AI-first startups challenge India's $300 billion IT services giants

Business Standard

3 days ago

When Atomicwork raised $25 million in January, the startup wasn't just another software company seeking venture capital. The Bengaluru-and San Francisco-based firm uses artificial intelligence agents that can autonomously handle everyday IT services.
The funding round, led by Khosla Ventures and backed by more than 40 global chief information officers, reflects a broader shift that is quietly reshaping the IT services industry. A new wave of AI-native startups — companies built from the ground up with artificial intelligence at their core — are challenging traditional players in the $300-billion IT-BPM industry.
AI-native startups are fundamentally different — they don't just use AI as a helping tool; instead, it is at the core of their product, business model, and customer offering. Their solutions are deeply rooted in technologies like machine learning, natural language processing, computer vision, and generative AI, making them truly 'AI-first' in their approach.
'This is the AI innovation that large organisations need to radically transform how they work,' Kanu Gulati of Khosla Ventures said after investing in Atomicwork.
For example, global businesses like Zuora and Pepper Money use Atomicwork to empower their teams with seamless service, intelligent automation, and actionable insights. This is driving productivity and transforming their digital workplace experience.
Venture capital firm Accel is backing 'Enterprise AI'-platforms that enable enterprise AI use cases using agentic technologies, large language models (LLMs), and small language models (SLMs). Another focus is 'services-as-software' - the other end of software-as-a-service - where AI startups leverage India's large IT services capabilities to provide better automation offerings. Additionally, 'vertical AI' focuses on startups tapping into India's AI talent pool to integrate AI into vertical-specific use cases.
Creating new business models
'AI is making software development and service delivery asymmetric—speeding up innovation cycles and allowing lean teams to deliver enterprise-grade outcomes,' said Prayank Swaroop, partner at Accel.
He said that India's edge lies not just in its engineering depth or cost advantage, but in its access to domain-specific datasets and its ability to reimagine workflows in sectors like healthcare, financial services, and legal operations.
Accel has backed a pair of AI startups aiming to reshape enterprise workflows. Nanonets, which uses AI to automate back-office tasks involving unstructured data, raised $29 million last year to improve accuracy and scale. Ema, which emerged from stealth last year, launched a Universal AI Employee designed to handle complex cross-domain tasks with high reliability. The company raised $25 million from investors including Accel, Section 32, and Prosus Ventures.
Nurix AI, a startup founded in 2024 by serial entrepreneur Mukesh Bansal, is developing enterprise-focused AI agents with human-like voice and reasoning capabilities. Backed by $27.5 million in seed and Series A funding from Accel and General Catalyst, the company aims to automate a wide range of business tasks, boosting productivity and transforming customer engagement.
'AI-native startups are not merely integrating AI into existing workflows, they are fundamentally reimagining how services are delivered, creating an entirely new operating model,' said Rishit Desai, partner, WestBridge Capital.
Shedding old habits
He noted that these startups are more agile and aren't burdened with legacy processes and tools compared to some of the larger and more established organizations. Also, this fresh, ground-up approach allows them to innovate rapidly and deliver superior customer experiences with speed at scale.
'We're an outcomes-first company. At Mintoak, AI is a tool to drive faster decisions, leaner operations and smarter execution,' said Raman Khanduja, chief executive and co-founder, Mintoak, which provides digital payments solutions to small businesses.
For structuring deals, venture capital investors are placing greater emphasis on early margins for AI-first businesses due to their service-oriented nature. They are also focused on profitability and operational efficiency as companies scale.
'We're seeing a growing wave of entrepreneurs emerging from the senior ranks of legacy IT players, and we're excited to partner with the most promising among them at the seed stage,' said Nithin Kaimal, chief operating officer, Bessemer Venture Partners in India.
He believes that incumbents in IT services — particularly BPOs — are poised for significant disruption by AI-first challengers. He said these AI-native companies are typically more responsive to customer needs, offer superior outcomes, and operate with outcome- or transaction-based pricing models, in contrast to the FTE (full time equivalent) based structures used by traditional players.
Gopal Jain, chief executive and managing director, Gaja Capital, said AI-first IT services are built on automation, not scale: lean teams powered by software accelerators and reusable models deliver faster, cheaper, and smarter outcomes.
'We see significant opportunity for AI-first IT services companies who will integrate AI models and products into their core offering and build on their deep domain expertise and customer relationships to deliver value,' said Jain.
He said talent arbitrage still matters, but the focus is shifting to high-value, globally deployable software talent. One of Gaja Capital's portfolio companies is Amber, a marketplace for students to book accommodation. They have adopted AI to significantly increase productivity of their customer success teams and increased the share of STP (straight through processing) from 30 per cent to 70 per cent within 2 years. They are also prototyping a ChatGPT like interface to help students select and book accommodation.
Such firms are now competing globally on product strength. Several Gaja Capital portfolio companies are pursuing international expansion, with the US remaining a key market for firms such as LeadSquared, Signzy, and Amber. Others, like Fractal, already have a strong US presence. The Middle East and North Africa (MENA) region is also gaining traction.
Incumbents rethink models
This surge in AI-first competition is now forcing established IT giants to reconsider their traditional business models.
This was summarised by Abhishek Singh, additional secretary at the ministry of electronics and information technology (MeitY), recently at an event where he said that the country's legacy IT giants are unlikely to remain on the sidelines for long.
'Given the capability that our IT industry has and what we are hearing about Infosys and TCS, all of them are working on AI-based applications,' Singh said at the Accel AI Summit, 2025 in Bengaluru. 'There will be a need for doing this and enhancing their capabilities.'
Infosys and TCS have both begun ramping up investments in high-performance computing infrastructure, including Graphics Processing Units (GPUs), while simultaneously retraining thousands of employees in AI-related skills. Singh noted that these companies are already supporting global clients with AI-driven applications, and it's only a matter of time before they begin to roll out proprietary AI products and platforms.
'Otherwise for them to survive without AI, it will be very difficult,' cautioned Singh.