India’s Defence Tech Revolution: A Call to Action for VCs

India’s defence tech landscape is experiencing a significant transformation, merging deeptech with national security, where startups are becoming integral to the defence strategy.

The Timing Is Perfect

India’s defence technology potential is now a reality, with clear indicators emerging:

• More than 100 defence tech startups are currently operating.
• The projected defence budget for FY25-26 has surpassed INR 79,000 Cr, with around 70% allocated for domestic purchases.
• Defence exports reached $2.63 Bn in FY24, marking a 32% increase year-on-year.
• Key institutional frameworks such as iDEX, Mission DefSpace, and the Technology Development Fund are fully functional.

Indigenous Procurement: A Major Step Forward

In a substantial move towards self-reliance, the defence ministry recently awarded a contract worth INR 62,700 Cr to Hindustan Aeronautics Ltd (HAL) for 156 light combat and utility helicopters. This significant order to an Indian public sector unit signals the government’s commitment to nurturing domestic capabilities on a large scale. For entrepreneurs and venture capitalists, this highlights the urgency of investing in technologies that can enhance India’s industrial defence infrastructure.

Defence as the Pioneer of Deeptech

History demonstrates that numerous major technological advances, including GPS, the internet, radar, and space exploration, have emerged from defence research facilities. India’s Defence Research and Development Organisation (DRDO) has successfully transitioned dual-use innovations into mainstream applications: consider bio-toilets for Indian Railways, lightweight ballistic vests for police personnel, and high-altitude rations for disaster management.

Currently, startups such as ideaForge, NewSpace Research, Big Bang Boom, Tonbo Imaging, and Optimized Electrotech focus on addressing critical defence requirements with scalable technology. These are not mere prototypes; they are functional systems, some of which have already been exported or are ready for initial public offerings.

Convergence of Defence and Commercial Markets

This is where the realms of defence and commercial total addressable market (TAM) begin to overlap, making it essential for venture capitalists to take notice.

India’s Opportunity to Follow a Global Path

The framework is already established globally. In the United States, venture-backed defence innovators like Palantir and Anduril are reshaping the landscape where private funding meets national security needs.

Palantir originally focused on intelligence agencies and has expanded to supporting military strategy and public health initiatives. Anduril, founded by Oculus co-founder Palmer Luckey, developed AI-enhanced surveillance systems and autonomous drones, rapidly growing into a $14 Bn defence technology enterprise within a decade.

These firms forged ahead without waiting for approvals, infusing speed and software solutions into an industry dominated by traditional contractors. They demonstrated that startups are capable of, and can compete for, major defence contracts.

India stands at the cusp of a similar evolution. With robust engineering talent, a more accessible procurement process, and the geopolitical necessity to foster sovereign capabilities, Indian startups are well-positioned to spearhead a new wave of global defence innovation. However, this growth will require courageous entrepreneurs, committed investors, and a venture ecosystem that appreciates both intellectual property and societal impact.

Overcoming Challenges in Defence Tech

Engaging in the defence sector is distinct from software as a service (SaaS). The funding cycles are extended, the primary buyer is often the government, and the market still favours public sector undertakings and established conglomerates with long-standing contracts.

Challenges include:

• Complex procurement and lengthy approval processes.
• Unfavourable practices by large legacy players, including OEM pressuring, undervalued mergers and acquisitions, and equity stakes.
• Capital inefficiency caused by delayed payments.
• Investor unfamiliarity with defence compliance, intellectual property laws, and foreign direct investment regulations.

Strategies for Venture Capital in Defence Tech

For those looking to thrive in defence tech, consider the following strategies:

• Focus on Core Science and IP: Prioritise supporting startups that are developing innovations in autonomy, intelligence, surveillance, reconnaissance, cybersecurity, and signal processing.
• Strategise Capital Allocation: Assist startups in leveraging TDF/iDEX grants, bank guarantees, and credit options to reduce equity dilution.
• Encourage Defence Expertise: Motivate teams to recruit former military personnel and procurement experts who understand the nuances of government systems.
• Support Dual-Use Innovations: Consider investments in firms that can also serve commercial markets, such as drone technology, AI surveillance, and resilient networks.
• Think Globally: Recognise that many defence solutions, particularly in drone technology and counter-UAS systems, can appeal to markets in the Global South and Indo-Pacific.
• Adopt a Long-Term Perspective: Understand that the defence sector rewards patience, depth in intellectual property, and collaboration across various domains.

More Than Just a Sector for Investment

It is uncommon for a field to present both economic opportunities and strategic importance. Defence technology occupies this crucial space.

The focus is on developing self-sufficient capabilities. It aims to reduce dependency on international supply chains for national security. Moreover, the goal is to foster globally competitive deeptech companies that embody genuine intellectual property and enduring value.

The demand for patient capital and investors with strong conviction in this area is greater than ever. Additionally, there is a need for more entrepreneurs who are willing to design solutions for defence while adapting them for global application.

The opportunity to invest is present. The supportive conditions are favorable. The pivotal question remains: Will Indian venture capital rise to the occasion?