Synopsis
Amid shrinking market shares early stage VCs look to niche areas to stay relevant in the AI race. ET explores the field.In the past two years, significant investments have been made in India’s AI startup ecosystem. The country has also seen the launch of AI-focused VC firms such as Activate, Boundless Ventures and Wyser. The rush to invest in AI startups has resulted in intense competition, with average funding size and valuation on the rise. Smaller venture funds face the challenge of getting squeezed out.
In India, average investment at the seed level is at $3-5 million, with Series A upwards of 10 million, according to investors. That compares with non-AI startups’ average seed round of $2-4 million and Series A at $5-8 million.
A partner at a global VC firm agreed that there is a markup in Series A deals for good founders as the companies are able to scale up faster in the era of AI. The cheque size for AI deals has gone up, agreed Manish Kheterpal, cofounder and managing partner, WaterBridge Ventures, with some seed funding for AI startups now as high as $10 million.
Kheterpal said many local VCs will get priced out on AI deals unless they have a differentiated value-add playbook. Three India VC firms, on condition of anonymity, told ET that they have lost out on deals to larger counterparts due to increased valuation. Early stage AI valuations are rising for structural reasons that differ from prior technology cycles, said Apoorva Pandhi, managing partner at Zetta Venture Partners, a San Francisco-based VC firm.
“In previous eras, you didn’t have a backdrop of multiple, multibillion-dollar private companies and trillion-dollar public incumbents defining the category,” he said. “Today, the existence of companies like Nvidia, OpenAI and Anthropic demonstrates the scale of potential outcomes. That naturally expands how investors think about the upside.”
Late-stage VC firms are also getting into early stage deals and driving up prices. Pandhi has lost track of the number of transactions lost to larger counterparts. “I’ve stopped counting because some of them are expensive, and it doesn’t make sense at that stage, given where the market is and what the company is doing,” he said. To stay competitive, early stage investors are betting on niche sectors and deeper engagement with founders early in the journey.
Focus in niche sectors, tap in early
“As an early stage fund we’re not trying to back the market leader in every category,” he said. “That often means working in domains that fewer venture firms understand deeply, areas like AI native sciences, and the parts of the AI and data infrastructure stack where we have strong technical conviction.”
Instead of competing purely on price, Zetta prioritizes building relationships with founders before companies are formed. “It starts with identifying the parts of the stack where we have the strongest thesis, building relationships with the people most likely to start companies there, and leading their pre-seed rounds,” Pandhi said.
“If you earn that early trust, even when larger funds show up later you already have a meaningful position in the company.” Boundless Ventures founder Natasha Malpani said the firm is spending more time with AI engineers and researchers, because the pace of change is not confined to startups alone as incumbents are moving fast too, and staying current requires being close to the technical frontier.
Indian investors told ET that it’s key to engage with founders early. Eximius Ventures is engaging founders in helping them with early hiring, introducing them to potential customers and downstream investors, said partner Preeti Sampat.
