AI startup landscape in India faces tech depth woes, talent drain

India trails global peers in core AI innovation despite rising investor interest

Experts in India’s artificial intelligence (AI) startup ecosystem fear an overuse of the AI label by companies, which see it more as an efficiency layer rather than a core innovation driver. 

According to them, some recently established companies are branding themselves as AI-driven, though in many cases AI functions more as a tool to enhance efficiency rather than redefine workflows. 

Abhishek Srivastava, general partner at Kae Capital, said while vertical software as a service (SaaS) companies are integrating AI to optimise repetitive tasks, their core technology stack and workflows remain largely unchanged — making AI more of a “wrapper”. In contrast, truly vertical AI applications fundamentally alter processes, he said. 

Such applications, where AI is central to the solution rather than an add-on, are still relatively rare. While a significant portion of AI adoption is genuine, Srivastava estimates that about 15–20 per cent of implementations are forced fits with limited impact. 

Santosh Maheshwari, partner at Grant Thornton Bharat, said, “I would say this terminology (AI) is used very loosely from any operational perspective.” He added, “Even a small tool that can be automated is now called AI. I think the term or function needs to be better defined to determine what constitutes an AI-operated startup.” 

Sumangal Vinjamuri, associate vice-president at Blume Ventures, classifies AI startups into three categories. The first includes companies established between 2010 and 2020 that are integrating AI into specific use cases. While many position themselves as AI-native, there is often a gap between marketing claims and actual product capabilities.  

The second category comprises deep-tech firms operating closer to the fundamental AI layer — genuinely AI-native by design. 

The third includes new applications built entirely around AI, blending traditional SaaS models with AI-driven functionalities. 

Over time, Vinjamuri noted, the first and third groups are likely to converge as they compete for the same customers.  

One major challenge facing India’s AI startup ecosystem is the outflow of top-tier technical talent. Vinjamuri said many engineers and product developers capable of building AI-native products have already moved to the United States. “We have a lot of tech talent, but it is not at the tip of the spear when it comes to AI,” he said. He added that this limits the depth of AI product development in India. 

According to him, India lags Silicon Valley by two to three years in both technological thinking and product imagination. “A pattern I see in many US companies is that they are able to imagine replacing not just software spends but also human resources,” he said. 

According to data from Tracxn, AI startup funding in India stood at $171.4 million across 30 rounds in 2024 and $12.5 million across two rounds in the first quarter of 2025. In comparison, China secured $3.3 billion and the United States raised $34 billion in 2024. For the first quarter of 2025, China attracted $220 million, while the US saw $6.2 billion.

 

“Governments like those of Karnataka, Telangana and Haryana — where startups are thriving — should establish their own funds so that more startups can access capital,” said Mohandas Pai, chairman of Aarin Capital. “This will improve funding availability and ensure that good companies get the backing they need. Every new technology creates hype. Everyone wants to join the bandwagon. Fund managers must carefully evaluate businesses before investing.”

 

India’s AI startup ecosystem is already drawing significant investor interest even as industry experts point to challenges such as migration of technical talent.

 

According to data from Tracxn, AI startup funding in India stood at $171.4 million across 30 rounds in 2024 and $12.5 million across two rounds in the first quarter of 2025. In comparison, China secured $3.3 billion and the United States raised $34 billion in 2024. For the first quarter of 2025, China attracted $220 million, while the US saw $6.2 billion.

TALENT DRAIN, A CONCERN

 

* Several startups fail to use AI as an innovation driver

  * ’AI’ label applied loosely, even for simple tools

  *  India raised $171.4 mn in AI startup funding in 2024 vs $3.3 bn raised by China and $34 bn by the US 

  *  Outflow of AI talent limiting local innovation depth

  *  India trails US by 3 years in AI thinking and product design