
June 26, 2025
The Great VC Shakeout: Lessons for India from the U.S.
Venture Landscape
Context
Chris Harvey’s compelling analysis on the dramatic
contraction in the U.S. venture capital (VC) market
has set the stage for a crucial reflection.1
The U.S., long considered the gold standard for venture
capital ecosystems, is now undergoing a fundamental
reshaping. For India, this shift offers timely lessons
and a unique opportunity to pre-emptively strengthen
its own venture landscape.
U.S. VC Landscape: A Cautionary
Tale
The American venture capital industry is undergoing
a phase of consolidation. Between 2022 and 2024, the
number of active U.S. VC funds plummeted from 1,650
to 538, a startling contraction.2 It is also
pertinent to note that the tally of VCs investing in
US-headquartered companies dropped to 6,175 in 2024
from its peak of 8,315 in 2021.3
This is anticipated to be more than a cyclical downturn
and signals a seismic realignment of the private funds
ecosystem. Key developments include:
-
Capital Consolidation: Larger
funds are absorbing the lion’s share of Limited
Partner (LP) commitments, crowding out smaller players.
Large -funds (>$500M) captured 67% of capital
despite constituting just 7.4% of vehicles closed.
Further, established firms raised 79.4% of the total
capital raised in 2024, which is the highest concentration
in the last decade.4
-
Fund-of-Funds (FoF) Activity:
Mega-funds are actively seeding specialist General
Partners (GPs) to manage niche investments.
-
Flight to Quality: LPs are prioritizing
performance, governance, and thematic clarity over
generalist approaches.


Strategic Lessons for Indian VCs
India stands at a critical inflection point. While
liquidity has improved and startup enthusiasm remains
strong, Indian VCs, particularly emerging managers,
must proactively institutionalize to avoid a similar
shakeout.
Here’s what must happen:
-
Sharpened Investment Theses:
Generalist models will increasingly falter. Funds
must articulate unique sectoral (e.g., deep-tech,
agritech, climate), geographic (e.g., Bharat, Tier-2),
or stage-based (e.g., seed to scale) insights.
-
Institutional Practices: From
compliance to capital calls, emerging funds must
embrace global best practices.
-
Value Beyond Capital: LPs now
expect funds to offer strategic support, ethical
alignment, and environmental, social, and governance
(ESG) insights, not just capital.

A Call to Action: What Indian Institutions
Must Do
Government-linked entities and regulatory bodies
must play a catalytic role:
-
Small Industries Development Bank of India (SIDBI)
should redesign its Fund of Funds program to selectively
back first- and second-time managers with thematic
sharpness and ethical rigor.
-
Life Insurance Corporation (LIC) can emerge as
a transformative LP by allocating part of its alternative
investment portfolio to high-governance VC funds
with ESG compliance.
-
Securities and Exchange Board of India (SEBI) &
Department for Promotion of Industry and Internal
Trade (DPIIT) should create regulatory sandboxes
for experimentation in fund structures: hybrid funds,
cross-border vehicles, and frontier-tech mandates.
VCs and Artificial Intelligence
(AI): Revolutionizing Governance
The future of venture capital governance lies in
AI integration. Forward-looking GPs are already deploying
AI systems to:
-
Monitor portfolio performance across granular
metrics such as revenue quality and momentum, customer
economics product engagement etc.
-
Ensure ESG and legal compliance.
-
Track real-time disclosures and ethical behavior.
Such systems enhance transparency, enable dynamic
LP reporting, and improve trust—particularly for
institutional LPs bound by international frameworks.

Reframing Capital for India’s
Entrepreneurial Leap
India’s dream of becoming a $5 trillion economy
will be powered not just by unicorns, but by capital
that is principled, long-term, and impact-oriented.
This moment calls for capital with conscience, platforms
that blend financial sophistication with ethical architecture.
Based on current trends and historical insights, here
are three shifts that could shape the future of Indian
VC ecosystem.
1. India Needs Its Own ‘First Cheque’
LP Movement
Just as angel investors take the bold first bet on
startups, the Indian government—especially through
SIDBI’s Fund of Funds—must play the same
catalytic role for first-time fund managers. With over
a million new founders emerging in the last decade,
India’s next startup leap hinges on empowering
local VCs who deeply understand grassroots problems.
These early-stage backers are best positioned to support
founders before institutional capital steps in.
2. The Rise of Operator-Led Capital Is Inevitable
In mature markets like the U.S., founders are increasingly
choosing funds led by former entrepreneurs—those
who’ve built, scaled, and exited businesses. This
trend will define India’s VC future as well. Operator
VCs offer more than money; they provide playbooks for
GTM, hiring, regulatory navigation, and strategic fundraising.
In the coming decade, “capital-plus-operational-value”
will become the gold standard.
3. From Quick Exits to Long-Term Ecosystem
Building
The capital landscape in India is shifting. Traditional
equity investors are redirecting allocations toward
real estate, Portfolio Management Services (PMS), and
Category II/III Alternative Investment Funds (AIFs).
According to SEBI data, Category II AIFs— which
includes real estate and private equity—grew from
₹9.54 lakh crore in September 2023 to ₹13.58 lakh crore
by March 2025, a 42% jump. Meanwhile, Category III AIFs
focused on listed equities and derivatives saw a 58%
year-on-year increase, reaching ₹2.3 trillion by March
2025.5 Instead of chasing quick exits, this
capital should be mobilized for patient, long-horizon
investments—those that allow Indian founders to
build enduring, industry-defining companies.

At Nishith Desai Associates, we are proud
to support this evolution—through law, innovation,
and purpose-led structuring.
Authors:
Written by
Dr. Nishith Desai, Founder, Nishith Desai Associates
Assisted by
Pratekk
Agarwaal, Founder & GP, GrowthCap Ventures and AI
Funds Team
Governance Team
You can
direct your queries or comments to the relevant member.
1https://www.linkedin.com/posts/harveyesq_the-vc-industry-is-undergoing-a-transformational-activity-7342349649057370112-IU8I
2NVCA Yearbook 2025, Page 8. https://nvca.org/wp-content/uploads/2025/03/2025-NVCA-Yearbook.pdf
3https://www.ft.com/content/7a787423-9466-4e55-8c0e-8811cfe44dd3
4Pitchbook NVCA Venture Monitor, Page 31. https://files.pitchbook.com/website/files/pdf/Q4_2024_PitchBook-NVCA_Venture_Monitor.pdf
5https://economictimes.indiatimes.com/markets/stocks/news/promoter-pe-vc-selling-crosses-rs-40000-crore-in-2-weeks-red-flag-for-nifty-bulls/articleshow/121922164.cms?from=mdr
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