India's startup ecosystem has been witnessing funding winter for a while now. However, the emerging technology segment called artificial intelligence garnered attention and capital during the same period from various venture capitalists and institutional investors worldwide and in India.

While India's funding size in AI dropped from USD 14.7 million in 2022 to USD 7.1 million in 2023, the space continues to go strong having raised USD 10.6 million till May 3.

For 2024, the biggest fundraisers were significantly smaller compared to previous ones. Players such as Perplexity.ai, Myelin Foundry, RapidCanvas, Kore.ai, and Atlan have raised funds in the first half of 2024. The biggest funding was bagged by Bhavish Agarwal's Krutrim worth USD 50 million, granting it a unicorn status in January.

Crunchbase data shows venture funding to AI-related startups increased in Q1 2024 (1 Jan 2024 – 31 March) compared to Q4 2023. So, what makes the AI space a fertile one for investors? How does one identify a potential bet?

Key factors

AI startups train and deploy large language models (LLMs) with extensive datasets and billions of parameters for various applications, such as natural language processing (NLP) and image creation. Hence, data held by startups are a key factor when deciding. "We invest in opportunities that are enablers of businesses and typically help these businesses maximize the value accretion from the data they have. Therefore having the ability of leveraging AI capabilities to maximise such value propositions is key to our investment thesis," shares Abhishek Prasad, Managing Partner, CSVP Fund.

"We prioritize startups that have an early advantage in terms of proprietary data sources or unique technological capabilities. The competitive landscape and customers are very important for us - are there few players globally, are there too many open source initiatives, who and where are the customers, what is the distribution strategy, etc," concurs Som Pal Choudhury, Co-founder & Partner, Bharat Innovation Fund.

Meanwhile, the founder and core founding members are also taken into factor while evaluating an investment. "Our thesis while investing in AI companies is always anchored on the team. We look for the background of the founders as well as their technical experience and expertise. It is important for the team at the helm to have a deep understanding of how to leverage AI to create a future-ready solution," shares Hemant Mohapatra, Partner, Lightspeed Venture Partners.

The Future Outlook

When talking about the emerging trends in AI, generative AI cannot be overlooked. Generative AI is a form of AI technology that is capable of creating diverse content types, such as text, images, audio, and synthetic data.

Tracxn states that there are 6,339 AI startups in the country, with Nasscom reporting that over 60 startups are working in the GenAI space. According to Future Market Insights, the gen AI market in India is expected to reach USD 13.2 billion. EY estimates that India has the potential to add USD 359 billion to USD 438 billion to its GDP via Gen AI adoption.

On the rapid emergence of Gen AI, Mohapatra shares "What we as investors can do is to back bold, ambitious, and capable founders with our capital, our vast global network and our experience in building global companies, and then go on a journey regardless of challenges and risk of failure." Prasad believes that the foundational models are mature enough to start building enterprise-grade use cases.

"India's role in the AI ecosystem is expected to span applications leveraging proprietary data sources, as well as contributions to AI infrastructure, platforms, and open-source initiatives driven by the vibrant developer community," shares Choudhury. According to Stanford University's annual AI Index report, India ranked fifth in terms of investments received by startups offering artificial intelligence (AI)-based products and services in 2023.