Arjun Rao, general partner at Speciale Invest: 'India Must Play to Its AI Strengths'

'There are certain sovereign AI domains where we must build capabilities using our own data, our own language models, and make our own attempts at global models.'

India's artificial intelligence (AI) journey must be rooted in its existing strengths rather than attempting to compete across every layer of the stack at once, Arjun Rao, general partner at Speciale Invest, tells Udisha Srivastav/ Business Standard on the sidelines of the recently-concluded India AI Impact Summit in New Delhi.

India recently hosted the first AI summit of this scale. What are the key takeaways?

Until now, we had not necessarily showcased our AI ecosystem in a consolidated way. The AI wave is now three to four years old.

There has been a lot of activity, and people within the ecosystem are aware of it, but there has not been a collective positioning of how strong our ecosystem is, what we are doing, and where the areas of improvement lie.

In terms of takeaways, we need to focus on our areas of strength.

However, there are certain sovereign AI domains where we must build capabilities using our own data, our own language models, and make our own attempts at global models.

India's AI Ecosystem Takes Shape

Apart from sovereign AI, what are the pressing gaps India should address immediately?

There will obviously be gaps because the AI ecosystem is vast.

My first view is that we should play to our strengths.

We have a very large developer ecosystem.

If that ecosystem transitions effectively into AI development, and we ensure this happens with speed and quality, we can benefit significantly by building a wide range of applications.

One clear gap is in large foundational models.

Recent announcements, for instance from Sarvam AI, show that the first step has been taken.

That is important because, a year ago, people believed that ship had sailed.

The second area is semiconductors and infrastructure.

If we think not just 12-24 months ahead but five to 10 years, this cycle has only just begun.

We need some level of self-sufficiency in data centres and AI chips.

We do not need to build every chip in India. That's not unrealistic, but developing some domestic AI chip and infrastructure capability is important.

Sovereign AI Push Gains Momentum

Do you think Indian AI founders are moving to the US for capital, talent, or markets?

It depends on what they are building and their ambitions.

If they need large amounts of capital or are targeting enterprise customers in North America from Day 1, it may make sense.

The Western capital pool is much deeper, maybe 100 to 1,000 times larger.

The VC industry there is 60 years old, while ours is under 25 years old.

However, if a company is building India-specific applications, such as defence AI, robotics for Indian manufacturing, drone technology, or sovereign chips, there is no reason to relocate.

Compared with five to 10 years ago, fewer founders are leaving. Earlier, it might have been eight out of 10; today it is closer to five out of 10.

Gaps in AI Chips, Infrastructure

You have applied to the government's RDI fund. What are your expectations?

We have applied for a Rs 1,400 crore deeptech growth fund.

The RDI fund has not committed to a fixed percentage. It will evaluate and may support some portion, maybe 20 per cent, 30 per cent, or 50 per cent.

It will act as a limited partner (LP), similar to any other investor.

The advantage of applying is that it serves as a vote of confidence.

If around 190 funds apply and a smaller number are selected, that helps when raising the remaining capital from private investors.

Raising capital is never easy, for startups or funds, but government participation accelerates the process.

Why Some AI Founders Move Abroad

Could you tell more about your Rs 1,400 crore growth fund?

With this fund, we will invest at Series A and beyond, writing $5-8 million cheques.

These will be companies that have built products and achieved early traction.

We expect to back about 12-15 companies and deploy the capital over three to four years.

Our earlier Rs 600 crore fund, which closed in August, has made four investments so far.

That fund will back around 20 companies with ticket sizes of about $1 million at the pre-seed and seed stages.

Family Offices Back Deeptech Growth

There is a view that family offices are showing strong interest in deeptech. Do you agree?

We have had family office support from the beginning, for nine years.

Family offices provide patient capital and can wait longer for returns.

It's because many have built wealth through manufacturing or product businesses, so they understand hardware, engineering, and innovation.

Sometimes deeptech startups can even become customers or partners of their core businesses.

In our case, over 90 per cent of our capital is domestic, largely from family offices and HNIs.

India ranks low on global IP indices. Is IP creation a concern?

Innovation is very important, and IP is beneficial. However, a patent by itself does not create a great business.

If we do more research, which initiatives like the RDI fund can catalyse, IP development will improve naturally. Research and IP are closely linked.

As an ecosystem, can we do better? Yes.

Given the long gestation period in deeptech, what do exits look like?

Deeptech in India is less than 10 years old. Mergers and acquisitions (M&A) have been the primary exit route.

In our portfolio of about 35 companies across three funds, we have seen six to eight M&A exits.

IPOs are also beginning to emerge, and Ather Energy, ideaForge, and MapmyIndia are early examples of hardware and deeptech listings.

Going forward, exits will come through IPOs, domestic and global M&A, and secondary transactions.

Feature Presentation: Ashish Narsale/Rediff