Top News

With the Union Budget 2026 set for February 1, India’s venture capital (VC) ecosystem stands at a pivotal juncture. After years of rapid expansion, VC funding momentum moderated in 2025, with Indian tech startups raising $11 Bn during the year and VC investments per capita touching $7.5, according to Inc42’s Annual Indian Startup Trends Report.

Overall, with a total of 126 unicorns, 147 soonicorns, 60+ minicorns, 70K+ tech startups launched to date and 57 new-age tech startups listed – India’s startup ecosystem is definitely structurally strong. However, there is enough data to showcase that the era of abundant, easy capital is giving way to a more disciplined, performance-driven startup funding environment in India moving forth.

Against this backdrop, India’s VC community is urging the government to shift its focus in Union Budget 2026 from conventional tax-based incentives for startups and announcement of future funding allocation to deeper reforms that can unlock scale-oriented growth.

Areas such as blended capital structures, access to flexible credit, deeptech R&D funding, and efficient grant execution have emerged as top priorities.

In the view of investors Inc42 spoke with, this year’s budget could prove to be a pivotal moment that could define India’s innovation ecosystem further — either by accelerating the country’s long-term startup and deeptech ambitions or leaving critical structural gaps unresolved.

Ankur Bansal, managing director, BlackSoil believes that the upcoming budget, which is slated to be announced on Sunday (February 1), must recognise that India’s funding needs have evolved beyond a pure equity-led model. What the ecosystem now needs is policy support for blended capital where venture debt and alternative credit work alongside equity investments.

“The focus should be on execution over announcements, with frameworks that enable cash-flow-aligned, sector-specific credit and stronger risk-sharing, so MSMEs and growth-stage startups can access flexible, non-dilutive capital that supports sustainable scale,” he added.

Further, VCs also flagged the recent slowdown in foreign capital inflows as a key concern. However, they pointed to the resilience of domestic investors, noting that heavy FII selling in public markets last year was largely absorbed by Indian institutions. While this points to the strength of domestic investor participation, investors believe India still lacks a deep, structured domestic funding pipeline that could further fuel private innovation.

From Bluehill.VC’s cofounder Sridhar Parthasarathy perspective, two key steps could help:

• Facilitating participation of larger domestic institutions: In the US, 401(k) investors can access private markets and benefit from returns on startups like Flipkart. In India, similar domestic investors such as Banks, pension funds, and provident funds currently have limited access. Expanding their participation would enhance returns for these institutions as well as provide long-term, patient capital.
• Creating tax incentives to channel domestic capital into innovation: Mechanisms similar to Section 54 of the Income Tax Code—where capital gains reinvested in a house receive tax benefits — could be applied to funds of funds.

“Also, there is an opportunity to allow individual investors to contribute directly to the SIDBI fund of funds. By linking this to tax benefits similar to Section 54, individuals could park their capital gains in the fund and receive exemptions, further increasing domestic long-term capital availability,” Bluehill VC’s cofounder and general partner Manu Iyer suggests.

In last year’s budget, the Indian government announced INR 1 Lakh Crore R&D Innovation Scheme and also proposed establishing a separate INR 10,000 Cr deeptech-focussed Fund of Funds to catalyse investment in early-stage, high-risk, and IP-led tech startups. However, India’s aspiration to lead in frontier tech can not be defined just by vision but calls for an ability to convert policy into accessible, scalable support for startups.

As Amit Chand, founder of early stage VC firm BYT Capital, highlighted, the real test lies in execution — particularly in speed, clarity of access, and seamless coordination across ministries.

“Deeptech will play a defining role in securing India’s technological sovereignty, strategic resilience, and long-term industrial competitiveness. To unlock its full potential, the government must take bold, outcome-driven steps to support high-risk innovation, especially where private capital alone cannot sustain the gestation cycle,” he noted.

Iyer added that while significant capital exists across schemes such as PLI, DLI, iDEX, IN-SPACe grants, the Defence Tech Fund, BIRAC, and RDI, the challenge lies in ensuring funds reach the right beneficiaries through robust verification.

While acknowledging the intent behind the EV-focused FAME subsidy programme, Iyer pointed out that the incentives were linked to batteries, with OEMs reimbursed on the assumption that this would drive supply-chain localisation in India. However, the largest beneficiaries ended up being players such as Okinawa and Hero Electric, which, he noted, did not manufacture even a single vehicle component domestically.

“Eventually, when the government reviewed this, it was found that there was zero localisation despite claims of around INR 1,000 Cr. Instead, if that capital had gone to some deserving new-age startups, they would have been far ahead in the ecosystem today. They are already ahead, but they would have had much stronger ammunition to compete against giants — both locally and globally,” Iyer added.

A growing consensus among venture capitalists is that angel investing must be democratised to allow professionals and informed small investors to participate meaningfully. While current accredited investor norms and participation limits are designed for protection, they are increasingly being viewed as premature for an ecosystem that is still evolving.

VCs argue that individuals should be allowed to invest modest amounts in startups — just as they do in public markets — while building diversified portfolios, sharing operational expertise, and profiting alongside founders. With SEBI-mandated trust and transparency mechanisms already in place, the case for broader participation with sufficient safeguards is gaining momentum.

“The next budget provides an opportunity to really impact innovation, job creation and value creation via democratising angel investing in India, by allowing professionals to contribute to the growth of the startups via angel investing. Just like individuals are trusted to invest in publicly traded corporations, they should also be able to invest modest amounts in startups with sufficient safeguards,” Inflection Point Ventures’ founder Vinay Bansa said.

While the surge in IPOs last year was positive in terms of providing liquidity and exits for early investors, Bluehill.VC’s Parthasarathy believes it has also exposed structural issues in how public market listings are being priced and executed. A strong IPO market is essential for a healthy venture and private equity ecosystem, but weak post-listing performance — with several stocks falling 20–50% after listing — has created a negative feedback loop for investors.

VCs also pointed out that aggressive pricing, driven largely by offer-for-sale participants, has impacted long-term market confidence. With limited regulatory oversight on IPO pricing, deals are often pushed through even when valuations are stretched.

While market forces do eventually correct excesses, repeated mispricing risks undermining trust and sustainability in the IPO ecosystem. Parthasarathy argues that some level of regulatory discipline, especially for large issues, could help bring sanity to pricing and protect the long-term health of the market.

“If the IPO market is not managed properly, in the long run, we will not be able to sustain it,” he added.

If implemented thoughtfully, these measures can provide startups with both patient capital and a reliable exit ecosystem, enabling India to scale innovation and deep-tech leadership over the next decade. But will Budget 2026 deliver the execution and reforms needed to turn this potential into tangible impact? The effectiveness of the announcements pertaining to the world’s third largest startup ecosystem hinge on whether these proposals move beyond intent to execution.

[Edited by Akshit Pushkarna]

The post Budget 2026: Indian VCs Want Action Rather Than Promises appeared first on Inc42 Media.