Adequate funds, easy rules to open up potential of deep tech startups

Deep stakeholder engagement, targeted support, and a flexible regulatory framework will be key to unlocking the full potential of India’s deep tech startups, analysts said as the September 15 deadline for consultations on a government draft policy approaches.

On 31 July, the government unveiled the draft National Deep Tech Startup Policy (NDTSP), designed to work alongside the Startup India policy. It introduces policy alterations across nine areas, including funding, research, and sustenance, to nurture deep tech startups use advanced technologies to tackle complex issues.

India is home to more than 10,000 deep tech startups, data from the office of the Principal Scientific Advisor show, with some of them turning into unicorns, or companies with a valuation above $1 billion, in the past few years.

Top unicorns in the deep tech space include Innovaccer, which uses artificial intelligence (AI) and machine learning (ML) to revolutionize healthcare data analytics, and Zetwerk that operates a business-to-business (B2B) marketplace facilitating the precise matching of businesses with manufacturing suppliers, backed by AI and ML technologies.

Industry experts and analysts that Press Insider spoke to emphasized that access to long-term finance for product development, validation, and scaling is critical for the sustenance of deep tech startups.

“Traditional funding routes may not suit the unique risk-reward profile of deep tech, necessitating innovative financial frameworks and government support. While the draft NDTSP takes steps in the right direction, sustained dialogue with stakeholders, bespoke assistance, and a flexible regulatory environment remain essential to truly unleash the potential of deep tech startups in India,” said Amit Jaju, senior managing director, Ankura Consulting Group.

Biotechnology startups face a notable funding gap, the analysts noted, given their extended development periods when compared to technology or direct-to-consumer (D2C) businesses.

“Investors in tech startups can generally expect to exit in five to seven years, but a biotech venture in India could take anywhere between 10-to-14 years. This, coupled with India’s stringent IPO (initial public offering) laws, makes investing less attractive,” said Harshad Lalwani, founder and chief executive officer (CEO) at HUMMSA Biotech.

There are accessibility hurdles, as well as growing competition for funding, Lalwani said.

“The government’s Biotechnology Industry Research Association Council’s Biotechnology Ignition Grant (BIRAC BIG) has been a beacon of hope for many, but the surge in biotech startups has made this grant increasingly competitive and less accessible,” he said.

To be sure, BIRAC BIG offers funding grants amounting to as much as ₹50 lakh (about $60,000) to foster leading-edge innovative ideas, steering them from inception to proof-of-concept. The proposed policy delineates plans to set up a comprehensive platform tasked with supervising government grant distributions and channeling corporate social responsibility funds to research entities.

It will also foster deep tech investments through a dedicated fund of funds, and encourage public and philanthropic investments through technology impact bonds.

The draft policy also aims to help startups navigate the “Valley of Death” phase, where they face funding and resource shortfalls, by improving access to capital and expertise.

Biotech startups often find themselves trapped in this “Valley of Death,” holding promising proof-of-concepts yet lacking funds to progress. “This forms a cycle where investors want more data, but the startups require funding to generate it,” Lalwani said, emphasizing the policy’s potential to break this cycle.

The intricacies of biotech often make due diligence a daunting task for investors. The limited awareness and access to institutions capable of conducting thorough due diligence further exacerbate this challenge, Lalwani said, adding that the draft policy promises to resolve these challenges.

“The draft policy envisions creating platforms to showcase deep tech startup innovations on global stages, facilitating international collaborations, and providing them with market access,” said Lalwani said.

“This framework can open doors to global markets, partnerships, and funding opportunities for biotech startups,” he said.

Finance minister Nirmala Sitharaman’s announcement in July on domestic firms being allowed to soon list overseas could potentially address the prolonged gestation period challenge, offering biotech startups an earlier exit route, akin to their counterparts in the USA, Lalwani said.

Meanwhile, the draft policy, formulated with insights from around 200 experts from various fields, advocates the creation of an inter-ministerial deep tech committee to harmonize objectives, strategies, and implementation plans for startups.

Some stakeholders said the policy should better balance regulation and innovation, while fostering a more collaborative and inventive space, without stifling the industry with excessive controls.

“The introduction of this policy raises questions about its timing. Considering the nascent stage of the Indian startup ecosystem, the focus should be on encouraging a culture that supports risk-taking and inventive approaches, as opposed to establishing a potentially restrictive regulatory framework,” Ankura Consulting’s Jaju said.

“Moreover, the pronounced emphasis on adherence in the policy could be seen as a subtle way for regulators to gain control over a sector characterized by disruption and originality. While it is essential to have rules that promote ethical and responsible business practices, it is equally important not to curb the entrepreneurial spirit with overregulation,” Jaju added.

In an August 2022 report, information technology industry lobby Nasscom and global management consulting firm Zinnov analyzed India’s burgeoning deep tech startup ecosystem, noting a considerable 40% compound annual growth in recent years.

Vikalp Sharma, an engagement manager at Zinnov, said: “The draft policy meticulously crafts the road map for India’s deep tech sector by empowering founders, bolstering research and development, and firmly establishing India as a hub for deep tech innovation. To facilitate a nurturing ecosystem, the policy outlines provisions for long-term grants, regulatory sandboxes, and avenues for pilot testing. It also envisages institutional funding to foster infrastructural development and pre-commercial funding to build prototypes.”

The proposed ‘deep tech capital guidance fund’ is conceived to provide significant financial impetus to startups, tailored to meet the distinct demands of deep technology initiatives and envisaging extended deployment phases, he added.

Industry analysts point to several obstacles that can potentially discourage both founders and investors from engaging in the deep tech ecosystem.

“Merely offering financial incentives such as tax rebates might not be enough to encourage Indian investors to support deeptech startups significantly,” said Salil Urunkar, a consultant for disruptive technologies and startups.

“Founders often have to set up entities abroad to meet the requirements of global venture capitals and investment firms, which is a notable challenge. Besides funding issues, they face other hurdles including the lack of a skilled talent pool, high costs associated with trial equipment, and regulatory barriers,” Urunkar said.

“While increasing capital for startups through university projects and incubator programs is important, the government should also focus on enhancing the scientific and deeptech infrastructure in higher education institutes,” Urunkar added.