The AI Startup Gap In India: What’s Impeding Their Growth?

Indian businesses have embraced the digital revolution, with artificial intelligence (AI) playing a vital role in the emergence of new companies. To push this advancement even further, generative AI (Gen AI) is now reshaping the startup landscape in India, yet the number of AI companies in India are relatively low compared to the major economies.

According to the 'Generative AI Startup Landscape in India: 2023' report by Nasscom, there were over 550 generative AI startups worldwide as of Q2 CY2023, a number significantly larger than India's 60 startups during the same period. Highlighting this scarcity, Lokesh Nigam, CEO and co-founder, Konverz.ai said lack of funds is one of the reasons contributing to few AI companies in India, although several other factors contribute to this disparity. 

"Firstly, infrastructure plays a significant role. Unlike the US and China, India faces challenges related to infrastructure development, such as access to high-speed internet and a reliable power supply, which are crucial for AI research and development," he said. 

Secondly, Nigam stressed that talent retention remains a challenge as many skilled professionals are enticed by opportunities abroad or in other sectors. Additionally, regulatory support and government policies also influence AI innovation. India may have to adjust its regulatory framework to create a more favourable atmosphere for AI advancement, opined Nigam.

In the prevailing narrative, there’s a widespread assumption that AI companies in India are flourishing, supported by generous government backing and ample investments from both AI aficionados and venture capitalists. However, a recent social media post by a former Google employee has brought attention to the hurdles confronting budding AI enterprises. This revelation has got the conversation going on the lesser-known aspects of the industry.

VC Perspective

T.V. Mohandas Pai, Aarin Capital Chairman and ex-Infosys CFO recently told BW Businessworld the dearth behind the AI and generative AI startups in India can be attributed to insufficient funding. Despite reports highlighting significant investments in AI startups, the actual reality seems to be quite different. 

"Everybody writes a report, but where is the money? The US invested USD 2.34 trillion from 2014 to 2023 in ventures and startups, and China invested USD 832 billion. Meanwhile, India invested USD 145 billion," said Pai. 

“The pool of investors interested in supporting AI startups is relatively small compared to the number of entrepreneurs seeking financial backing, creating a highly competitive environment." - Prateek Toshniwal, a seasoned Angel Investor and Financial Advisor  

"Tech-savvy investors and those eager to capitalise on the AI trend are particularly interested in startups that are pioneering the use of advanced AI technology. Unfortunately, many Indian AI startups lack a focus on advanced AI technology, limiting their potential and hindering their ability to replicate the success of Western AI startups, ultimately impeding their chances of securing funding,” Toshinwal said.

Meanwhile, Ankur Mittal, co-founder of Inflection Point Ventures said that funding an AI startup in India can present its own unique set of obstacles. These startups require a substantial influx of capital to expand their operations and achieve overall growth in their trajectory. 

“The lengthy gestation period of AI startups poses another challenge. The development of AI technology demands significant time and resources for research, data collection, model training, and testing, this extended timeline may cause potential investors to hesitate, as they may prefer quicker returns on their investments. Thus, investing in AI startups becomes a test of patience,” Mittal said.

Prepping For Rise Of Gen AI Startups

Currently, India is actively preparing for the emergence of Gen AI startups. According to Tyson Hartman, CTO at Infogain, embracing generative AI is not merely a choice, but rather the sole means to remain competitive. 

“Startups have the opportunity to leverage their data's potential to empower their clients, ensuring its quality, accessibility and governance, while also extracting valuable insights and actionable information. The true power of GenAI is realised when it is combined with other technologies,” said Hartman.

He suggested that startups should prioritise addressing the risks and challenges associated with governing unstructured data, as this is where generative AI truly excels and where other companies are still struggling. Subsequently, they can focus on designing, constructing and maintaining the necessary data pipelines, platforms and systems that support AI applications.

As per a Nasscom report, the Greater Bengaluru region boasts the highest concentration of generative AI startups in India, accounting for 45 per cent of the total. Following closely behind, Mumbai and Pune regions together contribute 21 per cent to the pool. Delhi contributes 10 per cent, while both Hyderabad and Chennai offer 9 per cent each.

AI startup concentration across India | Source: nasscom

Challenges Faced By Startups And VCs

Discussing the obstacles encountered during the development of an AI company, Konverz.ai's Nigam mentioned that their startup had to overcome various challenges in securing funding. These included skepticism from investors about the feasibility of AI solutions, especially in specialised or growing markets. Additionally, they struggled to communicate the unique value proposition of their AI strategy to potential investors, who were not well-versed in the complexities of the technology. 

He added that in the current competitive landscape, it was crucial to not just demonstrate the technical capabilities of the AI solutions, but also their market viability and scalability to attract funding. "To tackle these challenges, we utilised a mix of education, strategic connections, and relentless perseverance to convey the game-changing impact of our AI innovation to potential investors."

Further, Nigam shared key differences between Indian and US-based venture capitalists. He highlighted Venture capitalists (VCs) based in the United States and India have distinct differences in their investment criteria, market familiarity and risk appetite.

"Indian VCs tend to prioritise proven business strategies that generate consistent profits, whereas US VCs are generally more inclined to take risks and invest in early-stage companies that have the potential to disrupt the market. The advantage for India lies in the fact that while US VCs offer access to international networks and expertise, Indian VCs possess a deeper understanding of the unique aspects of the Indian market. This understanding can help mitigate risks and provide tailored strategic advice specific to the country." - Lokesh Nigam, CEO and Co-Founder, Konverz.ai

On the other side, investor Toshniwal shared his funding experience. He said, “The common challenge that I have encountered is the rampant skill gap in the deep tech market. In my experience, the sector still lacks expert AI professionals who could guide startups in a better direction. Additionally, the nascency of the AI ecosystem in India continues to emerge as a challenge, there is a gap in understanding among entrepreneurs, especially when identifying the full potential and application of AI.”

However, Pankit Desai, co-founder and CEO, Sequretek, feels that there is no significant disparity in technological advancement in this emerging field, as most countries are on a similar level of AI maturity. "This presents an opportunity for us to develop indigenous language platforms and take the lead in the growth of vernacular AI."

Ritu Mehrotra, founder and CEO at United We Care, too expressed confidence in the bright future of AI in India, citing government support and investor interest in deep tech startups. She stressed that staying ahead of technological advancements is crucial, but with the commitment of government entities and companies, the challenge can be fully embraced.