New gold rush: Indian VCs set their sights on defence innovation and deep tech

In the high-stakes world of venture capital, where the future is a prized commodity, ‘Defence’ is emerging as a major focal point for investors. VCs are actively scouting startups developing AI-powered drones, space-tech for surveillance, and cutting-edge cybersecurity platforms. The reason for this growing interest? A fundamental shift in strategy, driven by the Indian government’s growing focus on self-reliance in defence and technology.

For years, the “government-as-customer” business model was a deterrent for many venture capitalists. Bureaucratic delays, opaque procurement processes, and sudden policy changes were all seen as red flags. However, this calculus has been recalibrated. The global success of defence and space-led deep-tech companies like Palantir, Anduril, and SpaceX has changed the narrative.

“Look at the playbook of Palantir, Anduril, and SpaceX,” says Manish Kheterpal, Managing Partner at WaterBridge Ventures, during the IVCA Circles event in Bengaluru. “All three have a government share of revenue somewhere between 60% to 94%. This isn’t a niche; it’s a proven, global pathway to building companies worth tens of billions of dollars. That playbook has now been seen and accepted by Indian VCs.”

This monumental shift in approach is transforming venture capital’s focus. Traditionally driven by the need for outsized returns, VCs now see defence as a sector with clear, strategic incentives. With the Indian government acting as a reliable, deep-pocketed customer, the risks traditionally associated with long R&D cycles in deep-tech are mitigated. For example, a startup working on a new maritime surveillance system can now look forward to a primary customer in the Indian Navy, providing much-needed certainty in an otherwise volatile market.

The sector’s promise is significant, though not without its challenges. While the government’s backing provides assurance, the longer procurement cycles remain one of the biggest hurdles. However, Kheterpal believes that the landscape is evolving.

“This is a forced, protected market, and that’s its greatest strength,” explains a VC specializing in early-stage deep-tech. “Geopolitics ensures we won’t buy critical tech from China, and many Western technologies are restricted. This creates a walled garden where Indian startups can develop, iterate, and achieve scale without being crushed by global giants on day one.”

The Indian government is not just talking; it is acting. The positive indigenisation lists, which restrict the import of specific defence items, effectively reserve the market for domestic players. The recent announcement of a Rs 1 lakh crore corpus for research and innovation in sunrise domains like defence-tech signals a growing commitment to building a robust capital stack—from grants to venture capital and late-stage funding.

For venture capitalists, the opportunities lie not in building tanks, but in funding the foundational technologies that drive modern warfare: AI for data fusion, quantum-resistant encryption, autonomous systems, and advanced materials. These high-margin areas of deep-tech offer software-driven innovation and intellectual property, which create significant moats and massive valuation multiples.

The message is clear: from Silicon Valley’s Sand Hill Road to Mumbai’s Bandra-Kurla Complex, the next wave of iconic Indian tech companies is poised to emerge from labs and workshops focused on developing technology that ensures national security. Venture capitalists have their sights firmly set on the future of defence.