Budget 2025: Startups Cheer Doubling Fund Of Funds, Credit Support, Inclusive Steps

The Union Budget 2025-26 has reinforced the government’s commitment to fostering India’s thriving startup ecosystem, which is the third largest in the world.

With startups being crucial in the country’s economic growth and innovation landscape, the budget has introduced significant financial support and policy measures to accelerate their progress.

After a challenging phase of funding winter marked by mass layoffs and shutdowns across 2022 and 2023, the Indian startup ecosystem has shown signs of revival in 2024. According to the ‘Annual Funding Report 2024’ by Inc42, homegrown startups secured over $12 Bn in fresh investments, which was a steep 20% increase from the $10 Bn they had raised a year back. This upward trend set an optimistic tone for 2025, which was firmed up further by the budget boosters.

Finance Minister Nirmala Sitharaman in her budget speech today (1 February) announced an expansion in credit guarantee cover and a INR 10,000-Cr government-backed Fund of Funds to catalyse flow into Alternate Investment Funds (AIFs).

The budget also introduced a scheme providing term loans of up to INR 2 Cr for five lakh first-time women, Scheduled Castes (SC) or Scheduled Tribes (ST) entrepreneurs for the next five years, building upon the success of Stand-Up India.

Sitharaman’s eighth budget could be a game-changer, especially for early-stage startups in the deeptech domain that often struggle for investor attention. According to experts, these measures will drive innovation, bolster deep-tech growth, and create a more inclusive entrepreneurial landscape.

Doubling Of Fund Of Funds

One of the most appreciated moves in the budget was doubling the corpus for Fund of Funds for Startups (FFS) scheme, adding INR 10,000 Cr to the existing INR 10,000 Cr kitty. “The Alternate Investment Funds (AIFs) for startups have received commitments of more than INR 91,000 Cr. These are supported by the Fund of Funds set up with a government contribution of INR 10,000 Cr. Now, a new Fund of Funds, with expanded scope and a fresh contribution of another INR 10,000 Cr will be set up,” Sitharaman said.

“My take is that this fund should be deployed more towards start-ups that struggle to secure funding easily, particularly deep-tech start-ups. These ventures often face challenges in attracting VC investments because their journey to revenue and profitability is much longer,” suggested Rajesh Rahthi, founder of GRIDsentry and a CII Member.

Rathi was echoed by Chirag Shah, who leads fundraising and strategy at BlackSoil. Shah said the boost to the FFS will drive innovation across sectors like fintech, healthtech, and clean energy, providing crucial support for early-stage startups.

The FFS scheme was launched in 2016 to provide a boost to the Indian startup ecosystem and drive capital inflow. The Centre committed more than INR 10,500 Cr for AIFs under the FFS scheme by the end of 2023-24.

Rathi said that from a broader perspective, expanding the scope of the Fund of Funds will have several key outcomes. First, it will help smaller startups meet their initial funding needs, letting them implement and scale their ideas. But to support larger and more ambitious innovations, the quantum of funding must continue to grow.

At the same time, there needs to be better oversight on fund utilisation. Whenever such financial support is introduced, there will always be elements looking to exploit it. Stronger monitoring mechanisms are needed to ensure that the funds reach the right startups and are used effectively.

“By routing funds through SEBI-registered AIFs, the government leverages the expertise of professional fund managers, minimising the risk of inefficient capital allocation and reaffirming its confidence in startups as engines of economic growth and job creation. The scheme’s long-term success will hinge on sectoral priorities, regulatory reforms, and infrastructure,” Shah said.

Deeptech Fund: A Boost For AI

According to industry experts, what is more important for the startup ecosystem is the commitment for deeptech funds.

The doubling of the corpus for Fund of Funds is a step in the right direction, said Ankit Kedia, founder and lead Investor of Capital-A. “What really stands out is the proposed Deep Tech Fund of Funds – recognising that frontier innovation in AI, manufacturing, energy transition, semiconductors, and cybersecurity needs patient capital,” he said.

The finance minister allocated INR 20,000 Cr to implement a private sector-driven research, development, and innovation initiative. As part of this effort, a Deeptech Fund of Funds will also be explored to catalyse the next generation of start-ups, she said.

Ashish Bhatia, founder and CEO of India Accelerator, is upbeat on the Deep Tech Fund of Funds. This initiative will provide the capital necessary to scale disruptive ventures in AI, quantum computing, and frontier technologies, strengthening India’s position as a global leader in deeptech innovation, he said.

“The move signals a clear intent from the government to position India strongly in the global AI race, which is a much-needed boost for deeptech startups, specially in AI and space tech,” Sridhar Parthasarathy, cofounder and general partner at Bluehill.VC, said.

Higher Credit Support For Growth

Besides increasing the funding support, the government has also introduced measures to improve access to credit for start-ups. The credit guarantee cover will be enhanced from INR 10 Cr to INR 20 Cr, with the guarantee fee moderated to 1% for loans in 27 focus sectors crucial to the Atmanirbhar Bharat initiative.

According to Mayuresh Raut, cofounder and managing partner at Seafund, the credit guarantee enhancement will not only help startups gain access to debt capital, it will also help them scale faster with less equity dilution. “It will lead to a virtuous cycle of higher topline, less equity dilution, better valuation and better fundraise,” he said.

Experts believe that it will also boost the manufacturing sector, particularly for startups that lack sufficient collateral to secure loans from banks. This move is expected to improve their access to credit and support their growth.

Parthasarathy said that while equity funding through AIFs is essential, there is an urgent need for debt financing for startups. The introduction of a credit guarantee will help them achieve a balanced mix of equity and debt funding, making the growth more sustainable.

Rathi, however, noted that credit guarantees are generally offered at the higher levels, but when implemented by banks, there are still several hurdles. “I hope the process will be made more flexible, as banks often require extensive personal guarantees from directors, making access to credit difficult. The implementation needs improvement, and hopefully, the government will address these challenges,” he said.

Towards Inclusive Growth

Along with financial aid, the government has taken measures to make the startup ecosystem more inclusive. Sitharaman said that a scheme will be launched for five lakh women entrepreneurs from SC or ST sections. This will provide term loans of up to INR 2 Cr in the next five years. “The scheme will incorporate lessons from the successful Stand-Up India scheme. Online capacity building for entrepreneurship and managerial skills will also be organised,” Sitharaman said.

“Historically, these groups (SCs and STs) have encountered barriers such as limited access to capital and inadequate managerial support, hindering entrepreneurial pursuits. This initiative not only provides financial assistance but also includes online capacity building for entrepreneurship and managerial skills, empowering marginalised groups to establish and grow their businesses,” Pallavi Shrivastava, cofounder of Progcap, said.

Out of the 1.57 Lakh-plus startups recognised under the Startup India initiative, nearly half are led or co-led by women. This announcement comes at a time when women-led startups raised more than $930 Mn across 136 deals till the end of 2024, marking a steep 93.75% surge from the $480 Mn raised across 118 deals a year back, according to Inc42’s Startup Funding Report.

Industry experts said that be it startups or MSMEs or employment, women still have a long way to go to achieve equal opportunities. Any initiative that supports greater inclusion in these sectors is always welcome, they said.

While this budget addresses many issues for startups, some burning issues remain unaddressed, experts said. One of the most pressing topics on everyone’s mind is the ESOP tax. There’s a lot of confusion around phantom stocks and similar matters, and startups often resort to workarounds, which shouldn’t be necessary if the government recognises these challenges and makes the necessary amendments.

Another issue that the startup ecosystem was hoping would be addressed was the 15% tax rate on manufacturing income, which was introduced previously but not continued in the previous budget tabled last July.

[Edited by Kumar Chatterjee]