-
CENTRES
Progammes & Centres
Location
India’s startup boom runs on foreign capital. The next decade must inculcate self-sufficiency—unlocking domestic funds to build true techno-sovereignty.
In just over a decade, India has built the world’s third-largest startup ecosystem. Super-charged by the nation’s world-class software services and consulting sector, as well as its pioneering Digital Public Infrastructure (DPI), the ecosystem is evolving into one of India’s top growth engines and innovation frontiers. With more than 190,000 Department for Promotion of Industry and Internal Trade (DPIIT)-recognised startups, supported by nearly 10,000 investors, and having produced over 120 unicorns, India’s startup landscape has built significant momentum. These ventures have collectively raised over US$164 billion (~INR14 lakh crore at INR85 to a dollar) since 2014, driving growth across a diverse range of sectors, including fintech, consumer and e-commerce, SaaS, logistics, mobility, and increasingly in deep tech and artificial intelligence (AI).
Yet, the foundation of this success rests heavily on foreign capital, which constitutes approximately 83 percent of the total startup funding. Although overseas capital has undoubtedly catalysed the rise of India’s startup ecosystem, the nation’s technological and innovation future cannot remain hostage to global liquidity cycles, geopolitical tensions, and offshore decision-making.
The nation’s technological and innovation future cannot remain hostage to global liquidity cycles, geopolitical tensions, and offshore decision-making.
India must target a structural rebalancing of startup funding in the next decade by mobilising deep pools of indigenous capital, ensuring that the wealth created by Indian entrepreneurs ultimately accrues to Indian citizens and reinforces national techno-sovereignty.
India’s ecosystem now ranks third globally in both deal volume and startup density, behind only the United States (US) and China. However, it continues to remain heavily dependent on foreign venture flows.
Roughly 83 percent of India’s startup funding comes from foreign investors, translating to US$136 billion or INR 11.6 lakh crore from CY2014 to September 2025. These include:
When domestic institutions participate directly as investors, the ecosystem gains both capital depth and policy resilience.
The sharp growth in the Indian startup ecosystem and accelerated value creation have ensured it is a central beneficiary in global Asian investment allocations. While this capital has been catalytic, it poses three significant risks to India:
Policy governing India’s innovation economy must incentivise a rebalancing towards domestic ownership of capital and capability, ensuring that strategic technologies and economic value remain aligned with national priorities. Moreover, when overseas sovereign capital, insurance companies, endowments, and pension funds view the Indian startup ecosystem as a solid investment destination with significant returns, there is no reason Indian institutional capital must have barriers to the same opportunities.
The world’s leading innovation economies are anchored in domestic institutional capital, demonstrating that when domestic institutions participate directly as investors, the ecosystem gains both capital depth and policy resilience.
| Country | Model | Key Mechanism | Outcome |
| United States | Pension funds and university endowments | CalPERS, Yale, and Harvard act as long-term limited partners (LPs) in venture funds | Deep, stable pools of local capital sustaining Silicon Valley’s scale |
| China | Sovereign “Big Funds” | State-led thematic vehicles in semiconductors and AI | Strategic alignment of capital with industrial policy |
| Singapore | Temasek and GIC | Government-owned global investment arms | Sovereign wealth backing private innovation |
| Israel | Yozma programme | Public-private seed funds, later privatised | Sparked Israel’s venture industry in the 1990s |
Source: Compiled by the Author
The Indian policymaking machine must consider unlocking domestic capital in insurance companies, pension funds, endowments, Corporate Social Responsibility (CSR) pools, and public fund-of-funds (FoFs).
Pension Funds must be empowered to invest as Anchor LPs in alternative investment funds (AIFs). India’s pension corpus, comprising the Employee Provident Fund Organisation (EPFO) and the Pension Fund Regulatory and Development Authority (PFRDA), exceeds INR 40 lakh crore (~US$470 billion). Current allocations to alternative assets are negligible. In 2021, the EPFO board approved investing 5 percent of annual deposits in AIFs—a welcome move—but focused on government-backed alternatives such as infrastructure investment trusts. The PFRDA and EPFO should consider allowing a 5 percent investment of annual deposits into Category-I AIFs that focus on startups and MSMEs. They should also mitigate risks by selecting AIFs with proven track records and strong compliance histories. Insurance Giants as Patient Capital
Insurance giants are another major source of domestic investment. India has numerous insurance companies under the ambit of the Insurance Regulatory and Development Authority of India (IRDAI), with a significant corpus. Life Insurance Corporation (LIC) alone manages over INR 54 lakh crore (US$640 billion) in assets under management (AUM). One can extrapolate this to the total AUM under the IRDAI’s ambit, which exceeds INR 80 lakh crore (~US$940 billion). Insurance pools are long-dated and ideally suited for illiquid venture horizons. However, IRDAI’s regulatory norms are not conducive to investing in startups, and it must create prudential corridors for these institutions to invest a small percentage into regulated venture funds with audited track records.
Further, India’s premier universities—Indian Institutes of Technology (IITs), Indian Institute of Science (IISc), Indian Institute of Management (IIMs), and numerous private institutions—are building endowments that can seed spinouts in frontier technologies. However, government mandates do not enable them to invest significantly. Endowments in India face regulatory complexity, multiple compliance requirements, cultural resistance to non-cash or long-term giving, and a lack of a comprehensive legal framework. They must be allowed to assess and draw inspiration from global leaders such as Harvard and the University of Texas, and structure their corpus collections and investments similarly, with freedom to pursue diversified investment strategies.
India Inc. has built one of the most profitable and cost-efficient sectors globally. Accordingly, its CSR corpus is significant, estimated at ~INR 35,000 crore in FY24, having climbed steadily from ~INR 25,000 crore in FY20. This deep capital pool can be tapped by partially routing investments into impact funds or crowded into fund-of-funds (FoFs) that invest in sectoral AIFs.
By unlocking pension, insurance, and sovereign capital through calibrated reforms and scaled FoFs, India will enter a positive feedback loop where domestic savings fuel domestic innovation and secure its techno-sovereignty.
Lastly, the Small Industries Development Bank of India (SIDBI) FoF has been a notable success story of government intervention and has proven vital for the development of the ecosystem. It has committed over INR 11,000 crore across 150+ AIFs, catalysing more than five times in returns in follow-on investment, and demonstrating the unparalleled effect of public sector funding. In 2025, the Union Budget committed another INR 10,000 crore, nine years since the first commitment, despite the spectacular success of the FoF and the urgent need for more public sector capital.
However, the Indian government cannot rely on just one successful funding vehicle. For the scale of India’s population (144 crore), economy (nearly US$4 trillion, expected to scale to US$10 trillion in a decade), and startup ecosystem growth potential, the country needs a lot more FoFs. To begin with, it requires an INR 50,000 crore Deep Tech Fund, as well as thematic FoFs for AI, quantum computing, defence tech, health tech, and semiconductors. The government can act as a first-loss capital provider, drawing in institutional and private LPs to multiply every public rupee fivefold.
The government and bureaucracy have several policy levers available to unlock institutional capital in India. Insurance companies, pension funds, and endowments invest around US$200 billion annually—even a modest 3 percent of this annual allocation would mobilise US$6 billion towards startups. This would be a game-changer: stabilising funding cycles, reducing external shocks, and redefining the ownership of Indian innovation.
India has already demonstrated its capacity to build world-class companies. The ecosystem has achieved this remarkable feat without substantial domestic financial support. The next wave must be financed by indigenous capital. By unlocking pension, insurance, and sovereign capital through calibrated reforms and scaled FoFs, India will enter a positive feedback loop where domestic savings fuel domestic innovation and secure its techno-sovereignty.
Nisha Holla is a Visiting Fellow at the Observer Research Foundation.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Nisha Holla is Visiting Fellow at ORF where she writes on ideas and shifts at the intersection of technology economics and policy. She tracks the ...
Read More +
PREV
