Venture capital investors are increasingly bullish on application-layer AI startups in India, focusing on rapidly expanding AI applications with concrete use cases.

The key investment areas include enterprise IT solutions, PaaS (platform-as-a-service), and agentic AI, as India charts its own path toward developing a foundational AI model, according to experts.

According to data from Tracxn, in 2024, AI startups secured $165 million in funding, marking a 52 per cent increase from $108 million in 2023 and a significant 357 per cent rise from $36.1 million in 2022. As of 2025 YTD, the sector has raised $12.5M. 

There are broadly three layers in the AI stack—the foundational models, horizontal layers called enablers, and vertical AI applications.

Investment trend & outlook

Indian AI startup ecosystem is seeing a shift towards vertical AI applications that solve specific industry problems rather than foundational models, noted industry experts. India, being an application-driven market, will witness stronger growth in AI solutions catering to enterprises rather than broad horizontal AI platforms, they added.

“There has been a shift towards an enhanced focus on applications of AI rather than the algorithmic layer or the foundational layers, particularly in India. Today investors are looking for the business model innovation and the actual impact on a value-chain, rather than the hype around the tech itself,” said Abhishek Prasad, Managing Partner at Cornerstone Ventures.

Investors are betting on financial services, IT & technology services, healthcare, retail, FMCG, logistics, and research-driven industries.

“Domain-specific AI applications have been picking steam as businesses look to leverage the power of AI but realize that generalized foundational models only go so far in addressing the nuances of respective industries. Especially in areas where high context, accuracy and compliance are baseline expectations. For instance, financial services, healthcare and legal tech,” said Ravi Srivastava, Partner, Leo Capital.

AI-driven automation in enterprise workflows, IT service management, and domain-specific AI solutions in fintech, healthcare, and education are emerging as high-impact opportunities.

“Vertical AI applications that automate enterprise workflows and IT service management are attracting higher interest, with lesser focus on foundational models,” said Brijesh Damodaran, Managing Partner at Auxano Capital.

Role of VCs in Scaling AI Startups

Investors emphasize the need for strategic guidance, access to talent, and policy advocacy to create a more conducive ecosystem for AI startups.

“The key factors that we consider when assessing the potential of AI startups includes a clear GTM strategy with founders’ ability to expand sales footprint beyond India market; along with potential to price the solution in tandem with the variable cloud and model costs,” Vipul Patel, Partner Seed Investing, IIMA Ventures.

In India, where scaling with domestic enterprise customers is crucial, VCs can drive adoption by securing a broader customer base.

“VCs should focus on accelerating adoption by bringing in a larger base of signed-on customers, which is especially necessary in India to achieve scale,” added Prasad.

Despite the enthusiasm, startups face challenges in talent acquisition, regulatory compliance, and infrastructure limitations. Many enterprises struggle to understand AI’s real impact, making it essential for startups to articulate their value proposition effectively.

While challenges remain, the focus on application-driven AI solutions, strategic VC involvement, and enterprise adoption will be key to unlocking AI’s full potential in India.