Modi govt push prompts investors to zero in on defence startups

Bengaluru: The Modi government has been pushing for more private sector participation in defence equipment and technology in the country, and a large part of this focus is on funding startups to plug existing gaps in the sector with programmes such as the Innovations for Defence Excellence (iDEX).

Investments by venture capital and private equity firms in this space are miniscule compared to other sectors, but are steadily increasing. However, looking ahead, VCs feel that defence startups are not only substituting imports but reaching a stage where they export military hardware and systems to friendly nations as well. This would be a significant shift considering India is currently the biggest arms importer globally.

Indian armed forces have now reached a stage where they hand out problem statements for startups to directly solve. For example, the oldest of the Sukhoi SU-30 MKIs, the backbone of the Indian Air Force’s combat aircraft fleet, will undergo upgrades and artificial intelligence (AI) will be a key part of the process, as per news reports.

The government’s push has positively affected private sector investments, VCs who spoke to DH said.

“If you talk about equity-based funding, defense startups are now starting to get funding. But many of the VCs have two problems. One, they don't understand the defense market and hence they do not have the patience to fund here. Second, some of the VCs, because they also have funds from some foreign countries and there is some embargo on them relating to anything that kills or that has explosives should not be funded by those,” said Abhishek Jain, Chief Business Officer of defence startup Zeus Numerix.

Investors are interested in the sector, but still point to certain challenges, such as the government being the main customer, slow gestation periods, and limited use-cases. Despite these challenges, they are actively looking to put more money in the defence, paramilitary, and defence tech space, which extends to space, drones, satellites, communication surveillance, cybersecurity, and cyber warfare.

“People are working on drones, anti-drones, assisting defence on non-ammunition side. These are all specific to defence, and if it is not approved, a lot of money can go into something that does not make its use case. This is for early stage investors. But once the product has been accepted, then it shouldn't be a problem,” said Anil Joshi, Founder and Managing Partner at Unicorn India Ventures.

Late payments a problem

One of the biggest challenges with the government being the main client in this sector is the issue of timely payments.

“Attitudes vary, but I would say 80% of the VC's will be wary of the government as the only client. Some of that will change as the government becomes more efficient,” said Parag Dhol, General Partner at Athera Venture Partners.

“When you have a new area where the macro opportunity itself is so huge that you have to live with some inefficiencies of manufacturing or a single large government buyer where your payouts are coming late and it depends on a certain regulation or framework, it's a risk to tap into that opportunity,” said Abhishek Prasad, Managing Partner, Cornerstone Ventures. He sees defence-specific funds coming up in a year or so.

There are many defence companies whose tech and applications are also suited to civil use, especially in the cases of drones and satellite mapping. And there could be a case to export these technologies, outside of military use. A lot of this, however, depends on the push and pull of global geopolitics.

Naveen Jain, Managing Director of private equity Florintree Advisors, said, ”In one of the opportunities that we were evaluating, we got a major order from a European country, which was earlier sourcing the same product from Russia. Because of the geopolitical situation, almost all the countries are looking to kind of diversify their supply base beyond countries like China and Russia and also strengthen their military. So there is increased spending.”

Florintree has made five defence-related investments, out of which three have gone public.

Panneerselvam Madanagopal, CEO of the central government’s MeitY Startup Hub, believes that it might take at least five to ten more years to reach the stage where startups fulfill most of India’s defence requirements and are contributing significantly to exports.

“I may not see us exporting in a big way to some of these matured defense ecosystems, but for upcoming emerging nations in the Middle East, African, and Southeast Asian markets, India will be a very good source for their defense requirements,” he said.

Indian Naval ships INS Delhi INS Shakti and INS Kiltan arrived in Singapore.

Jammu: An army tank during an operation following a terrorist attack on an army convoy at Akhnoor sector in Jammu Monday Oct 28 2024.