Venture capital investors are bullish on application-layer artificial intelligence (AI) startups in India despite an overall fall in funding amount for companies in the sector this year. According to data from Venture Intelligence, Indian AI startups raised $747 million in 2024, down 26% from last year but the number of deals in the space increased to 121 from 78 in 2023.“This year, we saw many companies building vertical AI applications by leveraging more mature platforms to build on top of that,” said Ravi Srivastava, partner at early-stage investment firm Leo Capital.

There are broadly three layers in the AI stack—the foundational models, horizontal layers called enablers, and vertical AI applications. Leo Capital closed multiple deals in the AI and enterprise space this year, including Zeplyn, an AI copilot platform for financial advisors, Arch0, a cloud infrastructure security startup, and DecoverAI–a platform built for the legal community.

Notably, several AI startups being backed by investors in India are building in the US. Peak XV Partners managing director Harshjit Sethi, who focuses on AI investments for the VC firm, said that AI startups are expected to follow the trend set by enterprise software companies, which mostly build for US customers.

“What we should expect to see, and my hope for next year, is that there will be many more interesting application layer opportunities,” said Sethi. “Taking the capabilities of AI and translating them into what it means for each of our roles, I think that gap will be something companies will look to address, particularly those in India.”

According to Tracxn, Peak XV Partners, through its various programmes and the main fund, backed 13 startups building in AI space this year, including Enterpret, RapidCanvas, OrbitShift and Brainfish. Peak XV also participated in the $105 million round for SaaS startup Atlan, which is aiming to capitalise on the opportunity from large corporations looking to make their databases suitable for artificial intelligence.

Big-ticket AI deals

In addition to a series of small-cheque deals in the AI space this year, some of the larger deals included Mukesh Bansal-founded enterprise AI assistant platform Nurix AI, AI cloud and platform-as-a-service startup Neysa, and Bhavish Aggarwal-led Krutrim AI, which became a unicorn, a privately-held company valued at $1 billion or more.

Industry executives said in addition to the application layer, the opportunity for India is in the infrastructure layer, having missed the chance to compete on foundational models that are largely being developed in the US by large companies such as OpenAI, Meta, Google and Anthropic, which have raised billions of dollars in funding.

Neysa, which operates in the infrastructure layer, offers generative AI platforms and services to assist clients in managing AI projects. It raised $50 million this year across two rounds. Founder Sharad Sanghi pointed out that while the process was easier for them due to his experience with data centre services provider Netmagic, building the infrastructure layer is challenging for new startups. As a result, most new AI startups are focusing on consumer and enterprise applications.

“Because of our relationship with NTT and my experience founding Netmagic, I had access to data center space and power, which not everyone has. Access to capital is also crucial, as well as access to the right talent. You need highly skilled engineers on both the infrastructure and platform side. This talent is available, but it’s expensive and hard to attract,” he told ET.

Computing infrastructure key

The Indian government took a major step by approving a Rs 10,372-crore allocation for the India AI Mission for the next five years, focusing on building computing infrastructure through public-private partnerships.

However, VCs are of the view that the hype over AI has created a glut at the inception stage with regard to the applications layer.

“Technology is changing so rapidly that the notion of ‘problem’ and ‘value’ is getting redefined every quarter,” said Alok Goyal, partner, Stellaris Venture Partners. “It is not clear if what is differentiated today will remain so in just a few months. Secondly, entry barriers have become much lower, and hence in every space, there is a clutter at the inception stage of the category itself. This is particularly so for AI applications.”

Venture capital investors are bullish on application-layer artificial intelligence (AI) startups in India despite an overall fall in funding amount for companies in the sector this year. According to data from Venture Intelligence, Indian AI startups raised $747 million in 2024, down 26% from last year but the number of deals in the space increased to 121 from 78 in 2023.“This year, we saw many companies building vertical AI applications by leveraging more mature platforms to build on top of that,” said Ravi Srivastava, partner at early-stage investment firm Leo Capital.

There are broadly three layers in the AI stack—the foundational models, horizontal layers called enablers, and vertical AI applications. Leo Capital closed multiple deals in the AI and enterprise space this year, including Zeplyn, an AI copilot platform for financial advisors, Arch0, a cloud infrastructure security startup, and DecoverAI–a platform built for the legal community.

Notably, several AI startups being backed by investors in India are building in the US. Peak XV Partners managing director Harshjit Sethi, who focuses on AI investments for the VC firm, said that AI startups are expected to follow the trend set by enterprise software companies, which mostly build for US customers.

“What we should expect to see, and my hope for next year, is that there will be many more interesting application layer opportunities,” said Sethi. “Taking the capabilities of AI and translating them into what it means for each of our roles, I think that gap will be something companies will look to address, particularly those in India.”

According to Tracxn, Peak XV Partners, through its various programmes and the main fund, backed 13 startups building in AI space this year, including Enterpret, RapidCanvas, OrbitShift and Brainfish. Peak XV also participated in the $105 million round for SaaS startup Atlan, which is aiming to capitalise on the opportunity from large corporations looking to make their databases suitable for artificial intelligence.

Big-ticket AI deals

In addition to a series of small-cheque deals in the AI space this year, some of the larger deals included Mukesh Bansal-founded enterprise AI assistant platform Nurix AI, AI cloud and platform-as-a-service startup Neysa, and Bhavish Aggarwal-led Krutrim AI, which became a unicorn, a privately-held company valued at $1 billion or more.

Industry executives said in addition to the application layer, the opportunity for India is in the infrastructure layer, having missed the chance to compete on foundational models that are largely being developed in the US by large companies such as OpenAI, Meta, Google and Anthropic, which have raised billions of dollars in funding.

Neysa, which operates in the infrastructure layer, offers generative AI platforms and services to assist clients in managing AI projects. It raised $50 million this year across two rounds. Founder Sharad Sanghi pointed out that while the process was easier for them due to his experience with data centre services provider Netmagic, building the infrastructure layer is challenging for new startups. As a result, most new AI startups are focusing on consumer and enterprise applications.

“Because of our relationship with NTT and my experience founding Netmagic, I had access to data center space and power, which not everyone has. Access to capital is also crucial, as well as access to the right talent. You need highly skilled engineers on both the infrastructure and platform side. This talent is available, but it’s expensive and hard to attract,” he told ET.

Computing infrastructure key

The Indian government took a major step by approving a Rs 10,372-crore allocation for the India AI Mission for the next five years, focusing on building computing infrastructure through public-private partnerships.

However, VCs are of the view that the hype over AI has created a glut at the inception stage with regard to the applications layer.

“Technology is changing so rapidly that the notion of ‘problem’ and ‘value’ is getting redefined every quarter,” said Alok Goyal, partner, Stellaris Venture Partners. “It is not clear if what is differentiated today will remain so in just a few months. Secondly, entry barriers have become much lower, and hence in every space, there is a clutter at the inception stage of the category itself. This is particularly so for AI applications.”