In the dynamic realm of artificial intelligence, a curious paradox emerges: venture capitalists are exuberantly backing application-layer AI startups in India even as funding for the sector faces a notable downturn. Data from Venture Intelligence reveals a drop in investment—AI startups in India amassed $747 million in 2024, a striking 26% decline compared to the previous year. Yet, intriguingly, the volume of deals surged, rising from 78 to an impressive 121.
Ravi Srivastava, a partner at the early-stage investment firm Leo Capital, elucidates this phenomenon: “This year, we witnessed an upsurge in companies crafting vertical AI applications, building on the robust frameworks that have matured over time.” The infrastructure of AI can be broadly categorized into three layers: the foundational models at the base, the horizontal enablers, and the increasingly popular vertical applications. This year, Leo Capital completed several noteworthy ventures within the AI and enterprise landscape, funding firms like Zeplyn—an AI copilot tailored for financial advisors—alongside Arch0, a startup enhancing cloud infrastructure security, and DecoverAI, a platform crafted specifically for legal professionals.
What’s more, a significant number of these innovative AI startups are not just confined to Indian soil but are ambitiously developing products for the US market. Harshjit Sethi, managing director of Peak XV Partners and a key player in AI investments for the VC firm, anticipates a trend reminiscent of enterprise software companies, which predominantly target US customer bases. He reveals, “For the coming year, I envision a wealth of intriguing opportunities within the application layer. The challenge lies in translating AI’s formidable capabilities into practical solutions pertinent to our various roles—a gap that many Indian companies are keen to bridge.”
Further revealing the landscape, Tracxn data indicates that through diverse initiatives and its principal fund, Peak XV Partners supported an impressive 13 startups focused on AI this year. These include Enterpret, RapidCanvas, OrbitShift, and Brainfish. Additionally, Peak XV actively participated in a substantial $105 million funding round for Atlan, a SaaS startup seizing the significant opportunity arising from corporations eager to optimize their databases for artificial intelligence applications.
Big-ticket AI Deals
Amidst a flurry of smaller investments, the Indian AI sector also witnessed some substantial transactions. Noteworthy among these is Nurix AI, founded by Mukesh Bansal, which specializes in enterprise AI assistance, alongside Neysa, a pioneer in the AI cloud and platform-as-a-service domain, and Krutrim AI, led by Bhavish Aggarwal, which has impressively reached unicorn status, signifying a valuation exceeding $1 billion.
Industry insiders suggest that while the application layer is burgeoning, an equally promising opportunity for India lies within the infrastructure layer. Regrettably, India has missed the bus on foundational models, which are predominantly being developed stateside by heavyweights such as OpenAI, Google, Meta, and Anthropic, all of whom have accumulated significant capital. Neysa, operating firmly in the infrastructure domain, provides generative AI platforms and services to streamline AI project management for clients. They successfully secured $50 million over two funding rounds this year.
Founder Sharad Sanghi sheds light on the hurdles faced by new entrants, stating, “My previous experience with Netmagic offered advantageous access to essential resources like data center space, a luxury not all startups possess. Moreover, capital accessibility, along with the recruitment of elite talent, is imperative. Quality engineers—those well-versed in both infrastructure and platform optimization—are in short supply, leaving startups at a disadvantage.”
The Imperative of Computing Infrastructure
In a proactive move, the Indian government ratified a substantial allocation of ₹10,372 crore for the India AI Mission over the next five years, aiming to enhance computing infrastructure through strategic public-private partnerships. Despite this stride forward, venture capitalists express concerns regarding the saturation of the application layer, a reflection of widespread hype around AI.
Alok Goyal, partner at Stellaris Venture Partners, articulates this trepidation: “The landscape is evolving at breakneck speed, continuously reshaping notions of ‘problem’ and ‘value.’ What differentiates today may soon blend into the background, lost among a sea of emerging entrants as barriers to entry diminish rapidly. Thus, we find ourselves in a state of clutter at the inception stage across many AI application categories.”
As the AI narrative unfolds, investors remain optimistic yet cautious, navigating a landscape teeming with opportunity and complexity in equal measure.
