Forbes India 15th Anniversary Special

Deeptech in India will be a multi-decade journey: Rajan Anandan

Foundational support and patience hold the key to seeing large deep science and engineering-based global companies emerge from India in the decades to come, the managing director of venture capital fund Peak XV says

Harichandan Arakali
Published: Jul 11, 2024 12:24:37 PM IST
Updated: Jul 11, 2024 01:16:53 PM IST

Rajan Anandan, Managing Director, Peak XV
Image: Amit VermaRajan Anandan, Managing Director, Peak XV Image: Amit Verma

Rajan Anandan, managing director at venture capital (VC) firm Peak XV, also leads the VC firm’s Surge programme for early and seed investments in startups. In an interview with Forbes India, he pointed out that deeptech in India is where software startups were in 2010 to 2012. Edited excerpts:
Q. Give us a sense of why you started thinking about deeptech startups in India.
Our primary focus remains identifying exceptional entrepreneurs targeting sizeable markets. Recently, we’ve witnessed a surge in deeptech startups, reflecting our investment strategy. If you leave aside AI (artificial intelligence), initially, ventures like Log9, in advanced battery tech, and Absolute, in biosciences, stood out. Following a brief hiatus, a new wave of compelling deeptech opportunities emerged about 18 to 24 months ago.

We’ve since invested in semiconductor innovations, battery recycling, green hydrogen and space technologies. Each venture features founders with profound domain expertise. These startups aren’t just ambitious; they’re driven by years of technical groundwork, setting them apart in their respective fields.

Moreover, the evolving landscape, in semiconductors, for example, now benefits from a supportive local ecosystem, fostering growth opportunities previously untapped in India. This shift aligns with our strategy to back ventures poised to scale significantly, leveraging India’s expanding semiconductor market, projected to grow from $30 billion to $80 billion annually by decade’s end.
Q. What might have triggered this new wave of deeptech startups?
Let’s take spacetech as an example, where we’ve invested as well. In the last decade, the landscape of India’s space technology has transformed dramatically. Initially, there were just a handful of startups in the sector, largely due to the pioneering efforts of Isro and its affordable infrastructure and launch capabilities.

However, the real game-changer was the government’s decision to deregulate the space industry. This policy shift opened the door for private enterprises, leading to a surge in innovation and startups like Digantara and Skyroot, the latter founded by former Isro scientists.

Reflecting on this transformation, I see several critical factors driving this growth. First and foremost is the presence of skilled talent, nurtured partly through institutions like IIT-Madras, which invested significantly in semiconductor infrastructure, and IISc and other such top Indian schools of higher learning in science and engineering.

Further, the phenomenal work done by government-funded institutions such as C-CAMP (Centre for Cellular and Molecular Platforms) and departments such as biotechnology has also played an important role. Second, a favourable regulatory environment proved essential, allowing new players to thrive in sectors traditionally dominated by state control, such as defence and space technology.

While acknowledging the nascent stage of deeptech in India compared to established sectors like software-as-a-service (SaaS), I anticipate substantial growth ahead. The IT services sector is now 40 years old, and it’s taken years for SaaS companies to proliferate, and they’re probably a few years out from emerging as a large sector.

Similarly, deeptech companies are poised to accelerate as foundational investments and expertise continue to mature. Patience remains crucial, as these innovations unfold gradually, shaped by long-term academic and governmental support.

Q. Can you talk a bit about what you would consider as a deeptech company in India, and give us some examples of your portfolio investments?
In the realm of deeptech, innovations are rooted in significant scientific advancements and technological breakthroughs, transcending geographical boundaries. At our firm, we categorise deeptech broadly, with AI standing out as a primary focus globally for startups and venture capital.

Beyond AI, we identify several key sectors like semiconductors, drones, space technology, climate tech (including EV ecosystems and new energy solutions), defence and life sciences.

A standout example of deeptech innovation is Metastable’s revolutionary approach to lithium-ion battery recycling, which promises a dramatic improvement over traditional methods in terms of efficiency and cost-effectiveness. Similarly, Newtrace, founded by Indian PhD holders with European experience, has pioneered a membrane-less electrolyser for green hydrogen production, setting a new benchmark for performance and cost efficiency in the global market.

Our investment philosophy centres on identifying innovations that offer substantial technological or process improvements. For instance, Ethereal Machines from Bengaluru has developed a unique five-axis CNC machine, crucial for precision engineering in electronics, medical devices and aerospace sectors. Their innovative business model of offering machining services rather than selling machines themselves underscores their strategic approach to market needs.

While acknowledging that the US and China lead in research by decades, we recognise India’s competitive edge in specific areas of deeptech, exemplified by companies like Newtrace and Ethereal Machines. Our goal is to back technologies with global relevance and potential, ensuring that our investments contribute meaningfully to the evolving landscape of deeptech innovation worldwide.

Also read: India's deeptech sector is on the cusp of commercialisation

Q. Can you put this in the context of why India needs to encourage deeptech?
Ensuring global competitiveness is paramount in our evaluation of deeptech investments. While India initially serves as the market for many of our ventures, the goal is always to achieve world-class standards. For example, in semiconductors, our long-term aim is self-reliance, acknowledging the multi-decade journey ahead to establish top-tier fabrication capabilities.

This strategic approach extends to sectors like clean energy, where significant strides in solar power position us to exceed global expectations for carbon neutrality well before 2070.

Defence technology also holds strategic importance, given India’s substantial defence expenditure, necessitating indigenous technological capabilities. Similarly, space technology remains pivotal, not just for communication but also defence purposes.

Agriculture, crucial for feeding India’s growing population, demands transformative technologies like those pioneered by companies such as Absolute, leveraging AI and innovative agricultural practices.

The government’s initiatives, such as the Quantum Mission and others focussed on AI and semiconductors, underscore India’s commitment to advancing in deeptech sectors. These efforts are critical as we strive to achieve technological independence and global leadership across various strategic domains.
Q. At this point what might be the biggest challenges for India’s deeptech startups?
Navigating the landscape of deeptech startups involves grappling with several inherent challenges. Firstly, there’s significant technology risk: While promising innovations like Metastable’s battery recycling or Newtrace’s green hydrogen systems show potential, proving scalability from small-scale pilots to industrial levels remains a critical hurdle.

Second, scale-up risk is prominent as ventures transition from lab prototypes to pilot factories and eventually to full-scale production facilities. This progression demands not only technological advancements but also operational capabilities to deliver on initial promises.

Third, regulatory uncertainties, such as those affecting green hydrogen adoption, can profoundly impact market dynamics. For instance, without supportive policies, industries may hesitate to invest in new technologies, stalling their growth.

Lastly, market timing risk looms large in futuristic sectors like quantum technology, where advancements must align with market readiness. This dual challenge of technological breakthroughs and market acceptance underscores the complexity and risk profile unique to deeptech investments.

As investors, our strategy balances these risks: We’re willing to engage with technology risk at manageable stages but prioritise ventures with clear regulatory frameworks and realistic scaling prospects.

Unlike sectors like fintech or AI applications, deeptech ventures necessitate a nuanced approach that accommodates these multidimensional challenges, ensuring prudent investment decisions aligned with the sector’s demanding realities.

Q. Within the nascent deeptech segments, if you look at the most mature companies, what might be their commercialisation roadmap?
In evaluating say India’s top 50 deeptech companies, there’s no tech risk per se—it’s developed. The emphasis now shifts from technological development to scaling commercialisation efforts. Companies like Absolute, Log9 and Ethereal Machines exemplify this transition—they’ve moved beyond pure technology risks, now focusing on scaling and expanding their market presence.

These companies face challenges in execution, fundraising and navigating regulatory approvals for scaling operations, such as establishing factories in a particular state, say, which would need approvals at the state level and so on.

While capital remains a critical need, the immediate focus lies in aiding their commercial expansion rather than overcoming foundational technology risks.

Looking ahead, initiatives like India’s quantum mission and advancements in telecom infrastructure, such as 6G, represent pivotal opportunities. These sectors demand foundational support to foster a new wave of entrepreneurs capable of driving substantial growth.

The way I think about it is it’s like SaaS in 2010-12.That’s where we are with deeptech. From there, it took about six, seven years for it to really see lift off. And six years ago, we had our first SaaS unicorn. Today, we have 23 SaaS unicorns. By 2030, we’ll have 100 SaaS unicorns. So this is a multi-decade journey, more so in deeptech than most other things, that we are going to go through.

(This story appears in the 12 July, 2024 issue of Forbes India. To visit our Archives, click here.)