The Imbalance of India’s Startup Ecosystem

Synopsis

How India’s startup ecosystem disproportionately favors consumer-tech over deep-tech innovation, and what it means for the country’s long-term competitiveness

Consumer-Tech Dominance

• Over 60% of VC funding flows into consumer-tech and fintech startups
• Less than 10% goes into sectors like AI, robotics, semiconductors and other forms of deep tech

This imbalance is driven by several factors. Consumer-facing startups offer predictable metrics, faster exits, and large markets, making them more appealing to investors. However, this focus on short-term gains comes at the cost of overlooking the slower, riskier path of foundational innovation.

Consequences of Underinvestment

1. India’s most impactful technological achievements – Isro’s space programmes, Aadhaar, UPI and DRDO’s innovations – have been built with state support, not private capital
2. Companies working on AI, advanced analytics, defence surveillance or climate-tech continue to struggle for patient capital

This underinvestment in research-led initiatives has significant consequences. India’s most impactful technological achievements, such as its space programmes and defense innovations, have been made possible with state support. However, the private sector, despite its vibrancy, remains underinvested in research-led initiatives.

China’s Approach

In contrast, China takes a more proactive approach to directing venture funding towards deep-tech sectors. The government regulates the edtech sector to redirect national efforts towards high-impact areas like semiconductors, AI, and biotechnology.

A Balanced Approach

“We do not lack talent. We lack the right alignment between policy, capital and national ambition.”

To address the imbalance, a more balanced approach is needed. This could involve targeted policy incentives, such as offering enhanced R&D tax credits, exempting long-term capital gains on deep-tech investments, and requiring government-backed funds to co-invest with VCs allocating at least 30% to IP-led or research-backed startups.

Targeted Policy Incentives

• Offering enhanced R&D tax credits and faster depreciation for AI and ML infrastructure
• Exempting long-term capital gains on deep-tech investments held for over five years
• Requiring gov-backed funds to co-invest only with VCs allocating at least 30% to IP-led or research-backed startups
• Limited angel tax waivers to companies with demonstrable deep-tech innovation, such as proprietary models or granted patents

A more balanced approach can encourage capital allocation to defense-tech, AI, space, and semiconductor startups emerging from premier institutions and innovation clusters. This, in turn, can help India realize its ambition to lead in the AI era, build semiconductor self-reliance, and harness quantum or space technologies.

Conclusion

India’s startup ecosystem is a crucial component of its growth and development. However, the current imbalance in favor of consumer-tech over deep-tech innovation hinders the country’s long-term competitiveness. A more balanced approach, involving targeted policy incentives and a shift in investor focus, is needed to address this imbalance and ensure that India realizes its full potential as a global tech leader.