YourNest VC On Finding The Patient Capital Fuel That Indian DeepTech Needs

How deep is deeptech in India, really?

Going by the government line, it’s too shallow for a strong IP-led ecosystem to set sail in India. But the heat from commerce minister Piyush Goyal at the Startup Mahakumbh 2.0 has left founders with some thinking to do.

In private gatherings and public debates alike, the startup ecosystem is increasingly reflecting on whether the minister went overboard, flaying startups, or if India is still a laggard.

Well, statistically, the picture isn’t bleak. A NASSCOM-Zinnov report last year showed that 480 deeptech startups were established in 2023 alone, which grew 2X year-on-year. And over 100 of these newly launched startups developed intellectual property (IP) or innovative solutions in new domains.

Comprising verticals including robotics, AI, spacetech, defence tech, and semiconductors, the sector now boasts over 3,600 startups. Deeptech in India is seemingly in the spotlight today, thanks to the likes of Agnikul and Pixxel, which have garnered global attention in spacetech, and homegrown AI efforts from Sarvam AI and Soket AI, aiming to compete with global giants like Meta and Google. The list is long.

Despite visible gaps, this list of trailblazers is only getting longer with the collaborative efforts of entrepreneurs, venture capitalists (VCs), and the government. New deeptech-focussed funds have been launched, several sector-agnostic funds have begun allocating a portion of their investments to deeptech, and the government has also announced multiple state-backed funds to support the VC and deeptech ecosystem.

During this transitional phase, where the progress is steady and has started getting noticed globally, but not at a pace for India to claim complete self-reliance yet, Inc42 spoke to Sunil Goyal, MD and fund manager of YourNest VC, as part of Moneyball series. As one of the earliest VCs to bet on this space, Goyal shared insights into the various nuances, typical headwinds and tailwinds that the Indian deeptech ecosystem has faced, the approaches that the fund has historically taken, and the journey that lies ahead.

“Back in 2011, when Goyal, along with Sanjay Pande and Girish Shivani, founded YourNest VC, the concept of deeptech in India was still in its infancy, and the startup ecosystem was riding the wave of the consumer internet boom. Although YourNest initially invested in a few consumer internet startups, it pivoted to become a deeptech-only fund within two years of the launch of its first fund in 2012.”

Over the years, the VC has launched three funds, backed 51 companies (over 35 in deeptech), and has taken 10 exits at an average of at least 5X to 6X return. It now prepares for its fourth fund launch.

It invested in 16 companies from $14 Mn Fund I, a few of which, including Uniphore and ARYA.AI, were deeptech companies. Its $30 Mn Fund II backed 18 deeptech startups across sectors such as CRON AI, Exponent Energy, Orbo, LightSpeed Photonics, Uptime AI, among others.

YourNest’s $69 Mn Fund III has deployed almost 70% of the total corpus so far in 17 companies, including Perkant Tech, Map My Crop, ThinkMetal, CargoFL, EtherealX, and others.

The ethos of its brand is to provide “nurture capital”. Goyal said, “The brand name YourNest signifies that this is the nest where, if you, as an entrepreneur, keep doing well, you can keep coming back to us for extra capital and guidance. Whenever you are in a fledgling mode, come down to our nest, and we will be able to give you the wings to fly again.”

Edited excerpts from the interaction

Inc42: How has your investment thesis and the idea of ‘deeptech’ matured over the years?

Sunil Goyal: We must first understand that ‘deeptech’ as a definition will continue to evolve. Whatever is deeptech today, tomorrow it will be treated as a normal tech business.

Initially, we started with consumer tech, then moved to conversational AI with Uniphore as our first bet. After Uniphore, we invested in ARYA.AI, a horizontal AI platform for developers. In 2016, we invested in an IoT play, where the company had 30 patents around wearable technology. Taking a leap from there, today we are investing in India’s most powerful quantum computing startup, QpiAI. So, that’s how our understanding of deeptech has also evolved.

“It doesn’t mean that the innovation in industrial IoT, etc., is not happening anymore, but the opportunities in deeptech have now gone into building powerful quantum computers, fully reusable space rockets, innovative battery technology — that’s where we are also invested.”

In terms of our thesis, we have always called ourselves nurture capital, and that hasn’t changed. Our idea is to nurture global market leaders from India. So, we have only picked those founders who had the outlook to build global companies. We always wanted to ensure that the businesses we invest in could stand the test of time, and that they could be differentiated even five to seven years down the line, when we would sell our stakes.

Besides, since 2014, we have been religiously saying that we are a deeptech fund that invests in IP-led innovations and B2B enterprise use cases. This has also kept our investments highly curated (four to six deals a year). For us, doing less is more. Hence, we also invest in pre-Series A funding rounds only. If any Series A deal comes our way, we refer it to the fellow VCs in the ecosystem.

Inc42: YourNest primarily invests at Pre-Series A stage in particular. Why so? And how do you approach participation in follow-on rounds thereafter?

Sunil Goyal: We enter the Pre-Series A round because at this stage, usually a product is ready, and there are some customers to talk to, even though the revenues might not have started flowing in. So, we can speak to a few customers to validate the product that the startup is betting on.

Now, because we have a smaller number of entry-level deals, there is enough money kept for follow-on rounds in the existing businesses. We keep writing bigger cheques for the winners, and that changes the game because now we have a proprietary deal flow.

“By the time we write bigger cheques for our existing portfolio companies, we have already established a healthy relationship with the existing founders, which gives more confidence to both parties. Besides, when a new investor sees us increasing our bets by 2X or 3X in these companies, they also get more confidence to invest in them, hence, the deal flow improves overall.”

So far, our highest investment in any particular company has been $6 Mn.

Inc42: How does YourNest approach due diligence, particularly for deeptech investments?

Sunil Goyal: For us, understanding a technology in depth before investing in it is essential.

But even before that, the more critical step is assessing the founders from all dimensions of their personality. We evaluate whether they have the commercial acumen to monetise the technology and whether they possess the mindset required to attract high-quality talent to build alongside them. These are some of the key factors we consider early in the process.

“Then, even after we’ve completed our business and technology diligence and issued a term sheet, we take another two months to conduct a thorough assessment of their ability to comply with regulatory frameworks—be it financial, taxation, ESG, or others.”

Let me give you an example. In 2022, we were in the process of investing in a drone company. We had already issued the term sheet, and the ESG audit was underway. As part of the audit, we asked a straightforward question in line with ESG norms: “Can you ensure that the drones are locked away securely every night after office hours?” This was important because drones, if misused, can cause harm, and we needed to know whether they could be secured to prevent unauthorised access or use. We gave the founders a window of six to twelve months to become ESG compliant. They declined. So, we chose to walk away from the investment.

That’s the level of ESG diligence we undertake. And these evaluations don’t stop at the investment stage—they continue through monthly or quarterly reviews with our portfolio companies.

Today, every founder must recognise that ESG compliance needs to begin on day one. This is particularly important because most capital in later rounds will increasingly come from development financial institutions or sovereign wealth funds, which place significant emphasis on these parameters.

Inc42: As a VC, how do you view the sudden surge in ‘.ai’ investments in the Indian startup ecosystem? Is this FOMO driven?

Sunil Goyal: On the contrary, most of YourNest’s AI companies definitely don’t have just a dot-ai behind them, but they are much more deeptech than that.

Our thesis is simple: just stay away from such companies, as these are all SaaS players getting disrupted by AI.

We do not acknowledge or act on FOMO-driven investment decisions. Our approach is deeply rooted in first-principles thinking, rigorous due diligence, and long-term conviction in the potential of deeptech innovations.

We believe that true innovation demands patience, not panic. As such, YourNest continues to invest based on insight, not impulse.

Inc42: In your opinion, what would it take to bring more patient capital into India’s deeptech ecosystem?

Sunil Goyal: Normally, the consumer-focussed funds have a timeline of five years from entry to exit, which is extendable by one year. Or, multiple such funds have a 7+1+1 strategy, where, if they have invested in any company in the second or third year, they have to exit in four or five years’ time. That indeed became a challenge for deeptech startups.

YourNest has always had a 10+1+1 strategy in investing, so we have 12 years end-to-end to be able to manage investing in the first three years and exit in the next seven to eight years. This gives any entrepreneur a decent period to be able to scale and give good returns.

“Now, we need long-horizon capital for deeptech across the board. Even the 10-year-plus fund lives also need to be extended to be able to enjoy the full benefits of these investments.”

If we need long-term investments, we need to tap into those institutions that are sitting on long-term capital — the insurance companies, the pension funds, and the religious charitable institutions.

We are fighting tooth and nail with the government to redirect capital from these sources – funds that inherently grow with India’s economic progress and are not prone to rapid devaluation – into long-term asset classes like venture capital.

“If 1-2% of the lakhs of crores of corpus given to a religious place – I call it God’s own money (jokes Goyal) – can be allocated for VC or private equity, we will have a certain pool of capital coming for support. And these institutions don’t have to fund VCs directly; instead, the government can route this capital through structured vehicles like fund of funds.”

The only thing that pains a little bit today is that after we have grown a company to Series B and Series C level, for the next $100 Mn round, normally, they have to depend on some international fund. Also, the biggest challenge today is getting the subsequent round of capital. Today, several VCs are co-investing with us, but that is on the back of our knowledge, understanding, and conviction.

If the money from these institutions flows in, it will be a major change for the funding challenges the deeptech ecosystem faces today. We won’t need external capital.

Inc42: Can you add some examples here in the Indian context?

Sunil Goyal: The SIDBI fund of funds is a good example here. As more and more people see that SIDBI is able to realise a much better return than LIC or some other institutions have done in the past, because the former is running it professionally, those benchmark returns will enable more capital allocation to happen domestically. Without the domestic allocation of capital, we cannot fortify our deeptech ecosystem.

Now we are also talking to the ministry to see if some of the larger funds – for instance, the likes of Blume Venture, IvyCap – can get some monetary boost from the Centre only for deeptech investment.

“For example, someone has a $300 Mn fund, and we want them to spend 20% of their capital for deeptech, which is $60 Mn. Can the government give them the $30 Mn investment in that and say, twice the money you allocate for deeptech investments? That’s how the machinery will get triggered to grow further.”

Inc42: Broadly speaking, how are you viewing the AI landscape in India today?

Sunil Goyal: The foundational model building, as largely discussed, is too costly. We are watching the space to see if somebody emerges who can find a way to do it faster and better. We are also keeping a close watch to see if somebody can make the existing models more efficient using some new methods and innovations.

We can clearly see a huge investment going into the application layer. However, it is similar to investing in a consumer internet company as it was in the early 2000s, so that doesn’t fit YourNest’s thesis for investment. Whenever we invest in applications, it has to be AI plus hardware.

Meanwhile, we are interested in the potential of marrying AI with quantum computing, which can altogether create a new ball game of computing power.

Inc42: How do you view the current pace of deeptech innovation, and what role are government initiatives playing in driving it?

Sunil Goyal: In India, the seeds of innovation have multiplied since 2014 as the ease of fundraising for venture capital and the startup ecosystem increased. Whether it is the National Quantum Mission, Semiconductor Mission, or the Indian Space Policy, each of these initiatives is putting in half a billion to a billion dollars to accelerate the growth.

Today, there are around 1,150 accelerators and incubators in the country, many of which are inclusive technology business incubators. Around 150 of them have been funded by MeitY, the Department of Science and Technology, only to support deeptech startups.

So, backed by various grants and equity capital, innovation is happening across the sector, and hence, there is also enough pipeline. This has also created a vast pipeline of innovative ideas for us, VCs, to look into.

Having said that, a lot more can be done. Just the way we happen to do Fund of Fund’s scheme for seeding VCs, we need secondary funds to be supported by the government.

“There is a program under discussion with the SIDBI that once the cycle of VC funds (seven to 10 years) is over, we need to hand over the baton to somebody who understands which companies will be ready for IPO, and hence, prepare them for that. So, secondary domestic funds are required in India and the government needs to step in to be able to create that pool.”

Inc42: How do you see deeptech evolving by 2030?

Sunil Goyal: Look, the challenge is that there are too many unknowns for humanity today. There are unknowns everywhere, particularly around our health. So, we need to be looking at more biotech and healthtech solutions. Maybe using quantum technologies and AI, we should start inferring many aspects of this that are unknown to us.

So, one big thing emerging in deeptech is biotech.

“Biotech will become more mainstream in the next five years, not only in India but globally. By that time, we would have done some more innovation in space stations, and perhaps drug discovery will happen in space, which we are unable to do sitting here on Earth. With that, maybe new proteins and molecules will be discovered.”

I think alternative and more cost-efficient energy solutions are also emerging as a major trend here.

India will always be a capital-deficient country. So, if India has to be seen from a capital deficiency point of view, as well as from the point of view that it needs more energy, we need solutions that can help us do the same job as the Western world is doing while using far less energy than today. And more solutions will be required that can also make the broader deeptech innovations more cost-effective.

Inc42: What common GTM mistakes do early stage deeptech founders make? Any advice for them?

Sunil Goyal: The biggest mistake that deeptech founders often make is being obsessed with their products. These are normally technology founders, and they are so deep in love with the products that they keep on evolving and improving them for months and years without understanding the commercial aspects of it.

They do not reach out to prospective customers and miss key other aspects like understanding the market and geography, the price points they can set for their minimum viable products, which they can take to the market.

“Transitioning from being a specialist in a field to an entrepreneur is the journey only a few are able to travel. The ones who can travel that path are the ones who make an impact in the society at a larger level. The goal should be high: if you have discovered something good for humanity, take it to the masses; don’t be happy with making $100 Mn in revenue, take it to a multi-billion dollar revenue.”

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