India is booming — GDP growing, unicorns multiplying, IPO markets heating up. So why are American venture capital firms hesitant to write the large cheques they once did? The numbers tell a sobering story. VC funding into Indian startups declined 11% in the first half of 2025, with the total falling to $5.7 billion from $6.4 billion in the same period of 2024. More tellingly, the number of deals barely changed — the drop was almost entirely driven by fewer large transactions. In February 2025, there was not a single VC deal valued at $100 million or above. The problem is not India’s potential. The problem is a structural mismatch between what US VCs need and what India currently offers.
1. The AI Gravity Pull: Capital Is Staying Home
The most immediate force pulling US VC dollars away from India is the explosive AI investment cycle back in the United States. AI accounted for 65% of all VC capital deployed in the US in 2025 — but only 35% of deal count — meaning capital is concentrating in a handful of massive, US-domiciled AI companies. Mega-deals like Scale AI’s acquisition by Meta and multi-billion-dollar seed rounds for foundational model companies are consuming the bulk of large fund allocations. For US VCs managing capital-hungry AI portfolios at home, deploying $100M+ in an Indian startup is increasingly an opportunity cost question — and India is losing that battle. As one Accel partner bluntly noted, India does not yet have an AI-first company generating $40–$100 million in annual revenue in the timeframes that global AI companies are achieving.
2. The Exit Problem Has Not Gone Away
The core anxiety for any US VC writing a large cheque is: how do I get out, and at what return? India’s exit market, while improving, still relies overwhelmingly on public markets — IPOs account for roughly 70% of PE/VC exit value. Until recently, Indian companies faced strict revenue and profitability thresholds to list domestically, and could not IPO on overseas exchanges before listing at home. While some of these rules have relaxed, the practical reality is that US VCs depend on acquisitions, secondary sales, and cross-border M&A — and India’s M&A ecosystem for tech companies remains thin. Discounted secondary transactions — at 20–40% markdowns — have become common, with cases like Eruditus, Postman, and Exotel serving as cautionary tales for late-stage investors. Funds that deployed large cheques in 2019–2021 are now sitting on illiquid positions, and that memory is shaping current behaviour.
3. The Valuation Hangover from the Zero-Rate Era
During the era of near-zero US interest rates, SoftBank, Tiger Global, and Sequoia Capital India poured billions into Indian startups at sky-high valuations with limited regard for unit economics. When rates rose, the music stopped. SoftBank’s India portfolio — including recently listed Meesho and IPO-bound OYO — faced markdowns in the range of 20–70% in 2025. Tiger Global has since recalibrated its India strategy, pivoting to highly selective, late-stage bets. Their pullback has left a vacuum that domestic backers are only partially filling. For US VCs now operating under stricter LP pressure, the lesson has been absorbed: large, undisciplined cheques to Indian startups without clear paths to profitability do not generate the returns promised. The era of writing large cheques to unproven concepts or cash-burning experiments appears largely over.
4. Currency Risk Eats Returns
A structural problem that rarely makes headlines but quietly undermines large US VC investments in India is the rupee’s persistent depreciation against the dollar. When a US fund exits an Indian investment at a healthy rupee-denominated return, that profit can shrink considerably after conversion. This currency drag has historically deterred large-fund managers from building concentrated India positions, since the effective dollar IRR is meaningfully lower than the nominal Indian-market IRR. Indian early-stage venture funds delivered a 26.9% IRR in rupee terms over the four years to March 2024 — impressive on paper. But global LPs evaluating dollar-denominated returns apply a significant haircut, which dulls the appetite for large commitments.
5. India Lacks the Foundational AI Layer US VCs Want to Back
In 2025, US VC is essentially synonymous with AI investment. But India’s AI ecosystem, while growing rapidly, is primarily application-led rather than foundational. India lacks large homegrown foundational model companies, and building the research depth, talent pipeline, and patient capital needed to compete at that layer will take years. This is not a criticism — it is a reflection of India’s comparative advantages lying in services, distribution, and consumer tech rather than compute-intensive foundational AI. But US mega-funds chasing the next OpenAI or Anthropic are not finding those bets in Bengaluru or Delhi-NCR, and so the biggest cheques are staying in San Francisco.
6. Investor Participation Has Narrowed Dramatically
The contraction of US VC activity in India is also partly a function of what is happening domestically in the US venture industry. Between 2022 and 2024, the number of active US VC funds plummeted from 1,650 to 538 — a consolidation of historic proportions. Established firms raised 79.4% of total US VC capital in 2024, the highest concentration in a decade. With fewer, larger US funds doing fewer, larger deals — and those deals increasingly concentrated in AI at home — the bandwidth for international emerging-market bets has simply contracted. Investor participation in India funding rounds fell from roughly 6,800 investors in 2024 to around 3,170 in 2025, a 53% decline.
7. Profitability Benchmarks Have Replaced Growth at All Costs
Perhaps the most durable shift is cultural. The capital flowing to India now — whether from US funds or others — comes with fundamentally different requirements than it did in 2019. The pattern is clear: large capital is flowing almost exclusively to category leaders with defensible moats, proven unit economics, and near-term profitability or IPO readiness. Investors are scrutinising the use of funds far more closely, akin to how it happens in public markets. This is not bad for India’s startup ecosystem in the long run — it is building more sustainable companies. But it does mean that the number of Indian startups that can clear the bar for a US VC’s $100M+ cheque is limited, and the competition for those deals is intense.
The Silver Lining
None of this means US VCs have abandoned India. Accel participated in 34 Indian funding rounds in 2025, remaining one of the most active investors. Domestic Indian capital is stepping up, with India-based investors accounting for nearly half of all funding activity. Sovereign wealth funds and India-focused growth funds are filling part of the gap left by US mega-funds. And India’s improving IPO pipeline — with companies building toward public markets with genuine revenue and profitability — is gradually creating the exit infrastructure that large US funds need to feel confident committing at scale.
The structural story of India remains compelling. But for US VCs writing $100M+ cheques, the short-term calculus is being shaped by AI’s gravitational pull at home, unresolved exit liquidity questions, the scars of the valuation era, and an honest assessment that India’s startup ecosystem — brilliant as it is — has not yet built the foundational technology companies that attract the largest pools of global venture capital.
That reckoning, uncomfortable as it is, may ultimately be what pushes India’s ecosystem to build deeper, more durable, and more globally competitive companies.
Sources: YourStory Research, TechCrunch/Tracxn, Inc42, Morgan Stanley Investment Management, Lexology, Outlook Business, PitchBook/SG Analytics (2025)
