In Indian start-up technology churn, generative AI gets edge over Web3

Raise $7.1 million in funding across eight deals until June 1

Generative AI, a now prominent AI use case, has stolen the deeptech spotlight owing to its universal adaptability across sectors, while Web3 has been pushed to the sidelines. This has also impacted investor sentiment.

Industry stakeholders Business Standard spoke to say investors are now taking a calibrated approach to the Web3 sector in the aftermath of multiple cryptocurrency collapses and prevailing regulatory uncertainties, amid an overall decline in private equity and venture-capital bets.

Web3 as an industry covers technologies such as decentralisation and token-based economies such as cryptocurrencies and non-fungible tokens.

Currently, there are 1,367 active blockchain start-ups in the country. Of these, Indian Web3 start-ups have collectively raised just $7.1 million in funding across eight deals until June 1 this year, a 99 per cent decline over the same period last year, according to the data from Tracxn, a market intelligence platform. These start-ups raised $904.9 million across 55 deals in calendar year 2022.

In contrast, generative AI-focused start-ups have managed to raise $31.8 million across four deals so far this year. This, despite just 42 generative AI start-ups currently operational in India. Calendar year 2022 saw generative AI investments totalling $409 million across 14 deals.

One of the biggest factors in the rise of generative AI, which has largely remained immune to regulatory pangs despite uncertainty, has been its tremendous adaptability.

“The generative AI sector has seen particular investor interest due to the unprecedented rate of innovation and adoption of the likes of ChatGPT, and character-AI applications built on large language models. Other than the rapid adoption curves, this space has also seen a significant influx of talent as well recently,” said Ravi Srivastava, partner, Leo Capital, a technology-focused early-stage venture capitalist.

Dwindling Web3 funding

The primary reason for this decline in Web3 funding, experts signpost, is a dearth of regulations in the sector.

“The lack of regulatory clarity and the recent regulation-by-enforcement stance of government agencies have made it harder for investors to take an informed decision, and triggered a further slowdown in the space,” said Srivastava.

Cryptocurrencies, which account for a big chunk of Indian Web3, have also suffered from this ambiguity.

“The fact that India has the second-largest crypto user base indicates how lucrative the market can be domestically,” said Pearl Agarwal, founder and managing director, Eximius Ventures.

However, an unclear regulatory environment, she says, has forced as many as 60 per cent of Indian Web3 start-ups to shift base outside India. “In addition, the 30 per cent tax being levied on profits from crypto trading has massively reduced the lure of the industry among user groups,” Agarwal added.

Identifying use cases

Since the sector is still in its infancy, identifying and betting on effective, lucrative Web3 use cases has also been a challenge for investors.

“While there was a lot of hype around Web3, use case discovery is still underway within various verticals. As a fund, we have also been looking closely to identify application areas that are amenable to sustained adoption at scale, but barring a few use cases, we haven’t been able to identify many,” said Ashwin Raguraman, co-founder and partner, Bharat Innovation Fund, a technology-focused venture fund.

Yet, capital, although limited, has continued to flow into start-ups offering niche solutions such as decentralised finance (DeFi), infrastructure (including tooling, mining, etc), and blockchain gaming. Some companies, including the likes of Polygon, CoinDCX, and Coinswitch, have also earmarked pools of capital to be invested in Web3 start-up infrastructure projects.

“Those who’ve got strong roots in the space have continued deploying in promising start-ups,” said Vatsal Kanaiya, co-founder and chief technology officer, 100X.VC, an early-stage investment platform. “Investors at the earliest stages understand that regulatory frameworks are still evolving. They invest while being cognizant of the risk,” said Kanaiya.

Use cases like the Metaverse, which made headlines on the back of initiatives from tech majors like Meta, are, however, an area that has not managed to meet investor expectations.

“Advancements in this space will still arrive, but it will certainly take far longer than market participants believed 18 months ago,” said Srivastava.

A symbiotic path ahead

Industry watchers are of the view that the path ahead for Web3 will likely be in tandem with generative AI. One such start-up working on integrating the two worlds is Shardeum, a blockchain start-up established by former WazirX founder Nischal Shetty.

Shardeum, in October last year, raised $18.6 million in a seed round from over 50 investors, including Big Brain, Jane Street, and Struck Crypto.

“At Shardeum, we’re experimenting with generative AI tools like ChatGPT to review code; soon, more developers and start-ups will use AI to analyse blockchain data, and create and optimise smart contracts. AI can play a huge role in increasing blockchain security as well,” Shetty said.

Combining generative AI with Web3, he said, will lead to a brand-new generation of products.

“I see generative AI becoming embedded in most development and applications efforts. As a result, Web3 will also be influenced heavily by generative AI. However, the impact may be felt even more because there is a massive amount of content that will require to be created specifically for the Metaverse,” added Raguraman.