India’s tech sector needs deeper pools of risk capital

Why in the News

Seed funding for Indian technology start-ups fell 37% to $698 million in the first nine months of 2026, a second straight year of decline. India now has the world’s largest pool of developers contributing to public and open-source code. Yet the money that turns this talent into Indian-owned products is shrinking.

What is risk capital, and why does ownership depend on it?

1. What it is: Risk capital is money put into unproven ideas, accepting that most will fail, for a share of the few that succeed. It is like sowing many seeds knowing few will sprout.
2. Seed and early stage: Seed funding is a start-up’s first outside money, before the idea is proven. Early-stage funding follows once a company shows traction, meaning early customers or revenue.
3. Why ownership needs it: Product ownership is created early, when failure rates are high, so someone must back a founder’s belief in an idea before there is proof it works.
4. The takeaway: If capital dries up just when founders turn ideas into products, India’s path from capability to ownership becomes harder.

Where does India capture the value of its tech talent?

1. Jobs and salaries: India clearly captures this layer. The technology industry employs about 5.8 million people, and Global Capability Centres (GCCs), the in-house technology units of multinationals, about 2.36 million.
2. Profits and enterprise value: Indian IT companies sell services globally and keep margins and enterprise value, a firm’s total worth, in India. Export revenue splits roughly evenly between Indian providers and multinationals.
3. High-value work: GCCs that once handled support now house product engineering, artificial intelligence (AI), architecture and research and development (R&D), bringing better-paid roles into India.
4. Products and intellectual property (IP): This layer remains thin. Software products are only about $16.1 billion of India’s $282.6 billion technology industry, as estimated by the National Association of Software and Service Companies (NASSCOM).

Why is capital becoming more selective, and why does it matter?

1. Selective investors: Early-stage funding rose 27% to $4.2 billion as seed funding fell, so money is flowing to firms that have already shown traction. Each investor’s choice is rational, yet seed funding as a whole still falls.
2. Career choice: A skilled engineer can join an Indian IT firm, a global product company, a GCC or a start-up. Only the start-up offers ownership, with far more uncertainty.
3. Infrastructure is not capital: India has invested in research centres, incubators, public funding programmes and R&D facilities, but these cannot substitute for capital willing to accept early failure.
4. Disciplined, not indiscriminate: Most early ideas fail, so funding should stay disciplined. The need is for deep pools that back ideas before the evidence is overwhelming.

Challenges

1. Two-year seed slump: Seed funding had already fallen 30% in 2025, so the thinning of first money is a trend, not a blip.
2. Pull of GCCs: High salaries and global work at GCCs draw away engineers most able to found product companies.
3. Services-heavy industry: India is far stronger in technology services and global delivery than in building and owning globally scaled products.
4. AI uncertainty: It is unknown whether AI will mean India needs more developers or fewer, which clouds a talent-led strategy.

Way Forward

1. Domestic long-term money: Let more pension and insurance savings flow into regulated venture capital funds to deepen domestic risk capital.
2. Seed-stage focus: Direct public fund-of-funds commitments towards seed-stage funds rather than later rounds that private investors already serve.
3. Government as first buyer: Let ministries buy from Indian product start-ups, giving them the early customers investors look for.

Conclusion

India’s technology story now turns on ownership rather than talent, and ownership depends on capital willing to back ideas before they are proven. Whether seed funding recovers from its slide is the marker to watch.

Government initiatives for start-up risk capital

1. Startup India: Launched in 2016 by the Department for Promotion of Industry and Internal Trade (DPIIT), it has helped make India the third-largest start-up ecosystem, with about 1.9 lakh recognised start-ups.
2. Fund of Funds for Startups: Run by the Small Industries Development Bank of India (SIDBI), it invests in Alternative Investment Funds (AIFs), which back start-ups, rather than in firms directly.
3. Startup India Seed Fund Scheme: DPIIT’s scheme routes seed money through selected incubators for proof of concept, prototypes and market entry.
4. Research, Development and Innovation (RDI) Scheme: A Rs 1 lakh crore window, approved in 2025, offering long-tenure, low or nil interest loans and equity for private research.

Matching Previous Year Question

“[2025] With reference to investments, consider the following: I. Bonds II. Hedge Funds III. Stocks IV. Venture Capital How many of the above are treated as Alternative Investment Funds? (a) Only one (b) Only two (c) Only three (d) All the four ANSWER: (b)”