Devansh Lakhani, Director, Fundraising Expert, and Investment Banker at Lakhani Financial Services, is a startup investment strategist with over 10 years of experience in fundraising and venture advisory. He specializes in capital raising, financial modeling, investor relations, and deal structuring, supporting startups across sectors while enabling growth, market expansion, and strategic scaling through structured investment banking and deep ecosystem expertise.

The article highlights India’s startup ecosystem shift from foreign-funded growth to a gradual rise in domestic capital, emphasizing AIF expansion, HNI participation, and policy support, while underlining reduced external dependency, evolving investment behavior, and the need for a balanced, resilient funding structure despite existing gaps.

For most of the last decade, India’s startup ecosystem was funded from abroad.

Between 2014 and 2023, roughly 83 percent of total startup funding came from foreign investors, according to estimates by the Observer Research Foundation. Global venture firms, sovereign wealth funds, and crossover hedge funds provided the bulk of growth capital that powered India’s startup boom. During this period, India’s primary contribution lay in its strong base of founders, a rapidly expanding pool of skilled engineers, and a large, consumption-driven domestic market that offered scale. However, the financial risk capital required to build and sustain high-growth startups largely originated from outside the country.

This arrangement worked efficiently as long as global liquidity remained abundant. Capital was relatively easy to access, valuations were buoyant, and investors were willing to fund aggressive growth strategies across sectors. However, this model also carried an inherent fragility that was not immediately visible during periods of economic expansion.

After 2022, as global interest rates rose and liquidity tightened, venture funding in India declined sharply. The impact was particularly visible in late-stage funding, where large capital inflows began to recede first. Valuations corrected across sectors, and startups faced increasing difficulty in closing follow-on rounds. This shift exposed a fundamental vulnerability: an ecosystem heavily dependent on foreign capital is inevitably tied to global financial cycles that may have little connection to domestic economic realities.

What has followed since then is not a sudden reversal of this trend, but rather a gradual and measurable rebalancing. Domestic capital is beginning to play a more meaningful role in supporting Indian startups. While foreign investors continue to remain important participants, the funding mix is slowly evolving.

This shift is gradual and incomplete. But it is structural.

Rupee capital is expanding

The most visible indicator of this transition is the growth of India’s Alternative Investment Fund (AIF) framework. Commitments to Category I and II AIFs—investment vehicles that primarily house venture capital and private equity funds—have more than doubled in recent years. Over the past decade, domestic venture assets under management have grown multiple times, reflecting a steady increase in locally sourced capital.

More important than the aggregate numbers, however, is the evolving source of this capital.

Indian high-net-worth individuals (HNIs) and family offices are increasingly allocating a meaningful share of their portfolios to private markets. Since 2018, the number of family offices in India has risen sharply, driven by wealth creation across sectors such as technology, manufacturing, and financial services. Many of these family offices now allocate double-digit percentages of their assets to venture capital and private equity. This form of capital is typically patient, rupee-denominated, and invested in businesses operating within the same economic environment that generated the wealth in the first place.

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In addition to private investors, the state has also played a catalytic role as a limited partner. The government’s Fund of Funds for Startups, managed by SIDBI, has committed capital to numerous domestic venture funds, which in turn have invested in hundreds of startups across sectors. The recently approved Startup India Fund of Funds 2.0 further signals continued policy intent to deepen the domestic capital base and strengthen the funding ecosystem.

Regulatory developments are also contributing to this expansion. Proposals to relax restrictions on banks’ exposure to AIFs could unlock additional institutional capital, while the development of GIFT City as an international financial center is creating new avenues for structuring and channeling India-focused investments. These measures collectively broaden the pathways through which domestic and globally linked capital can be mobilized.

Taken together, these developments suggest that domestic capital is no longer a peripheral player. While foreign investors continue to dominate in cumulative terms, domestic capital is steadily becoming a meaningful contributor to annual funding flows.

Why the source of capital matters

The composition of capital plays a crucial role in shaping incentives within the startup ecosystem.

An ecosystem that relies overwhelmingly on foreign capital is inherently exposed to global monetary conditions, portfolio reallocations, and macroeconomic shifts that may not reflect domestic fundamentals. By increasing the share of domestic capital, India can reduce this external vulnerability and create a more resilient funding environment.

The source of capital also influences investment behavior. Investors operating within the same currency, regulatory framework, and economic context as their portfolio companies tend to adopt a different approach to risk and return. They are often more sensitive to governance standards, financial discipline, and long-term sustainability.

During the previous funding cycle, rapid scaling and market capture were often prioritized over profitability. In contrast, the current environment—shaped by tighter capital availability—places greater emphasis on capital efficiency, unit economics, and sustainable growth models. Domestic investors, in particular, are more likely to align with these priorities.

There are also important sectoral implications. Domestic funds and corporate investors have shown increasing interest in sectors that align with India’s long-term economic priorities, including enterprise software, financial infrastructure, climate technologies, and manufacturing-linked innovation. These sectors are closely tied to structural shifts within the Indian economy.

In comparison, foreign capital in the earlier cycle was more concentrated in high-visibility consumer platforms, such as e-commerce, food delivery, and mobility, where scale and growth potential were the primary drivers of investment decisions.

This does not imply that domestic capital is inherently more prudent or strategically superior. However, as its share increases, it is likely to influence the ecosystem’s overall risk appetite, investment horizons, and sectoral focus, contributing to a more balanced and diversified funding landscape.

Limits and unresolved gaps

Despite the progress, the transition toward greater domestic participation remains incomplete.

Foreign capital continues to account for a significant share of total funding by value, particularly in late-stage rounds where capital requirements are substantially higher. Large global investors still play a critical role in providing growth capital at scale.

At the same time, participation from domestic institutional investors such as pension funds and insurance companies remains limited compared to their counterparts in developed markets. These institutions manage large pools of capital but have relatively low exposure to venture and growth equity, restricting the overall depth of domestic funding.

Another challenge lies in the underdevelopment of secondary markets for private assets. Limited liquidity options make it more difficult for domestic limited partners to exit investments, which in turn affects their willingness to allocate capital to this asset class.

Domestic capital is also unevenly distributed. It tends to be concentrated among established fund managers and metropolitan networks, particularly in cities like Bengaluru, Mumbai, and Delhi. As a result, early-stage founders operating outside these major hubs often face greater difficulty in accessing funding.

These constraints highlight an important point: the current shift is not about replacing foreign capital, but about diversifying funding sources. A balanced ecosystem requires both domestic and international participation, each playing complementary roles.

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A more durable funding base?

The significance of this transition is not merely symbolic—it is fundamentally economic.

If a larger share of Indian innovation is financed by domestic savings—whether from individuals, corporates, or institutions—the ecosystem becomes inherently more stable and less dependent on external cycles. It also becomes more accountable to domestic stakeholders, aligning investment outcomes more closely with national priorities.

In such a model, risk is internalised within the economy rather than being outsourced to foreign investors. This can contribute to greater financial resilience and long-term sustainability.

Conclusion

The key question is not simply how many startups or unicorns India can produce, but whether the country can build a robust and resilient funding architecture capable of sustaining innovation independent of global liquidity cycles. The focus is gradually shifting from headline valuations and rapid scale to the underlying strength and stability of the financial ecosystem that supports entrepreneurship.

The data so far indicate that this transition has already begun to take shape. Domestic capital is steadily increasing its presence, supported by a combination of policy initiatives, regulatory evolution, and growing participation from high-net-worth individuals, family offices, and institutional investors. This emerging pool of local capital is beginning to complement foreign investment, adding a layer of stability to the funding landscape.

However, the real test lies in whether this momentum can be sustained and consolidated over the next decade. If domestic capital continues to deepen and diversify, it could significantly alter the trajectory of India’s startup ecosystem. A stronger domestic funding base would not only reduce reliance on external cycles but also enable India to evolve from being primarily a destination for global capital into a self-sustaining innovation economy with deeper financial roots, greater resilience, and enhanced strategic autonomy.