Introduction: The Deeptech Dilemma
Deeptech startups—working across domains such as artificial intelligence, semiconductors, biotechnology, quantum computing, and space technology—represent the frontier of innovation. These ventures are not just businesses; they are engines of scientific progress and strategic capability.
However, deeptech innovation comes with a unique challenge: it is capital-intensive, high-risk, and slow to mature. Traditional venture capital models, which often prioritize quick returns and scalable business models, struggle to align with the realities of deeptech.
This is where the Fund of Funds (FoF) model emerges as a powerful enabler.
Understanding the Fund of Funds Model
A Fund of Funds is an investment strategy where capital is deployed into multiple venture capital (VC) or private equity funds rather than directly into startups. These VC funds, in turn, invest in startups.
In essence, FoF acts as a meta-investor, creating a multiplier effect:
- It channels capital into multiple funds
- Each fund backs multiple startups
- Resulting in broader ecosystem development
In India, initiatives like the Fund of Funds for Startups (FFS) India, managed by SIDBI, have demonstrated how this model can catalyze the startup ecosystem at scale.
Why FoF Works for Deeptech
1. Enabling Patient Capital for Long Gestation Cycles
Deeptech startups often require 5–10 years or more to reach commercialization. Whether it is drug discovery, chip fabrication, or advanced materials, the path from lab to market is long and uncertain.
FoF supports venture funds that are structured for longer investment horizons, thereby:
- Reducing pressure on startups for early exits
- Allowing sustained R&D investment
- Encouraging breakthrough innovation over incremental gains
2. Diversifying Risk in High-Uncertainty Domains
Deeptech investments carry layered risks—technological feasibility, regulatory hurdles, and market adoption.
By investing across multiple VC funds:
- FoF distributes risk across sectors and stages
- Reduces dependency on a few outcomes
- Makes deeptech more palatable for institutional capital
This risk pooling is essential to attract conservative investors such as pension funds and sovereign institutions.
3. Leveraging Specialized Expertise
Deeptech investing demands deep domain knowledge. Evaluating a semiconductor startup or a genomics company requires expertise far beyond traditional financial analysis.
FoF enables:
- Investment through specialized VC funds
- Access to domain experts and scientific advisors
- Better due diligence and portfolio support
Rather than centralizing decision-making, FoF decentralizes it to experts who understand the nuances of each sector.
4. Catalyzing Private Capital Participation
One of the biggest barriers in emerging ecosystems is the lack of private capital in high-risk sectors.
FoF plays a critical role as an anchor investor:
- Signals confidence in the ecosystem
- Reduces perceived risk for private investors
- Attracts domestic and global LPs
This crowding-in effect significantly amplifies the impact of public capital.
5. Building a Sustainable Venture Capital Ecosystem
A robust deeptech ecosystem requires more than startups—it needs:
- Experienced fund managers
- Sector-focused investment strategies
- Institutional capital pipelines
FoF contributes to:
- The emergence of new VC firms
- Growth of deeptech-focused funds
- Long-term ecosystem maturity
Over time, this leads to a self-sustaining cycle of innovation and investment.
6. A Scalable and Policy-Friendly Mechanism
For governments, directly investing in startups is operationally complex and resource-intensive.
FoF offers a more efficient alternative:
- Scalable across geographies and sectors
- Easier governance and monitoring
- Alignment with policy priorities without micromanagement
It allows policymakers to guide capital toward strategic sectors like AI, defense, and clean energy, while leveraging market-driven decision-making.
7. Enabling Blended Finance and Strategic Alignment
FoF structures can combine:
- Public funding (government capital)
- Private investments (VCs, corporates, global funds)
This creates a blended finance model that:
- Shares risk across stakeholders
- Enhances capital efficiency
- Aligns innovation with national priorities
The Indian Context: A Strategic Opportunity
India stands at a pivotal moment in its innovation journey. With increasing focus on self-reliance, digital infrastructure, and emerging technologies, deeptech has become a strategic imperative.
Programs like the Fund of Funds for Startups have already:
- Strengthened the VC ecosystem
- Increased capital availability
- Enabled startup growth across sectors
The next step lies in deepening this model for deeptech-specific funds, fostering collaboration between academia, industry, and capital providers.
Conclusion: Building the Capital Architecture for Deeptech
Deeptech ecosystems cannot be built overnight. They require:
- Time for innovation
- Capital for experimentation
- Expertise for guidance
- Risk-sharing for sustainability
The Fund of Funds model uniquely brings all these elements together.
Rather than directly funding startups, FoF builds the financial backbone of innovation ecosystems—empowering those who fund, mentor, and scale deeptech ventures.
In doing so, it transforms not just startups, but the very structure of innovation economies.