VC Insights | Issue# 9 [January 14, 2025]
What?
2024 saw a rise in the quantum of VC investments that poured into the Indian startup ecosystem. Precisely, the number rose 20% from $10 Bn in 2023 to $12 Bn in 2024. Interesting changes underlined this shift – from a rise in the number of IPOs, focus on profitability and sustainability, increasing consumer spends, rise of quick commerce, and AI / GenAI. Notably, the VC ecosystem saw an exodus of partners and fund managers, launch of new, niche funds, fund size recalibrations, unique fund management fee structures, and more. Recently, Inc42 explored the evolving landscape of the Indian VC ecosystem and the potential changes 2025 may bring. Let us delve deeper.
Current Scenario and Path Ahead
A lot of Indian VC funds are undergoing leadership changes and consolidation following the exits of several partners and fund managers. This has enabled the outgoing partners and fund managers to start new funds by leveraging their network and experience, resulting in an influx of fresh players in the Indian VC ecosystem. The majority of new funds are focused on early-stage investments, with AI emerging as the most preferred sector. Additionally, many of these funds are micro VCs, and the oversaturation in this group is expected to stabilize in 2025 as weaker or less competitive players are phased out.
Certification compliance (to come into effect from May 2025) and other regulatory compliance issues plagued Indian VCs in 2024 and this coincided with the fund closing cycles at some of the leading firms, which have been active since 2012. Moreover, profitability, sustainable growth, pre-IPO rounds, and secondaries, have become increasingly popular with Indian VCs. However, some believe that this has raised the expectations that startups will provide successful exits (another reason why new funds are firming up) and fear the bubble may burst sooner than later.
Emergence of Pre-IPO Rounds
Pre-IPO rounds in the Indian startup ecosystem gained prominence in 2024 and are poised to see further growth in 2025. A lot of late-stage funding rounds are now considered as pre-IPO rounds, given they come with exit conditions from investors. Accordingly, startups are focusing on sustainable, market-friendly valuations, with a commitment to an IPO within two years. These late stage rounds help startups build a strong foundation before going public. In fact, Some of the startups have also started behaving like public companies, following protocols that listed companies follow.
The VCs too have begun scrutinizing the use of funds closely. At the pre-IPO stage, startups are under pressure from investors to comply with filing and disclosure regulations. This has led to a shift in hiring trends, with a focus on utilizing the raised funds to bring in experienced finance and operations professionals, rather than investing heavily in tech talent. Previously, companies like BYJU’S, OYO, Meesho, PhonePe, Paytm, CRED, Ola Consumer, and other major unicorns raised large rounds at Series E or Series F stages. However, the pre-IPO wave has nearly eliminated these stages from the market.
Rise in Qualified Institutional Placements (QIPs)
In 2024, QIPs gained significant traction in India, with notable examples including Zomato’s INR 8,500 Cr raise, Nazara’s INR 855 Cr preferential placement, and Zaggle’s INR 595 Cr QIP. Overall, listed companies raised over INR 1 Lakh Cr through QIPs in 2024. In 2025, new-age tech companies that went public between 2021 and 2023 are expected to continue this trend.
The rise in QIPs can be attributed to the high liquidity in the mutual fund industry, which has seen positive net equity inflows since March 2021, with SIP contributions crossing INR 2,500 Cr for the first time in October 2024. The strong market performance has also inflated valuations, making equity dilution more appealing for promoters than raising debt. The market remains favorable for high valuations, as demonstrated by the premiums achieved by the likes of MobiKwik, BlackBuck, and Swiggy in 2024, suggesting more companies will seek domestic institutional capital through QIPs.
M&As
While VC investments jumped 20% in 2024, the M&A landscape was rather grim. The Indian startup ecosystem entered into a consolidation phase and recorded just 71 M&A deals, the lowest number since 2014. While the larger, listed startups and conglomerates were in a consolidation mode and waited for the right time, capital inflow favored the public markets, further impacting the M&A landscape. In 2025, the focus is expected to shift towards strategic investments that could unlock long-term value for listed companies and large startups with IPO ambitions. Additionally, the significant growth of Private equity (PE) activity in India in 2024, with over $31 Bn raised across 1,000+ deals, weighed in on the low M&A count. Startups in healthcare, green energy, and manufacturing sectors are now prime targets for PE-backed corporations and conglomerates.
Surge in Secondary Deals
There was a strong momentum in secondary deals in the Indian startup ecosystem in 2024, with VCs offloading stakes in startups, such as Capillary Technologies, ixigo, Urban Company, Porter, and Pocket FM. As per a survey by Inc42, 60% of Indian startup founders reported increased enthusiasm for secondary transactions. This reflects a preference among VC and PE firms to back established tech companies by entering their cap tables later. The trend is expected to continue in 2025, as older funds from 2012-2013 near their expiry dates, prompting VCs to exit portfolios and return capital to Limited Partners (LPs).
New Fee Models and Fund Structures
2024 saw Alternative Investment Funds (AIFs) come up with new and unique fund management fee models, as well as change in fund structures. Leading VC Peak XV Partners launched the Peak XV Anchor Fund, backed by its internal balance sheet, signaling a shift in strategy for mature VC firms in India. This evergreen or rolling fund allows Peak XV to expand its mandate beyond India and further establish its independence from the US-based Sequoia Capital, following their split in 2023.
Rolling funds, which rely on a firm’s profits rather than external fundraising, reduce the pressure on fund managers to raise new funds or engage with LPs, and offer the flexibility to explore non-core sectors or geographies. Such funds do not have fixed sizes, grow over time, and are more accessible to investors. With gains from IPO exits in 2024, similar structures may be adopted by other legacy VC firms.
Additionally, Indian VC funds are experimenting with fee models (such as the “2 and 20” model) tailored to domestic LPs and market needs, creating competitive advantages for fundraising. Such innovations are expected to grow as firms seek differentiation in the evolving VC landscape.
The Rise of Micro VCs and AI
Micro VCs offer specialized funds that are niche and have a special area of focus, often leveraging the expertise of the fund manager in a specific area or addressing market gaps. Over the past three years, India has witnessed exponential growth in new funds, particularly in the early-stage segment where micro VCs now resemble angel funds. Much of this activity stems from opportunities in the generative AI revolution, benefiting not just AI-native startups but also those leveraging data advantages to tackle niche challenges or underserved markets. In fact, the AI boom has captured the attention of entrepreneurs, General Partners (GPs), and fund managers alike, and is driving significant growth in micro VC funds.
The impact of AI extends to sectors, such as fintech, SaaS, ecommerce, consumer services, and healthcare, with many startups positioning themselves as AI-driven. We expect the launch of more AI funds to support early-stage AI startups in 2025. However, the rise of micro VCs has raised concerns about market froth, as inexperienced GPs aim to capitalize on the trend. While a bubble hasn’t formed yet, the influx of investors without sufficient market depth could lead to challenges in due diligence by late 2025 and invite more regulatory scrutiny.
Other Predictions
Inc42 predicts several other key trends for the Indian VC ecosystem in 2025. PE firms are expected to focus on opportunities in the education and healthcare sectors. SEBI’s new certification rules could disrupt certain AIFs, while VC firms facing fundraising challenges might shut down operations. Leadership changes and partner exits are likely to persist across the industry and portfolio mergers will likely continue between legacy VC firms. Additionally, unicorn startups are anticipated to bring more domestic investors onto their cap tables, reflecting a shift in investment dynamics.
Thoughts
The year 2025 is expected to witness a rise in pre-IPO rounds, QIPs, M&As, strategic bets, secondary deals, and micro VC funds targeting specific sectors like AI. Apart from newer fund structures and fee models, we expect recalibrations in fund sizes (similar to that of Peak XV) to continue based on slowdowns in growth- and late-stage deals, and the increasingly complex regulatory / compliance requirements for VCs in the country. There was a rise in seed- and early-stage investments and IPOs in 2024, indicating a shift towards building sustainable, fundamentally strong, and profitable businesses, and we expect the momentum to continue.
The larger VC firms have been quick to adapt to the micro VC boom by launching smaller funds or accelerator programs. Programs, such as Chiratae Ventures’ Sonic and Peak XV Partners’ Surge, exemplify this strategy, supporting early-stage startups with targeted funding and mentorship. Such programs are expected to gain prominence in 2025.
In 2025, AI remains an untapped opportunity, with significant room for innovation and growth, particularly in India. Applications built on top of AI models (large and small language) and agentic AI will attract the eyes of larger VCs, as well as micro VCs in India. In terms of strategic acquisitions, globally, a new trend emerged in 2024, particularly in AI – major tech companies formed innovative partnerships with AI startups, bringing in top executives and gaining access to cutting-edge technology without fully acquiring the startups. Examples include, Microsoft and Inflection AI, Amazon and Adept, as well as Covariant, and Google and Character.AI. See more on these partnerships here. We expect Indian AI startups to enter into such novel partnerships with tech giants.
Additionally, in the past two years, there has been a rise in corporate-backed micro VC funds, which differ from typical investment funds as they often serve as pathways for future acquisitions. Leading companies like Tata Consumer, Marico, and Emami have developed strategies where their investments in startups frequently lead to profitable acquisitions. We expect to see more such corporate-backed micro VC funds come up in 2025.
Lastly, sectors like fintech, enterprise SaaS (driven by AI-first solutions), and consumer services, along with emerging sectors such as semiconductors, cleantech, and spacetech, attracted investor attention in 2024, and the trend is likely to continue into 2025. The Indian VC landscape in 2025 is poised to be defined by innovation, consolidation, and a focus on investments in profitable, sustainable, and scalable businesses.
If you are interested to learn more, feel free to check out this coverage by Inc42.
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Acronyms used in the blog that have not been defined earlier: (a) Venture Capital (VC), (b) Billion (Bn), (c) Initial Public Offering (IPO), (d) Artificial Intelligence (AI), (e) Generative AI (GenAI), (f) Crore (Cr), (g) Systematic Investment Plan (SIP), (h) Mergers and Acquisitions (M&A), (i) United States (US), (j) Software as a Service (SaaS), and (k) Securities and Exchange Board of India (SEBI).