Even as the funding winter stands over the startup ecosystem, AI startups look to be bucking the trend as ChatGPT and Generative AI captivate India Inc. Deep tech, specifically AI, is growing as the darling of venture capitalists (VC) in early-stage funding. The share of VC investments in AI startups stands at 15% of the total VC funding in the first five months of 2023 (January-May) compared to a corresponding 10% share commanded by AI startups in 2022, data sourced from research company Venture Intelligence displays.

Overall, VC investments have slumped on the back of a difficult economic environment in 2023, and accordingly, AI investments stood at just 28 deals worth $0.5 billion in 2023 (January-May) compared to 114 deals worth $2.4 billion in 2022. However, the growth in the share of AI investments over the last three years is reflective of investors’ bullishness for AI, industry trackers and investors. The heightened interest and deal activity around AI in the US is also translating to the Indian ecosystem and AI-centric ideation by existing and new startups is on the rise, they said.

Top AI deals this year include AI-powered software composer Builder.ai’s $250-million raise from Qatar Investment Authority in addition to being backed by Microsoft. This round saw the startup double valuation. Enterprise AI player Mad Street Den raised $30 million in a series-C round led by Avatar Growth Capital. Exfinity Fund (3 deals), Peak XV Partners (2) (formerly Sequoia India), and Lightspeed Ventures (2) led the tally of VC investors who made maximum bets in AI in 2023.

Vishesh Rajaram of Speciale Invest says many entrepreneurs are exploring ways to strengthen their business proposition with AI. “Some are doing it to prevent AI from disrupting their product, and while some are fads,” he adds. 3One4 Capital has a similar thesis for its investments. “The best teams are now thinking about AI, and we’ve seen teams with unique insight and strong execution capabilities raise large sums of capital, especially at the pre-seed and seed stage,” Sonal Saldanha, VP of investments, 3one4 Capital, said.

The dry powder currently with India-dedicated funds runs into tens of billions, suggesting a steady early-stage deal flow in coming months, Arun Natarajan, founder of Venture Intelligence, said. “In such a situation, sectors with tailwinds such as AI and electric vehicles (EVs) will be the first beneficiaries,” he adds.