VC Insights | Issue# 10 [January 16, 2025]
Rising Investor Interest in AI Startups
In 2024, Artificial Intelligence (AI), particularly Generative AI (GenAI), saw widespread adoption across industries. Alongside AI-focused Indian startups, investors too showed strong interest in AI-driven startups, resulting in noteworthy funding rounds, such as Sentient Labs’ $85 Mn and Nurix AI’s $27.5 Mn. The significant funding rounds in early-stage AI startups led to a 31% Year-on-Year (YoY) surge in seed-stage funding in 2024. GenAI use cases include AI-driven analytics for decision making in areas like marketing and sales, workflow automation for tasks such as customer support, and personal assistants like chatbots. Other applications include research assistance, content generation (e.g., summaries, reports, audio, video), code generation and testing, and a wide array of use cases across various sectors and industries. In fact, 56% of the 75 investors surveyed by Inc42 are prioritizing AI and GenAI startups for 2025. Check out Inc42’s coverage of the growing investor optimism around Indian AI startups in 2025. Let us dive deeper.
AI’s Impact on Key Business Functions
Indian startups across deeptech, healthtech, and ecommerce have adopted AI and built foundation models or fine-tuned existing models to gain competitive edge. GenAI is expected to have the most significant impact on marketing and sales, with 39% of startup founders highlighting its importance. According to data from an Infosys report, 96% of 2,600 surveyed marketing professionals across 14 industries have leveraged AI in their work. As per Inc42’s survey, 26% of founders feel that AI chatbots and assistants will take over customer / product support roles. AI adoption has streamlined operations for many companies; for example, Paytm used AI to reduce support staff costs by 60%.
Building AI Technology Stacks
With AI solving critical business functions, it is imperative that startups start leveraging its capabilities. It is not just AI-focused startups offering innovative solutions; startups across sectors are adopting diverse approaches to integrating AI. The most popular approach, as per 100+ founders of early-, growth-, and late-stage Indian startups surveyed by Inc42, is the hybrid combination of building in-house AI models and leveraging (by purchasing) AI models and solutions offered by established tech companies. While 28% of startup founders rely completely on existing AI solutions from established vendors, 18% are experimenting with off-the-shelf GenAI products and services. However, only 16% of startups possess in-house capabilities to develop custom GenAI solutions, highlighting the complexity and resource-intensive nature of AI development.
Thoughts
With investor focus and enterprise adoption increasing, AI startups are positioned for sustained growth. The technology is evolving beyond enterprise applications, finding use cases across various domains. As businesses continue adopting AI, startups offering scalable and innovative AI-driven solutions are expected to dominate the investment landscape in 2025.
GenAI funding reached new heights in 2024 and GenAI companies across the globe raised $56 Bn from VCs in 2024 across 885 deals. A growing trend among investors across the globe is to invest in startups that build GenAI applications on top of AI foundation models, rather than startups working on building the foundation models. The primary reasons behind this are faster returns of investment, given foundation models are costly and time-consuming to build, and the fact that they are more prone to risks arising out of regulatory uncertainties across geographies. Instead, by leveraging established foundation models from other companies, startups can concentrate on creating unique, value-added services tailored to specific consumer or business needs, enhancing their market appeal and competitive edge. GenAI applications are more scalable and facilitate quicker deployment and adaptation to market demands without the need to build complex AI systems from the ground up. With the cost of accessing state-of-the-art models declining, AI has become more accessible, making it easier for startups to create GenAI applications. Additionally, AI foundation models – specifically Large Language Models (LLMs) – have been trained on most of the available open and proprietary data. However, the next generation of high-profile models have not shown significant performance improvements, with further training offering negligible gains relative to the high costs involved (see more).
In 2025, Indian investors (the larger VCs, as well as micro VCs) too are expected to favour startups that fine-tune existing AI foundation models (large and small language) to create AI-based applications solving specific problems across sectors. Apart from the applications built on top of AI models, startups working on agentic AI (an emerging area within GenAI) and curation of novel, synthetic training data (especially in Indian languages), are expected to attract the eyes of Indian investors. Interestingly, training costs for AI models have started to decline and this may spark renewed investor interest in foundation models. In fact, we anticipate some investment activity in startups developing foundation models trained on Indian language datasets, vision-language and other multimodal foundation models, and Small Language Models (SLMs) optimized for running AI on edge devices such as phones, cars, and medical equipment.
In terms of strategic acquisitions, globally, a new trend emerged in 2024, particularly in AI – major tech companies formed innovative partnerships with AI startups, bringing in top executives and gaining access to cutting-edge technology without fully acquiring the startups. Examples include, Microsoft and Inflection AI, Amazon and Adept, as well as Covariant, and Google and Character.AI. See more on these partnerships here. We expect Indian AI startups to enter into such novel partnerships with tech giants. Well, there is a lot happening on the AI front in India and we are excited to see what the future holds in 2025.
If you are interested to learn more, feel free to check out this coverage by Inc42.
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Acronyms used in the blog that have not been defined earlier: (a) Venture Capital (VC), (b) Million (Mn), and (c) Billion (Bn).
Hi Ankan,
Good to read your Blogs.
Very informative, indeed.
Looking forward to more such interesting articles.
Thank you very much! Appreciate the feedback!