India boasts the world’s third-largest startup ecosystem and a vast technical talent pool. However, despite this, the country lags in DeepTech innovation.

Issues in India’s Startup Ecosystem

• Focus: Most unicorns solve distribution problems rather than scientific challenges.
• Prioritizing Payments: The brightest minds are working on payment apps instead of breakthrough technologies like quantum computing or fusion energy.
• Funding Bias: Venture capitalists prefer investing in food delivery and fintech rather than high-risk, high-reward DeepTech.
• 2×2 Framework: The incentive structures guiding Indian businesses can be analyzed through two key dimensions:
  • Local Opportunity: The size and potential of the domestic market.
  • Competitive Pressure: The intensity of local and global competition.

Categorization of Indian Business Environment

• Market Skimmers: They  target large domestic markets with high local opportunity and low competition. They operate with minimal need for scientific breakthroughs, instead achieving success by solving inefficiencies through the strategic use of existing technology.
  • These businesses leverage low-hanging fruit rather than investing in R&D-driven innovation.
  • Examples: BharatPe: Made digital payments accessible to small merchants. 
    • Byju’s: Digitized test preparation without fundamentally reimagining education.
• Efficient Adapters: Businesses in this category operate in high local opportunity but high competition environments.  They succeed by adapting global business models to local Indian conditions, focusing on localization and efficiency rather than scientific advancements.
  • Characteristics: They modify global strategies to fit India’s unique market dynamics. 
    • Innovate in operations and logistics, not in core technology.
    •  Win through cost efficiency, localized customer preferences, and supply chain adaptation.
    • High competition forces business model innovation, but not technological breakthroughs.
  • Examples: Flipkart: Adapted e-commerce with cash-on-delivery and motorcycle deliveries.
    • Zomato: Localized food delivery logistics to suit Indian market challenges.
• Global Outsiders: Businesses in this category operate in low local opportunity and low competition environments, primarily as contract manufacturers producing goods designed elsewhere.
  • Characteristics: Operate as contract manufacturers, focusing on assembly rather than innovation.
    • Minimal domestic demand for cutting-edge technology, reducing incentives for R&D investment.
    •  Limited scope for differentiation, keeping them manufacturing hubs rather than technology leaders.
  • Example: Dixon Technologies which  specializes in assembling electronics without significant investment in proprietary R&D.
• Global Innovators: They compete in highly competitive international markets, where success depends on high-stakes innovation and advanced scientific research. 
  • These companies focus on True DeepTech innovation, but only a few Indian startups operate in this space due to low local opportunity.
  • Examples : Astrome – Advancing millimeter-wave wireless communication technology.
    • ePlane Company – Developing electric flying taxis for future urban mobility.

Reasons for Lack of Deep Tech innovation in India

• High-Reward Opportunities: Investors and entrepreneurs prioritize markets with faster returns over long-term scientific breakthroughs. 
  • Indian startups focus on business model innovation rather than deep scientific research due to quicker scalability and profitability.
  • For ex: Ola addressed transportation inefficiencies instead of investing in self-driving technology. 
    • Fintech startups attract more investment as they offer faster returns, unlike semiconductor research, which demands decades of patient capital.
• Filling State Gaps: Indian startups privatize essential services, addressing government inefficiencies. They solve real problems but do not push global technology frontiers.
  • For ex: Swiggy Instamart replaces reliable grocery stores with on-demand convenience. Urban Company offers services that function as public utilities in other countries.
• Complacency: Domestic comfort breeds complacency, lowering global competitiveness. Without global competition, Indian firms underinvest in innovation.
  • For ex: Micromax thrived in India but collapsed globally due to weak R&D. South Korean and Chinese firms faced early global competition, driving deep tech investments.

Approach of Other Countries

• Taiwan’s Semiconductor Success: Government-backed TSMC as a public-private partnership while investing in specialized research institutions, ensuring sustained innovation and global competitiveness. 
  • Developed strong talent pipelines and fostered semiconductor expertise, enabling TSMC to dominate 61.7% of the global foundry market.
• Market Skimmer Approach: Reliance Jio built a multi-billion-dollar business by leveraging existing network technology instead of developing proprietary solutions.
  • Companies in finance, retail, and healthcare follow this pattern, adapting global technologies rather than pioneering new inventions.
• Embraer’s Global Edge: Brazil, like India, has a large market with inefficiencies, but strategic policies drove innovation. 
  • State support was tied to export requirements, while military-commercial collaboration fueled aerospace R&D. 
  • Embraer now competes globally in commercial aircraft manufacturing, showcasing Brazil’s success in high-tech exports.
• South Korea’s  Model: Pushed chaebols (conglomerates) to export, linking subsidies to global performance. 
  • Structured capital access to drive R&D and technological growth. South Korea’s Per capita GDP is 10x India’s, despite a smaller population. 
  • High innovation and patent filings, showcasing global competitiveness.
• Germany’s Ecosystem: Fraunhofer Institutes bridge academic research with industrial application, driving innovation. 
  • Strong state support + thriving private R&D fuel sustained technological growth. 7,011 active patent families, showcasing global leadership. €143 million in licensing revenue, proving commercial success.
• China’s Innovation: Massive government investment fuels innovation, despite historically weak private R&D. Initiatives like GGFs and new infrastructure projects drive growth in AI, clean tech, and semiconductors.
  • Investment Scale: RMB 563 trillion (USD 83.7 billion) in 2022, showcasing aggressive state-led development. 
    • State-driven technology compensates for weaker private innovation networks.
• Israel’s Innovation: Private innovation thrives, compensating for limited government resources. Military-civilian tech transfer and strong global VC partnerships drive growth. Israeli startups raised $25 billion in 2021, 10x the expected amount based on population.
• India’s Innovation Challenge: Weak government and private support hinder deep tech innovation. 
  • Lack of R&D incentives and limited state funding stall progress. Minimal public-private collaboration slows technological breakthroughs. 
  • VCs prefer short-term gains, limiting long-term innovation investment.

Way Forward

• Encouraging Export Orientation: The Production-Linked Incentive (PLI) scheme is fostering a shift towards global competitiveness. 
  • However, more export-driven policies are needed to replicate success stories like South Korea’s chaebols or Taiwan’s semiconductor industry.
• Moonshot Technologies: The National Quantum Mission signals serious intent towards cutting-edge research. Scaling up such initiatives can position India as a global leader in emerging technologies.
• Long-Term Innovation: Current venture capital cycles (5-7 years) discourage long-term R&D. India needs investment models similar to:
  • China’s government-backed guidance funds.
  • Germany’s industrial R&D financing.
  • Israel’s deep tech venture funding ecosystem.
• Commercialising Research: Israel’s success in deep tech stems from seamless technology transfer between universities and industries. India’s research ecosystem remains disconnected from commercial applications
• Expanding National AI: The establishment of AIRAWAT, India’s first national AI computing platform, is a step forward. However, India needs dozens of such initiatives to compete globally.
• Elevating Tech Entrepreneurs:  Western innovators like Elon Musk and Jensen Huang have achieved household recognition. In contrast, India’s entrepreneurial icons are software and services-focused. 
  • Building a culture that celebrates scientific risk-taking is crucial.

Conclusion

India’s startup ecosystem has thrived by solving market inefficiencies through digitisation. However, as these inefficiencies decrease, returns from simple digital solutions will shrink. The future lies in deep tech innovation, requiring a radical shift in mindset, policy, and funding.

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