Why India’s next $5 billion startups will be AI-first IT disruptors

“Over the last 15 years, SaaS has come in under expectations as a category, in terms of how many $5 billion-plus companies we expected to emerge from India,” said Dev Khare, partner at Lightspeed Venture Partners, in an interview withMint.

It’s not that India hasn’t seen its share of SaaS success stories. Freshworks is listed on the Nasdaq, while Zoho continues to scale, moving from small and medium business contracts to larger enterprise deals.

However, only a handful of innovative companies came from that era, including healthtech company Innovaccer, contract management company Icertis, and data observability platform Acceldata, to name a few. Notably, these are companies founded by Indians who started them back home before relocating their headquarters to the US.

According to Khare, the problem was the large number of fast-follower companies that emerged during that period, compared with firms focused on pure innovation. “In the pre-AI era, Indian companies could still enter mature categories in the US or Europe and work their way up from the small and medium business segment to the mid-market,” Khare said. “It was essentially the same product, just lower priced.”

Fast followers typically enter markets soon after pioneers, allowing them to spend less on research and development, take on lower risk, and gain market share with a more mature product.

Withartificial intelligence (AI), however, the fast follower model no longer works, particularly in the enterprise market, where customers are looking for innovators. “I don’t think the opportunity for India anymore is to wait 10 years for AI market leaders to emerge and then disrupt them from the bottom,” he said. “Entrepreneurs need to go at problems immediately, and lead if possible.”

Going for IT

But while India might not have lived up to its SaaS potential, AI startups here are well positioned to disrupt the country’s information technology (IT) services sector, a trend that has already begun.

Broadly, Lightpseed sees opportunities across three areas: application building from scratch, software implementation services, and application maintenance services.

“There are massive revenue streams across three segments of IT services that have not been automated,” said Khare. “India has got a good shot, given the legacy ofIT services here.”

On the applications side, Lightspeed invested in the $23 million Series A round for the vibecoding startup Emergent last year. It also participated in the startup’s recent $70 million Series B in January, which was led by SoftBank Vision Fund 2 and Khosla Ventures. The firm is currently scouting for opportunities across the other two segments.

Companies in the remaining areas include Ressl, an AI-powered Salesforce implementation and automation company that raised $500,000 from Y Combinator earlier this year, and Realfast, which raised $2.75 million from RTP Global, DeVC, and Peak XV Partners in 2024.

Like with most new technologies, most AI startups have yet to prove that they can do what incumbent companies do better. A PwC report this year found that despite pilot projects and experiments within their enterprise ecosystem, only one-in-eight (12%) CEOs say AI has delivered both cost and revenue benefits. Overall, 33% report gains in either cost or revenue, while 56% said they have seen no significant financial benefit to date.

Lightspeed is the latest addition to a growing list of venture capital and growth funds scouting for startups trying to change how the $283 billion IT services industry operates. While funds such as Bessemer Venture Partners, Peak XV Partners, Stellaris Venture Partners, Accel, and Elevation Capital are targeting early-stage startups aiming to transform the sector, growth-stage funds like TVS Capital Funds have also entered the fray.

While AI-first disruption of IT services is still at an early stage, with few startups raising large cheques so far, Khare said a roll-up, or consolidation, is inevitable down the line. “These are likely to be clever entrepreneurs who will acquire IT companies running at 20% net margins, bring them onto their platform, and then drive margins upwards of 40%,” he said.

AI disruption continues to be a cause for concern for IT services companies. Just within the last week, announcements by US-based Palantir and foundational model startup Anthropic have sparked anxiety among incumbents, given their ability to automate work that has traditionally been core to IT services revenue.

Palantir said during its earnings call on Monday that its AI platform, Hivemind, can now autonomously migrate data from legacy systems to new systems, a task that has historically been carried out by IT services firms.

In January, Anthropic announced its agentic AI system, Claude Cowork, designed to streamline work for white-collar employees. Later in the month, it released a set of plugins that automate tasks across multiple applications under a single system. Such agentic AI platforms have been investor darlings for some time, with Indian venture capital firms increasingly seeking a category winner.

Investor concern around agentic AI was quickly reflected in the share prices of Indian IT services companies.TCS, Infosys, HCLTech, Wipro, and Tech Mahindra fell 6.95%, 7.19%, 4.22%, 3.73%, and 4.12% at market close on Wednesday. Even on Thursday, despite a partial recovery, the Nifty IT index closed down 0.56%, with eight of the 10 stocks in the index still ending the day in the red.