Geopolitical shockwaves emanating from the ongoing conflict in Ukraine have contributed to renewed emphasis on defence technology innovation as a means of enhancing security and resilience. Start-ups in Europe and the US have benefited accordingly.

India is undergoing a similar evolution. While VC involvement in defence tech remains nascent and new, some investors are looking to ride tailwinds created by growing defence budgets – partly in response to disputes with China and Pakistan – and government support for start-ups focused on indigenous defence technology capabilities.

Nithish Kumar, an investment manager at deep tech VC firm Speciale Invest, pointed to the lack of a definitive playbook as evidence of an industry still in its early days. Generally, start-ups turn to the defence forces for expertise on product development and hope to secure government contracts.

“All of this is very recent. It’s just in the last three or four years where very few have actually translated into contracts,” said Kumar. “We’re still in the cycle of figuring out the trials and figuring out building products to the requirements so that they can go out and sell.”

Speciale has completed several defence investments, most recently leading a USD 2m seed round for autonomous drone manufacturer Unmannd alongside Accel Partners. Other relevant portfolio companies include space tech start-ups VyomIC and GalaxEye, as well as QNu Labs, an integrated quantum technology platform.

IvyCap Ventures made its first defence investment earlier this year, backing cable assemblies manufacturer TIEA Connectors. Vikram Gupta, a founder and managing partner at the firm, regards defence as a key deep-tech subsector alongside semiconductors, artificial intelligence (AI) and machine learning, quantum computing, the internet of things (IoT), and industry 5.0.

Gupta used a bell-shaped curve to describe the state of technology readiness level (TRL) among these start-ups. Most are in the third or fourth stages, having begun active research and design or launched testing of component pieces in laboratory environments. A very limited number are at the final stages where qualified testing and successful mission operations have been completed.

As early as India may be in its defence journey, investors are optimistic about the growth potential. Gupta added that competitive labour costs would help the country differentiate itself from global peers.

“If you use your innovation engine properly, the chances are that you would be able to scale to different markets like Europe and other markets that are now willing to buy more defence products,” he said. “Of course, the US has primarily done this. But there will be opportunities for defence tech players from India, because of the huge cost advantage.”

Macro to micro

Historically, defence equipment has mostly been imported. Now, though, self-reliance is on the agenda, helped by policy reforms, government start-up initiatives such as iDEX and the Anusandhan National Research Foundation (ANRF), and larger annual budgets for technology procurement.

India’s defence exports reached a record INR 236bn in FY24-25, up from less than INR 10bn in 2014, according to the government’s Press Information Bureau (PIB).

The country achieved record-high defence production of INR 1.54tn in the same year. Local innovation played a big part. About 16,000 micro, small, and medium-sized enterprises (MSMEs) have emerged to help strengthen indigenous defence capabilities. Indigenous defence production hit a record INR 1.27tn in FY23-24, up from INR 464bn in FY14-15.

The gush in VC interest in defence has also coincided with softened LP sentiments about dabbling in a potentially controversial theme. Even impact investor Aavishkaar Capital is getting involved. Through the OneAavishkaar platform that supports emerging managers, it recently teamed up with Jamwant Ventures, which claims to be India’s only military veteran-led GP, to raise an INR 5bn fund.

Investors must still navigate plenty of other hurdles, such as the defence sector’s longstanding reputation for poor commercial and scaling potential. Notably, sustainable business models that enable technologies for dual-use capabilities are still lacking because of regulatory complexity and long sales cycles. Investors pin the blame on government customers and contracts.

Building a diversified customer base is therefore seen as the key to driving sales and revenue growth – and this is contingent on having different product lines and development pathways. According to Speciale’s Kumar, it is much like other technology domains where strong planning, strategy, and execution are required to stay ahead of the market.

“I don’t see the risks in defence are necessarily that different from the risk that we typically see in other sectors, which is not being able to achieve the right product-market fit in the required time,” he said.

By Kumar’s reckoning, the narrative of single-buyer risk is unfounded, given how many potential enterprise clients exist in different divisions of the army, which in turn may address concerns about scaling. Government contracts can be difficult to secure, but currently, demand for defence technology seems to be beating supply, and so this should lead to more opportunities.

Moreover, Navneet Kaushik, founder of Jamwant, doesn’t subscribe to the broader market view of a sizeable dual-use capabilities disconnect. He cites drones as an example: Those used for civil purposes can, granted minor changes in technical standards, be ready for military use as well. Communication and autonomous systems largely remain the same.

Military technology, meanwhile, is extremely tried and tested, with requirements often exceeding those of civilian standards. With a few tweaks, it can similarly be ready for civilian use.

Wider recognition

Jamwant was established in 2023 by Kaushik, Kartik Gopal, and Jyotsana Dalal. Kaushik and Gopal are both former Indian Navy officers, while Dalal previously worked at the government’s Technology Development Board. Defence, aerospace, deep tech, and material sciences are its key verticals.

Jamwant and Speciale, which consider defence a core competency, are few and far between in India’s VC ecosystem. Nevertheless, Kaushik attributes recent incipient activity to an evolving perception of the defence sector among investors and entrepreneurs.

“The industry is realising that working in defence is not as difficult as they thought. Not everyone is making missiles or rockets. That is one part of it, but there are a lot of other things going into defence that have a lot of commonalities vis-a-vis the civil side of it,” he said. “That boundary of tech, whether it’s defence tech or civil tech, is actually getting blurred nowadays.”

IvyCap, which identifies as sector-agnostic, is a case in point. It is about to invest in a manufacturer of camera vision chips that targets consumer and military customers. While macro trends are creating opportunities, investor bullishness is equally rooted in the notion of a virtuous circle that can sustain them.

“Defence is not the flavour of the day or the week or the year, it’s coming to prominence, and it’s also a function of where India is in its ecosystem,” said Tarun Mehta, a partner at Aavishkaar Capital. “The only way that in any sector becomes investable is when you have capital and when you have talent.”