VCs back AI startups to shake up Indian IT services industry
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ETtech
A new wave of AI-first startups is catching the attention of top-tier venture capital firms , as they look to back companies reinventing traditional IT services Accel , and Elevation Capital are among the country's top venture capital firms which are scouting for artificial intelligence (AI)-first startups to place early bets, several investors told ET.From application development and infrastructure maintenance to software testing and customer support, AI is beginning to fundamentally reshape services that have long relied on large human workforces, they said.'AI is making IT services non-linear and it opens up opportunities for startups to deliver services faster, cheaper and at a higher quality,' said Rajan Anandan, managing director at Peak XV Partners, which has evaluated several companies using AI agents to automate application maintenance, an area where big monies are spent annually.The shift isn't about replacing traditional IT services overnight, but rather building leaner, AI-enabled firms from scratch, said the VC executives ET spoke with.'We have created a map of everything IT services companies do and view each line of business as an opportunity for a new AI-native company,' said Anandan, adding that Peak XV is evaluating horizontal startups focused on cross-sector capabilities as well as vertical ones building AI-first solutions for specific industries, such as banking, insurance, healthcare and retail.Stellaris Venture Partners has already backed two startups focused on automating core IT services. Founder and partner Ritesh Banglani said AI is also disrupting knowledge process outsourcing (KPO) functions such as accounting, wealth management, and legal support.'Our belief is that India holds a special advantage in providing these AI-led services to the world. We know how to scale people-heavy operations and sell services – not just software,' he said. 'Our bet is that tech-first services startups will be able to build distribution faster than the incumbents can build technology. We have already invested in two AI-led services startups this year and look forward to funding several more.'Accel India is also bullish. 'By being able to price for the outcome, AI-first services companies can charge like services but earn like software,' said Anagh Prasad, vice president at the firm. 'Going forward, we'd continue looking for full-stack AI companies, especially in verticals like accounting, legal, insurance, as well as selective late stage services companies undergoing rapid AI transformation.According to Krishna Mehra, AI partner at Elevation Capital, the transformation of IT and IT-enabled services is already underway and will accelerate in the next few years. 'We expect action across BPO, KPO, knowledge work, and customer support. Winners and losers will significantly change,' Mehra, who is based in the US, said, adding that even legacy IT firms may be targets for buyouts and AI-led turnarounds.Despite investors taking early bets on startups looking to disrupt the nearly $300-billion IT services industry in India, they said the behemoths are not watching this from the sidelines.ET had earlier reported that Japanese investor SoftBank is also eyeing buyout deals in India to push AI-led IT, BPO transformation.'Incumbent ITeS majors are hardly sitting out of the AI transition. Most companies are not only helping clients implement AI, they are also using it extensively themselves to improve productivity and speed of delivery,' Banglani said.Further, investors are looking at backing teams that not only comprise AI talent but also bring domain expertise from IT services companies of dealing with large enterprise customers.A telling sign of the growing adoption of AI at large IT services companies is the widening gap between revenue and headcount growth. According to Nasscom, the industry grew by 5.1% in FY25 from the previous year, while its workforce expanded by just 2.2% – indicating a shift towards more tech-driven, less people-intensive operations.'The entry of AI in this sector would be very disruptive to jobs. There might be a lot of global rebalancing of the workforce but it's not all gloom and doom from a jobs perspective,' Elevation Capital's Mehra said.
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