Of Dry Powder And Wet Blankets: How India’s VC Hit Reset In 2025

As 2025 draws to a close, the contours of India’s venture capital market look clearer than they appeared at the start of the year. The fund hasn’t fizzled out of the system, but investors seemed more reluctant on parking their money.

What made VCs risk-shy this year? While funds froze sitting on dry power, deployment slowed down as exit uncertainties became the wet blanket. Valuations went into a reset and limited partners stepped up scrutiny.

An Inc42 report on funding at the end of the first half of 2025 showed that startups had so far raised about $5.7 Bn, with the full-year projection exceeding $15 Bn. By mid-December, however, total funding stood at roughly $11 Bn across 936 deals, marking a slump in both funds raised and deals sealed from over $12 Bn mopped up from 993 deals last year.

A closer examination of valuation trends, exit activity, LP expectations, and stage and sector wise funding patterns reveals just how uneven and selective the flow of capital has been through the year in a market that remained active, but stayed cautious on deployment.

For instance, mega-deal count went through a structural reset, sliding down to 18 from 24 last year but the capital deployed through them nearly doubled, making 2025 one of the strongest large-ticket years outside the post-Covid outlier of 2021.

Between 2023 and 2025, a total of 73 mega deals above $100 Mn were recorded, of which 35.61% or 26 deals were concentrated in just nine companies – PhonePe (6), Zepto (5), and rest gaining two deals each including Zolve, Udaan, Rapido, Pharmeasy, Minitif, Lenskart and InMobi.

Fund-level fundraising in 2025 scripts a parallel story. As Green Frontier Capital managing partner Sandeep Bhammer highlighted, several VCs started the year with enough dry powder generated from their exits from vintages, partly backed by an IPO boom. Such exits take long to materialise and investors are aware that the windows are cyclical, and not continuous.

“Having finally achieved liquidity, VCs have become cautious about redeploying the capital too quickly and getting locked into another long investment cycle,” he said.

At the sundown, 2025 does not seem to be a year of momentum, but of behavioural changes. Cheques were fewer, diligence was deeper and capital flowed only where conviction was high and exits felt plausible. As the ecosystem nears the dawn of 2026, it has hit the reset button.

Stage-Wise Reset: An Evolving Trend

Activities softened in the early stage landscape in 2025. Seed stage deal volumes remained largely flat, with 433 deals sealed during the year, up from 425 a year back. Capital raised also stayed broadly stable at $0.8 Bn as against $0.9 Bn in 2024. This indicates a steady pace of experimentation through a similar number of bets, but lower capital deployment per company, which signals thinner cheque sizes and stricter caution among investors.

As Waterbridge Ventures partner Anjali Sosale mentioned, at the early stage, investor confidence is increasingly tied to founder quality, rather than market momentum. The ecosystem sees a sharp rise in repeat and experienced founders, including operators who have built or worked at scale, listed startups such as Lenskart, Zomato and Urban Company. This shift has strengthened the quality of entrepreneurship at the grassroots level and changed how early stage risk is assessed.

“Investors are keen on founders with proven execution experience and operating depth. As a result, despite broader caution in the market, early stage funding remains accessible to high-quality founders only,” she said.

Growth stage funding, however, recorded a notable rise in 2025 to $4 Bn across 269 deals from $2.9 Bn from 287 deals in 2024. This reflects a clear recovery from the mid-year slowdown, though it stayed below the 2020–21 peak. The indicated return of investors but in an air of caution.

The clearest signal came from the late stage. While the number of late stage deals fell to 122 from 150, total capital deployed in 2025 held relatively steady at $6 Bn, slightly down from $7 Bn the previous year.

“In 2025, investors were seen prioritising businesses where exits were clearly visible or where capital could be scaled and recycled more easily. Even strong investment theses were being passed over if exit pathways seemed unclear, largely because LPs were demanding real distributions rather than paper gains,” said Bhammer.

“Many funds have delivered marked-to-market appreciation but limited DPI, reinforcing this caution. In essence, dry powder exists, but the need to preserve liquidity and ensure exit visibility has restrained new investments,” said Abhishek Nag, head of early stage VC at 360 One Asset.

Valuation Reset: A Lesson For Late Stage

By mid-2025, India’s valuation reset was real, yet uneven. Late stage companies that priced aggressively in 2021–22 learned their lessons. Data shared by 360 One Asset with Inc42 shows at least 55 startups have raised follow-on rounds at lower valuations since early 2023, with marquee names like Cred, Meesho, OYO and Postman seeing 20-70% cuts as revenue multiples in SaaS reverted from the levels reached during the pandemic to 7–10 times for the profitable names.

Secondary and pre-IPO markets have also normalised, with investors reporting that only 6–8% of exits they track now clear at a discount, but those discounts can be steep where growth or governance are weak — again reinforcing that this is a selective and fundamentals-driven correction, rather than a crash.

At the same time, global capital is still overpaying in a few narratives. Generative AI startups raised $48–49 Bn in 2024 and in H1 of 2025 alone, and AI now accounts for over half of all VC dollars worldwide, with particularly intense competition in the US.

“India is seeing a milder version of this with over 150 native AI startups raising more than $1.5 Bn since 2020 and the India-AI mission pumping over INR 10,000 Cr into infrastructure, keeping top-tier AI infra and crossborder SaaS deals priced at a premium to historical norms,” Nag said.

Seed valuations have also proved sticky. Several datasets suggest median seed round pricing in H1 2025 around H1 2022 levels, reflecting intense competition for a small pool of top founders.

So, while 2025 has delivered a realistic reset for the late stage, over-funded categories like edtech, B2C fintech and ad-driven consumer internet, early stage AI, infra-adjacent SaaS and climate hardware remain pockets where conviction, and not funds crunch, still sets the price.

Sector Reset: In Race For The Pie

Data from 2025, which set the base for the next year, showed a clear pattern with sectors such as ecommerce ($1.7 Bn), SaaS/enterprise-tech ($1.8 Bn) and fintech ($2.5 Bn), garnering over 54% of VC funding, with fintech alone capturing more than 22% of it.

Deeptech is finally getting organised capital through initiatives like the India Deep Tech Alliance, which sits on over $850 Mn commitments as part of a broader government R&D push, even though deeptech still accounted for only about 4.5% or $0.5 Bn of the $11 Bn Indian tech startup ecosystem raised in 2025. Deeptech saw 87 deals in 2025 after 206 in ecommerce and 120 in fintech, suggesting conviction is real but still early stage. Cleantech and AI are the other structural winners, gaining spots in top 10 with 65 and 63 deals.

The risk appetite of investors cooled off structurally during the year for nice-to-have consumer narratives. These include aspirational D2C, vanity commerce, ad-subsidised B2C fintech, and Generic AI apps with weak moats as well as scaled businesses with lack of foundation.

People don’t want to invest in science projects or unproven businesses where product–market fit and unit economics are not evident. Bhammer highlighted that the collapse of high-profile companies like BluSmart and Log9 Materials – both were flagship bets in the climate ecosystem – has dented investor confidence. When companies positioned as category leaders struggle or shut down, it prompts investors to reassess assumptions across the sector.

“As a result, capital deployment has slowed, with funds choosing to pause, recalibrate and seek deeper clarity before committing fresh capital. The pullback reflects not just exit caution, but also a broader sentiment reset driven by visible failures in once-favoured sectors,” he said.

The centre of gravity for VCs has shifted decisively towards categories such as datacentres, AI, especially Agentic AI and SaaS rails, BFSI infra and compliance tech, logistics and healthcare rails, and climate-linked hardware and project platforms. Defence is another area where analysts see an incredibly high volume of investment.

LP Expectation Reset: All For Performers

India’s VC assets under management (AUM) has grown nearly fivefold in a decade to INR 4.9 Lakh Cr, driven by small domestic funds, LPs, small homegrown funds and family offices. The share of VCs in the broader private capital pool shot off from 24% to 36%, and dry powder across its sample surged 50 times since 2015, implying that the real constraint is not capital supply, but manager selection and pace.

LPs are clearly rewarding realised performance with only 48 of 169 schemes surveyed fetching at least 50% returns on called capital, while top-quartile funds boasted of a DPI of three to seven times that of the industry average, accelerating a rotation towards managers with demonstrable distribution track records, it showed.

Another structural change is the rise of domestic capital. “By 2025, around 39% of new funds had a fully domestic LP base as against 20% two years back, with Indian family offices both backing funds and making direct early stage bets,” Nag said.

The local LPs are more governance-sensitive, and focussed more on near-term cash yields compared to their offshore peers.The trend has pushed general partners (GPs) towards smaller, more specialised funds focussed on themes such as AI, climate, defence, and agriculture. It has also led to a greater use of co-investment structures and fund designs where profit share and capital recycling are linked to distributions to paid-in (DPI) capital, rather than relying only on paper total value to paid-in (TVPI) capital.

Bhammer noted another shift towards governance. LPs are now demanding board seats and be accountable like the management in companies where the capital is deployed. The emphasis is on board-level governance with presence of independent directors on the boards, instead of those appointed by the companies.

The year has seen a massive plunge in the Indian currency. This has fuelled an additional concern for international LPs. The INR has slipped from around 85 at the beginning of the year to 90.

“That implies an annual depreciation of 7-10%. Compounded over five years, that can mean a near-50% erosion in value,” Bhammer pointed out.

Fundraising Reset: Gold Rush Stays On 

New VC fund announcements sharply exceeded $13.6 Bn in 2025 from $8.7 Bn a year back. Several venture funds, particularly those backed by family offices, faced slower capital inflows, while allocations to unlisted assets moderated not solely because of valuation reset, but also because a significant share of capital had been committed during earlier allocation cycles, highlighted Aarti Gupta of DBR Ventures.

Venture capital being a long-duration, illiquid asset class, limited distributions from maturing funds constrained the ability of LPs to recycle capital into new vehicles that leads to friction across the fundraising cycle.

The year saw a proliferation of new funds, led by senior professionals spinning out from established platforms. While many secured anchor commitments, several struggled to close their targeted fund sizes, eventually settling for smaller final closes.

The dynamics reflected in both cautious LP behaviour and heightened competition for capital in the domestic VC landscape. Sentiment among global LPs towards India remained constructive, supported by the market’s predictability, scale and partnership-friendly environment, though questions remained around whether capital would flow directly into India-focussed domestic funds or through global managers building India strategies.

“There was clearly a slowdown in allocations, especially from family offices, as capital remained tied up in older funds that are yet to return full capital. At the same time, many new funds entered the market and found it harder to raise beyond anchor commitments. Globally, LPs are more open to India than before, but how that capital ultimately gets allocated is still playing out,” Gupta said.

Exit Policy Reset: Reaccleration On The Cards

Corporate India finally had a credible exit baseline, instead of one-off outliers, during the period between 2024 and early 2025.

As per analysts, growth stage and late stage funds responded by doing fewer, more concentrated bets, underwriting multiple exit paths such as domestic IPOs, crossborder IPOs, sponsor-to-sponsor, and continuation vehicles, at the entry level, and demanding cleaner governance, tighter documentation and shorter time to cash before paying up.

Flagship IPOs like Swiggy, GoDigit, and Blackbuck together added tens of billions to realised and marked-to-market value and helped push Bengaluru into the world’s Top 15 startup ecosystems in 2025.  But once India’s exit puzzle for VCs fell into place, it was clear that a meaningful share of secondary exits, especially from late stage consumer, edtech and B2C fintech companies, were clearing at 20-40% discounts, with investors openly prioritising IRR, DPI and governance over maintaining notional marks.

As a result, today’s credible pitches lead with cohort profitability, payback periods, burn multiples, and regulatory postures, rather than GMV or vanity DAU graphs. Founders arrive with cleaner cap tables, more realistic ESOP pools, and increasingly, a professional finance and legal stack in place before Series A fund-raise.

The true non-negotiables in 2025 have been audited numbers, credible paths to break even in core markets, and demonstrably institutional governance. No amount of narrative or logo slides can compensate for those anymore. So, if 2023–24 were about survival and 2025 about recalibration, then 2026 is going to be a year of disciplined reacceleration.