India Approves $1.1B State-Backed VC Fund to Accelerate Deep Tech and AI Startup Ecosystem

India has officially approved a $1.1 billion state-backed venture capital program designed to inject government funding into startups through private investment channels. This initiative represents a strategic commitment to financing high-risk, high-reward sectors including artificial intelligence, advanced manufacturing, and deep tech domains.

Initially announced in the January 2025 budget address by India's Finance Minister, the ₹100 billion fund received cabinet approval this week, more than a year after its initial proposal. This authorization enables the government to proceed with capital deployment across the startup ecosystem.

The program operates as a fund-of-funds model—a proven venture capital structure where government entities invest in startups indirectly by allocating capital to private investment firms. This approach has demonstrated significant success in India's market.

Performance of Previous Initiative:

The predecessor program, launched in 2016, committed ₹100 billion to 145 private funds, which subsequently invested over ₹255 billion (approximately $2.8 billion) across more than 1,370 startups, according to official government data released Saturday.

Strategic Focus Areas:

The new fund adopts a more targeted investment strategy compared to its 2016 counterpart, with emphasis on:

• Deep-tech and manufacturing startups requiring extended development timelines and substantial capital investments
• Early-stage founders and entrepreneurial ventures
• Geographic expansion beyond major metropolitan areas
• Strengthening domestic venture capital infrastructure, particularly smaller fund managers

During Saturday's announcement, IT Minister Ashwini Vaishnaw highlighted India's remarkable startup ecosystem growth, citing data showing expansion from fewer than 500 startups in 2016 to over 200,000 today. Notably, more than 49,000 startups were registered in 2025 alone—the highest annual figure on record.

Regulatory Environment Evolution:

The cabinet approval follows recent modifications to India's startup classification framework aimed at supporting deep-tech companies. New Delhi has extended the startup classification period to 20 years (doubled from previous limits) and raised the revenue threshold for startup-specific tax benefits, grants, and regulatory advantages to ₹3 billion (approximately $33 million), up from ₹1 billion.

This approval arrives just before the government-backed India AI Impact Summit, where global AI leaders including OpenAI, Anthropic, Google, Meta, Microsoft, and Nvidia will participate alongside Indian conglomerates such as Reliance Industries and Tata Group.

Market Context:

India, as the world's most populous nation and one of the largest internet markets with over one billion online users, has become increasingly strategic for global technology companies seeking user base expansion. However, the funding environment has tightened considerably.

India's startup ecosystem raised $10.5 billion in 2025, representing a 17% decline year-over-year, as investors adopted more selective strategies and significantly reduced deal volume. The number of funding rounds decreased nearly 39% to 1,518 transactions, according to Tracxn data.

Minister Vaishnaw emphasized that the new venture capital program would maintain operational flexibility, noting that "extensive consultations have taken place with all stakeholders."