AI-first startups challenge India's $264 billion IT services giants

AI-native startups are reshaping India's IT services landscape as automation drives efficiency and innovation, with the sector projected to touch $400 billion by 2030

A new wave of artificial intelligence (AI)-native startups — companies built from the ground up with AI at their core — are challenging traditional players in India’s $264 billion information technology (IT) services sector.

 

India’s IT services exports underpin global technology and digital transformation. As large language models (LLMs) and AI upend traditional, people-heavy outsourcing methods, both global enterprises and nimble startups are disrupting traditional delivery models, according to venture firm Bessemer Venture Partners, which unveiled a report titled “AI services road map: Reinventing IT services in the age of AI”.

 

“What we're seeing is enterprises are super keen and under pressure from investors, boards, etc., to adopt AI and convert it to tangible revenue or bottom-line impact. That will more than compensate for any price compression,” Nithin Kaimal, chief operating officer (COO) and partner at Bessemer Venture Partners, told Business Standard. “Almost every CXO (chief experience officer) at every enterprise is interested in moving to an AI-first approach. Earlier they were very happy with their long-term partners. Now there is room for new players,” Kaimal added.

   

Before AI-native disruption, India’s IT giants relied on three pillars: a vast and skilled talent, cost arbitrage, and a “follow-the-sun” delivery model, which ensured round-the-clock service.

 

Also, despite fears of displacement after the rise of ChatGPT and other LLMs, Indian IT services revenues and margins remain resilient. Enterprises still rely on these firms for complex projects, where embedded engineers and subject matter experts provide business-specific context that AI alone can’t capture.

 

However, seamless transformation into an AI-native world is hindered by billable-hour models, standardised entry-level workforces, and low research and development (R&D) spend (under 2 per cent versus over 20 per cent for global product firms). In essence, the growth of large, traditional IT and outsourcing firms remains driven by headcount rather than productivity gains.

 

Bessemer said that AI-first startups and platforms are already demonstrating their ability to deliver outcomes that are faster, better, and more cost-efficient. They are led by founders with deep domain expertise. Their models emphasise rapid time-to-value, measurable returns on investment, and pricing tied to usage or outcomes.

 

“Even if 70-75 per cent of the budget continues to go to incumbents, there is growing awareness that they cannot solve everything perfectly,” said Kaimal. “Decision-makers are beginning to acknowledge that it is too risky to rely entirely on a single group of vendors. They are increasingly willing to allocate 25-30 per cent of their budgets to explore new founders,” he added.

 

Bessemer has identified three fast-emerging categories of AI-first challengers that are poised to disrupt traditional service models.

 

The first are pure software plays — intelligent platforms that fully automate tasks end-to-end, delivering scalable, high-speed results with minimal human intervention. Examples include Graph AI and Leena AI.

 

Graph AI represents a new generation of AI-native challengers transforming the $8 billion pharmacovigilance market.

 

“One of the clients was frustrated after working with an incumbent vendor for 18 months to solve a pharmacovigilance use case. Graph, our portfolio company came in, had a demo up and running in four weeks, and delivered a production-ready rollout in eight weeks,” explained Kaimal.

 

The second category, AI-enabled services, combines AI-driven automation with human-in-the-loop oversight to balance efficiency and quality. Companies such as Crescendo and Shopdeck exemplify this hybrid model.

 

The third, services for AI, encompasses firms that provide the data, model operations infrastructure, and evaluation tools needed to build new AI solutions. Notable examples include Scale and Turing.

 

Most of these companies are tapping markets such as the US, Europe, and India, and have distributed presence across these regions.

 

“Indian AI challengers are not just competing with each other but also with global players, including software startups in Silicon Valley and US-focused companies. To succeed, you have to be the best in class, regardless of geography,” said Kaimal.

 

India’s IT services industry is projected to exceed $400 billion by 2030, as AI fundamentally reshapes how enterprises source and deliver technology. While AI-driven efficiencies will compress pricing in the short term, the Bessemer report said the exponential growth in AI capabilities will dramatically expand both the propensity and ability of global enterprises to outsource complex workflows. This next wave of outsourcing will fuel the sector’s growth, with AI-first products and startups poised to capture outsized value by delivering smarter, faster, and more adaptive solutions.

 

Kaimal said people underestimate how much more work can now be outsourced to India. He maintained that complex tasks once handled in-house in North America and Europe are now feasible with LLMs and AI-enabled services.