Over the last decade, the most significant investor in Indian venture funds has not been a venture company, but the Government of India. It has made considerable efforts to avoid accusations of bias when selecting companies.
According to the SIDBI annual report, total commitments amounted to 11,808 crore rupees across one scheme for 153 alternative investment funds. These funds, in turn, invested approximately 25,548 crore rupees into 1,371 startups by the end of 2025. Crucially, the decision to select a founder or company was made by the professional fund manager, not the ministry.
This approach was a deliberate choice with deep historical roots in India, sharply contrasting with the actions of the world's two largest economies. Washington is increasingly turning support for industrial policy into direct stakes in strategically important companies, while Beijing has created guiding funds on an unprecedented scale, long while trying to maintain their commercial character. India, however, built an intermediary system, remaining outside the board of directors.
However, this position is now changing, subtly, through various instruments rather than one loud announcement. The Research, Development and Innovation Scheme allows authorities to acquire up to 25 percent of shares in supported companies. Under the semiconductor program approved in July, the state will directly co-finance private rounds on the same terms and in the same class of shares as leading investors. The space technology initiative worth 1,000 crore rupees maintains the old intermediary model through a professionally managed fund. The RDI and Semicon 2.0 programs go further, as the architecture now explicitly allows for state capital participation in company capitalization tables.
Thus, the question for 2026 is not whether the government should invest in startups—it already does so in significant volume, and the 'arm's-length' model has successfully fostered the development of managing funds and attracted private capital into the ecosystem. The question is whether the discipline that made this model successful will be maintained after transitioning to closer ownership.
The Fund of Funds for Startups, introduced in January 2016 with a corpus of 10,000 crore rupees, set the template for everything that followed. It itself does not invest in startups but channels capital into Alternative Investment Funds registered with SEBI. These funds are then obligated to invest several times this amount into recognized startups and make the selection decisions independently. By design, the scheme excludes the possibility of company selection. Of the 25,548 crore rupees placed by these funds by the end of 2025, 3,803 crore rupees went to 205 women-led enterprises.
The impact on the market was structural, not merely financial. Guaranteed commitments from a sovereign-backed institution gave initial managing funds the credibility to attract funds from private limited partners in a market that lacked an internal institutional LP base. SIDBI became and remains the largest single limited partner in Indian venture capital, doing so without ever choosing a company. This separation was not bureaucratic caution for its own sake, but a product of the system.
Startup India Fund of Funds 2.0, notified on April 13, 2026, with operational guidelines published on April 25, clarifies the same idea rather than replacing it. The fresh 10,000 crore rupees are divided into four categories: deep tech funds without corpus limits and with a term of up to 18 years, micro-venture funds with a limit of 400 crore rupees, manufacturing technology funds, and sector-agnostic funds. A private capital multiplier is set for each segment: 1.5 times for deep tech and 2.5 times for sector-agnostic funds. This is a precise way of saying that the state will subsidize fundamental science more heavily than categories already favored by private capital. Distributions, excluding five percent allocated to ecosystem development, return to the Consolidated Fund of India. This is state capital structured as working investment, not a grant.
The Research, Development and Innovation Scheme, valued at 1 lakh crore rupees, approved in July 2025 and launched in November, uses the same principle on a larger scale. The capital resides in a Special Purpose Fund managed by the Anusandhan National Research Foundation and passes through a two-tier structure to second-tier managing funds, initially the Technology Development Board and BIRAC, which conduct their own competitions and evaluations. Support is provided in the form of long-term loans at three-to-four percent, up to 25 percent equity stakes, or hybrid forms. By March 2026, over a hundred Indian venture firms had applied. The first five cheques were issued in May 2026 to startups in space, drones, energy storage, medical robotics, and research measurement equipment. Manish Kheterpal from WaterBridge Ventures clearly compared: RDI for the deep tech ecosystem is similar to what SIDBI was for the startup ecosystem over the last decade.
Even the bet on space followed this template. When the government allocated 1,000 crore rupees to space technology, it did not issue cheques to launch companies. IN-SPACe acted as guarantor for the Antariksh Venture Capital Fund, which is an AIF Category II with a ten-year tenure and is managed by SIDBI Venture Capital, achieving its first close of 1,005 crore rupees in November 2025 against a target of 1,600 crore rupees.
The template is consistent throughout. For most of the architecture created over the last decade, a professional intermediary stood between the taxpayer and the capitalization table. This 'arm's-length' structure is perceived as caution, but it is better understood as institutional memory.
India's venture capital industry was not born in a garage; it was created by the state. IDBI launched a venture fund in 1986. In January 1988, ICICI and Unit Trust of India jointly established the Technology Development and Information Company of India—the country's first institutional venture company, alongside the Risk Capital and Technology Financing Corporation at IFCI. The World Bank selected six Indian institutions to begin venture investments. The guidelines released that November narrowly defined venture capital, limiting it to innovative technologies from first-generation entrepreneurs, which hindered its commercial application. Public financial development institutions at the central and state levels constituted all of India's venture capital for about a decade.
This generation of institutions carried a structural problem, not a human resource deficiency. Financial development institutions that assessed long-term projects directly bore the risk of selection, industry risk, and institutional responsibility on one balance sheet, while having much lower institutional tolerance for portfolio-style failures required by venture capital. The return on institutional investments depends on the portfolio, where most positions do not work; an institution that must justify every individual decision cannot easily manage such a portfolio. Failures of that era were failures in tool design.
Intermediation through funds of funds is a direct response to this problem. The state provides capital and defines the mandate; a professional manager, interested in the outcome, with a defined tenure and profit-sharing structure, assumes the selection risk and is evaluated based on the portfolio, not on individual positions. India did not become a limited partner by chance; it achieved it by first testing an alternative.
It is important to note that between 2025 and 2026, the two largest economies decisively moved towards ownership, and India's design began to look less like caution and more like a deliberate stance.
In the United States, the Department of Commerce converted about 10 percent of Intel into a non-voting federal stake under the unpaid CHIPS Act grants. The Department of Defense acquired a 15-percent stake in MP Materials, making the Pentagon the largest shareholder in the country's sole integrated rare earth producer. Other deals followed in strategic sectors, turning what might have seemed an exception into a broader political direction. Larry Summers characterized this trend as transaction-based capitalism rather than rule-based, and the essence of this critique lies in consistency: individual negotiations are harder to standardize than a rule applied to everyone.
China took a different path to a similar result. State guiding funds, launched in 2005, numbered over 1,800 by 2021 with a cumulative target of about $1.52 trillion. However, scale did not automatically ensure efficient capital allocation. A study published in The China Quarterly showed that only 26 percent reached the target capital size, while audits and subsequent reforms revealed difficulties in attracting private capital, deploying funds, and creating exits. In December 2025, Beijing announced a National Guiding Venture Capital Fund with a target of one trillion yuan, a twenty-year term, and a focus of at least 70 percent on seed and early stages.
The latest detail represents an interesting convergence. Beijing concluded that state venture capital requires timelines roughly twice as long as private norms. India's FoF 2.0 allows deep tech funds to operate for up to 18 years and extends the recognition of deep tech startups to 20 years according to a February 2026 decree, which first defined this category. Two very different systems arrived at the same conclusion regarding patient capital, moving from opposite directions. The difference lies in who holds the pen when making the investment decision.
An honest analysis of the decade of the 'arm's-length' model is that it fulfilled its purpose and is now facing a limitation for which it was not designed. It created an internal base of limited partners where none existed, nurtured a generation of fund managers, and helped reduce the ecosystem's dependence on foreign capital. These were the stated goals in 2016, and they were materially achieved.
The constant friction point was fund deployment, a gap documented over many years, not based on any single assessment. In 2023, the Deputy Managing Director of SIDBI set sanctions of about 9,500 crore rupees against distributions of approximately 4,500 crore rupees. Policy reviews from the preceding period found a similar ratio, with distributions accounting for about 43 percent of commitments. Year-end 2025 reporting suggested an improvement in the proportion, but not its closure. Payouts depend on the managing funds' own deployment schedules, which is a feature of the structure, not a flaw, but it means that committed capital and working capital are different figures. SIDBI has since replaced the fixed payout formula with a graduated structure, allowing funds to request larger sums as actual deployment occurs, which is a system responding precisely to this friction.
The broader point is that the market changed under the instrument. Indian startups attracted $5.2 billion in the first half of 2026, 9 percent less than the previous year, while the number of deals grew by 7 percent to 501. Late-stage funding fell by 29 percent to $2.2 billion. Nevertheless, over the same six months, according to EY and IVCA, the attraction of private equity and venture capital in India more than doubled to $21.2 billion across 48 funds, while actual investments fell by 36 percent to $20.5 billion. Money is being raised into funds faster than it is being deployed. Dry powder is high and growing.
This means that additional limited partner capital itself puts pressure on a door that is already open at least at the aggregate fundraising level. The binding constraint has shifted. Now it is the willingness to guarantee complex, long-term, capital-intensive categories and visibility of exit at the end. This is precisely the gap that the transition to equity capital fills.
[ ]
