India's startup funding slows as global investors turn cautious, capital shifts to US

The slowdown follows an exceptional funding boom in 2020 and 2021, which experts attribute to excessive liquidity and valuations that proved difficult to sustain.

Late-stage funding, which peaked at $29.7 billion in 2021, fell to $6.1 billion in 2025 and $5.7 billion as of 26 October 2026. The number of rounds also declined from 277 in 2021 to 164 in 2025 and 98 so far in 2026, according to Tracxn data.

“As interest rates normalized, capital rebalanced and the market reset to levels that fundamentals could support. What has changed is the underwriting discipline. The anchor is now public-market comparables, which means positive unit economics, a clear path to profitability, improving contribution margins and cash conversion,” said Karan Mohla, general partner at global multi-stage venture capital firm B Capital, where he leads the South and Southeast Asia team.

Analysts view the decline as a re-baselining of the ecosystem. The 2021 peak was driven by the zero interest rate policy (ZIRP) era, when abundant capital flowed into late-stage private rounds at forward revenue multiples that public markets were unlikely to sustain.

A changing landscape

A shift in investor appetite is adding to the slowdown. While funds earlier backed conventional financial services and internet businesses, interest has increasingly moved towards artificial intelligence (AI) and deeptech. Many companies in these sectors, however, are still too young to attract late-stage investments.

“My sense is that late-stage funding will pick up around 2028, when these companies mature and graduate to that stage. Until then, some companies in the consumer and financial services sectors will continue to attract late-stage capital. However, the investment landscape is undergoing a reset, with a shift in the kinds of businesses investors find attractive,” said Ashish Kumar, co-founder and general partner at venture capital firm Fundamentum and F2A (Fundamentum Frontier Advisors).

Between 2020 and 2026 YTD, retail, enterprise applications and fintech attracted the most funding, at $32.2 billion, $31.5 billion and $25.6 billion, respectively, Tracxn data showed.

The retreat of once-active growth-stage investors has further constrained capital flows. Tiger Global's investments in Indian startups fell from 55 in 2021 to one in 2026 YTD. SoftBank, which made 17 investments in 2021, largely stayed away from fresh deals after 2022 before making two investments in 2026, according to Venture Intelligence.

Global capital looks elsewhere

Competition from the US has added to the pressure, with global investors increasingly concentrating capital in artificial intelligence. Companies such as OpenAI and Anthropic have raised billions of dollars at multi-billion-dollar valuations. SpaceX's entry into public markets through its record-breaking initial public offering (IPO) in June has added to the pull of the US technology market.

“As a result, there is little incentive for an LP to invest in VC funds in India right now. India has become a classic high-potential but underperforming market for global LPs,” said Abhay Agarwal, founder and fund manager of early-stage VC firm Piper Serica Advisors.

The pullback extends to the earliest stages of startup financing. Angel funding ffell from $542 million in 2020 to $95.4 million in 2025, while the number of rounds declined from 577 to 286, according to Traxcn data.

Experts attribute the decline partly to the growing institutionalisation of angel investing. Angel networks are increasingly setting up their own funds, tapping domestic capital to formalise early-stage investments in the startup ecosystem, Mint reported in March.

Regulatory changes have added to the uncertainty. Under revisions to the Securities and Exchange Board of India's (Sebi) accredited investor framework, angel funds can raise capital only from accredited investors and must onboard at least five such investors before their first close. Investors must meet prescribed income or net-worth criteria and undergo accreditation.

The changes have raised concerns that smaller and newer fund managers could struggle to raise capital, as the requirements narrow the pool of eligible investors. Following industry representations, Sebi extended the compliance deadline for existing angel funds from 8 September 2026 to 31 March 2027.

However, some industry participants argue that tighter regulations may change how angel capital is deployed rather than reduce its overall availability.

“If getting accredited is too onerous or the eligible pool shrinks too much, you'll see capital simply route around the regulated structure — people will invest directly or find other vehicles. So the regulation may end up reshaping the pipeline more than shrinking the overall pool,” said Nidhi Killawala, partner at law firm Khaitan & Co.

Nabodita Ganguly

Nabodita is a New Delhi-based journalist who covers India’s startup ecosystem and venture-capital landscape. She enjoys reporting on emerging companies, funding trends, founders, and the policies shaping the innovation economy. Before this, she worked with Outlook Business and The Hindu Businessline. When she’s not chasing stories, you’ll find her with a cup of coffee, watching a good comedy, or getting lost in a book. She believes there’s always a good story waiting to be discovered, sometimes in a boardroom and sometimes over a great cup of coffee.