Downturns are opportunities for bold moves that pay off when markets recover. While India seems to be weathering the macro headwinds better than the rest, it's hardly a time to sit back.
The fourth industrial revolution, like its earlier iterations, will promote new winners and find losers in the global economy. Industrial revolutions come from innovation in the physical world—but infrastructure development and manufacturing competitiveness will keep us playing catch-up for a long time to come. The India growth story requires more than software. It’s time for investors to look more seriously at deep science tech, also known as hard tech. Deep science tech is described as technologies driven by substantial scientific or applied engineering breakthroughs.
Globally, investment in deep science tech startups quadrupled from $15 billion in 2016 to $62 billion in 2020. Corporate investment similarly rose from $5 billion to $18 billion. The US accounted for 75 percent of this capital, but Europe and China are seeing rapid growth. Deep science tech has shown resilience against recent market turmoil. The European Deep Tech Report 2023 edition heralds the segment as the second-best performing in venture capital for the second half of 2022, behind only energy.
As promising as it is, the segment is still not always well understood, at least in India.
Deep science tech companies are often seen as asset-intensive with long gestation periods. While there is some truth, it is not all true. Like Moore's law for computing, the cost of advanced physical assets has dropped significantly. The price of 3D printers has gone from $20,000 to $200. The development of a net-gain fusion reactor is being reduced from a 30-year $20 billion concerted effort by 35 countries to a 10-year $200 million project by a single Boston-based startup. The design-build-test-learn ethos of deep science startups enables them to develop novel prototypes on a thin budget.
A recent study by Hello Tomorrow, a not-for-profit organisation accelerating the transfer of science-based technologies to solve some of the world's most pressing industrial, environmental and societal challenges, suggests that while deep tech companies have higher capital needs at the early stage, they even out against their digital tech counterparts over their lifetime. It is admittedly a long journey. Deep science tech startups take an average of 11 years from founding to exit, compared to four to five years for consumer and payments companies—but the reward for such patience is high. Valley-based hard tech investors are seeing 80 percent operating gross margin businesses that seemed a reality only for SaaS companies.
India currently boasts the third largest startup ecosystem in the world with more than 326 incubators and accelerators. This network of incubators and accelerators has grown 15x since 2000. The highest density of these incubators exists in academic institutions with technology commercialisation being their primary focus. There’s also been a significant policy push to enable private investments, public-private relationships into major deep tech sectors. For example, India launched the Semiconductor Mission in 2022 to promote competitiveness in the segment. Similarly, the National Medical Devices Policy incentivises domestic manufacturing of medical devices. Then there’s the India Space Policy, launched in early 2023, to enable a more conducive regulatory environment and promote private investments in the space industry. Finally, the country also boasts a large R&D talent base with over 500,000 personnel—a 40 percent to 50 percent increase over the last 8 years.
The confluence of India's STEM talent, cost-competitive tech development, and conducive policy environment will drive gains over the next 10 years.
Deep science breakthroughs in one domain can have significant spillover effects in another. One solution can have multiple use cases and unlock market potential in several industries. A few trends have emerged. Globally, half of deep science tech investments went towards synthetic biology. India's bio-economy is on par. The number of biotech startups grew from 50 companies in 2012 to over 6,000 startups today. There are now 750 startups with valuations over Rs 3500 crore. The bio-economy added $10 billion over the past decade. By 2025, the bio-economy is expected to record over $100 billion. Applications for synthetic biology solutions range from reducing the use of chemical fertilisers to waste processing to soft robotics.
The transition to sustainable energy is another massive opportunity ripe for deep science technology solutions. India has the lowest total installation cost for new utility-scale solar PV projects but now needs 190 GWh of energy storage to meet growing demands. Beyond optimising grid and battery performance with digital layers, there is a need to fundamentally rewire battery chemistry to meet both performance and sustainability targets. An estimated $10 trillion in climate dollars is required to achieve net zero targets and investment into novel technology has to be a large chunk of that.
Overall, investors seeking long-term gains in India should pay closer attention to the untapped opportunity of deep science tech startups. While the segment is often misunderstood, it has demonstrated resilience against recent market turmoil. India shows strong potential for global competitiveness with bioeconomy and sustainable energy as just two examples of massive opportunities. Investors who take the time to understand the potential and navigate the challenges can position themselves to reap significant benefits as the fourth industrial revolution unfolds.
The writer is managing partner at Ankur Capital.
The thoughts and opinions shared here are of the author.
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