-By S Rangarajan
India’s Startup Ecosystem: Growth, Challenges, and the Road Ahead
The Indian startup ecosystem has evolved significantly over the past few decades, transitioning from a back-office IT service hub to a global innovation powerhouse. In the 1990s and early 2000s, global investors primarily viewed India as a cost-efficient IT talent pool. However, the narrative has shifted. Today, investors are not asking, “Do you have an India strategy?” but rather, “Do you invest in India?” This change highlights India’s emergence as a leader in scalable innovation, evidenced by groundbreaking initiatives like UPI, Aadhaar, and JAM.
Government Initiatives and Funding Trends
The Indian government continues to play a pivotal role in fostering entrepreneurship. Programs such as the Startup India Seed Fund Scheme and the $1.15 billion Fund of Funds announced in the 2025-26 budget are designed to stimulate innovation, particularly in deeptech, cleantech, and spacetech. These sectors, along with AI and sustainability-focused startups, are expected to attract significant funding in 2025 as investors seek long-term growth opportunities in a maturing market.
However, despite these encouraging developments, challenges persist. Posts on social media platforms highlight concerns about declining funding for startups and SMEs. Increased capital gains taxes have deterred angel investors and venture capital (VC) firms, potentially stifling job creation and innovation. Industry observers also point to a decrease in funding rounds, high operational costs, and persistent infrastructure bottlenecks as key obstacles to sustained startup growth.
Early-Stage Funding and Challenges
Most startup funding in India has traditionally concentrated in tech-driven sectors, including e-commerce, edtech, fintech, enterprise tech, agritech, and SaaS platforms offering digital marketing, point solutions, and aggregator services. While various central and state government grants have promoted entrepreneurship, the success rate of university incubation centers remains limited, with only a few thriving in metro cities.
Grants provide a crucial initial boost for startups to develop Minimum Viable Products (MVPs), but a major challenge remains: 70% of startups struggle to secure follow-on funding even after gaining market traction. Despite rigorous screening by incubation cells, mentors, and angel investors, many startups that raise under $30K to reach MVP stage, fail to attract further capital and collapse within three years.
The stark reality is that India’s startup failure rate stands at approximately 98%, meaning only TWO out of every 100 startups survive beyond five years. This raises critical questions about the risk appetite of VCs and their ability to assess early-stage ventures effectively.
This clearly states that neither the VC community nor the ecosystem partners such as Govt, Educational Institutions, Forums that are promoting Entrepreneurship are interested in addressing this BIG issue while every VC is busy running behind “Unicorns, Soonicorns and Minicorns”.
The Role of VCs: Transparency and Evaluation
While venture capital firms follow structured investment processes, including investment committees and data-driven evaluations, concerns about transparency persist. Many founders spend over 15 to 18 months to raise follow-on capital despite demonstrating revenue generation and a viable business model. This highlights a need for VCs to reassess their evaluation criteria and bring greater clarity to their investment decisions.
Key questions for early-stage VCs and growth funds include:
- Should VCs adopt more data-driven evaluation criteria instead of rejecting startups based on subjective reasons?
- Is it fair to expect official rejection communications from VCs, outlining specific reasons for non-investment?
- While banks follow clear sectoral lending policies, should VC firms be more transparent about their investment focus and risk appetite?
- SEBI mandates certification for investment advisors in public markets. Should similar qualifications be required for VC professionals evaluating startup proposals?
- Should there a major overhaul to the Govt. policies about the way VCs carrying out business?
- With technology landscape changing by the day, is it not mandatory for VC firms to ensure that Investment Committee comprises of people with the relevant experience and skills to evaluate funding proposal?
Notably, many VC firms have to upskill/upgrade their partners’ qualification standards for evaluating startup investments. For an entrepreneur raising funds for his/her startup is an important event and that should be given lot of importance.
Any wrong decisions that will significantly impact entrepreneurship and innovation.
Investor Sentiments
Predominantly, the investor sentiment seems to follow a pattern in terms of sector and type of ventures they support. Suddenly, there is a flurry of activities in AI, Deeptech startups and rest of them are looked upon as aliens as though the world will come to an end without the Artificial Intelligence.
The ‘herd mentality’ that often drives funding trends, especially the current obsession with AI and Deeptech startups. It’s true that investor sentiment tends to follow patterns—sometimes cyclical, sometimes reactionary—where certain sectors get flooded with capital while others are left to fight for more than 15 months.
Right now, AI seems to be the sun rise segment, and it’s understandable that investors are enamored by the hype created by consulting companies and large tech companies. The promise of transformative breakthroughs, from autonomous systems to generative models, has everyone glued to notice who will be the next big unicorn. But the real concern about jumping the gun before the maturity cycle and ignoring lessons from past hype bubbles raises some pertinent questions about whether we will have a level playing field from investor community where the risk portfolio will be spread across several portfolios.
Market Dynamics
In 2024, VC firms raised an estimated $2.5 billion, up from less than $2 billion in 2023, indicating available capital. However, deployment remains very selective, with a preference for startups demonstrating strong unit economics, clear profitability pathways, and sustainable business models.
Late-stage funding remains sluggish, while the early-stage investments (Seed and Angel rounds) are purely rests with entrepreneurs through Govt. Grants, Angel investors and personal funds. Entrepreneurs end up spending a minimum of 12 to 18 months for pre-series A.
The pre-series A is the MOST difficult round (USD sub 1 Mil) for many entrepreneurs. Many VCs have the concept of FOMO (Fear of Missing Out) when it comes to investment. If one VC makes the commitment, many follow suit without applying any thoughts on business model, revenue projections. Such examples are in public domain and subsequent disastrous closure of startups which have been funded way above their worth.
To summarize:
- FOMO was exercised and pumping money into businesses without strong unit economics, clear profitability pathways, and sustainable business models.
- It’s a cascading effect. When businesses were falling like pack of cards investor sentiments became very vigilant and cautious. Fund-Raise for startups touches four years low, Giants like Softbank, Tiger Global are not making big bets.
- Finally, any systemic problems will take some time to settle down. I think in 2025 there will be major correction and there will be fresh energy and talent to solve perennial problems.
Conclusion: Building a sustainable growth model
As of March 2025, India’s startup funding landscape is stabilizing, with selective growth following a turbulent period. While total funding remains below the 2021 peak, the ecosystem is adapting by emphasizing sustainability, early-stage innovation, and public market exits.
The outlook for the rest of 2025 will likely depend on global market conditions, domestic consumption demand, and the success of anticipated IPOs. To ensure long-term resilience, the Indian startup ecosystem must focus on improving access to follow-on funding, increasing transparency in VC decision-making, and fostering deeper engagement between investors and entrepreneurs.
Any systemic problem in the past esp. in the financial markets, there have been several occasions the regulators have stepped in to address the same and make a level playing field.
It is imperative for SEBI to consider much tighter scrutiny about the investments made by VC firms that include Partners’ qualification, experience to evaluate funding proposals, statutory reporting and risk exposure.
More than looking for breakthrough innovations / business models to invest, I think time has come to disrupt VCs investment decisions to create more sustainable businesses.
