India's startup story has a mismatch at its centre. There are more startups than ever, and domestic investors have more money than ever. Yet the founders who need money first, at the seed stage, are finding it harder to raise.
A new report from Grant Thornton Bharat (GTBharat) and the Indian Venture and Alternate Capital Association (IVCA), released on Friday, says this gap is where a new group of venture capitalists can make their mark.
According to the report, India's recognised startup base crossed 2.5 lakh in October 2026, and more than half of these companies are located outside metropolitan cities. Domestic venture fundraising doubled to $5.4 billion in 2025. Over the same period, seed-stage funding dropped 37 per cent in the first nine months of 2026 as the market became more selective.
Why the Gap Favours Specialists
Large, generalist funds tend to look for proven traction and big cheques, so they rarely spend time on a two-person team in a tier-2 city. That leaves an opening for emerging managers who know a sector or region well and can back founders before the mainstream market notices them.
The report says the ecosystem is entering a phase where specialist fund managers will play a crucial role in identifying promising businesses and delivering stronger returns to investors. It also says conviction alone is not enough. It lists the priorities that will separate durable funds from one-time experiments: a clear, research-led investment thesis; fund sizes matched to realistic exit outcomes; disciplined reserves for follow-on rounds; active support for portfolio companies as they scale; and early planning for strategic sales, secondaries and IPOs.
"Emerging managers who build their investment thesis on rigorous research and independent conviction may face a tougher first fundraise, but they give themselves a better chance of succeeding over the long term. Before approaching LPs, managers should be able to demonstrate a clear investment strategy, differentiated sourcing and a pipeline of companies that fit the thesis," said Amarjeet Makhija, Partner, Grant Thornton Bharat.
The Policy Push
The report also asks for institutional backing. Its main recommendation is a dedicated pathway for first-time managers within the Rs 10,000 crore Startup India Fund of Funds 2.0. For first-time managers, the first fund is often the hardest to raise, and this would give them a credible anchor investor.
Anisha Singh, Founder & Managing Partner, She Capital, and Executive Committee Member & Co-Chair, Emerging Managers Council, IVCA, said emerging managers play an important role in identifying new sectors, backing underserved opportunities and broadening the country's investment landscape.
"The priority now must be to strengthen access to institutional capital, create more predictable pathways to liquidity and enable credible managers to scale beyond their first fund. A stronger emerging manager ecosystem is essential to the long-term depth and resilience of India's private capital markets," Singh added.
The Bottom Line
The data points one way. Indian entrepreneurship is spreading beyond Bengaluru, Mumbai and Delhi faster than early-stage capital is following it. If emerging managers can pair local knowledge with the exit discipline the report describes, they could help fund founders in smaller cities who have so far been overlooked. The report says these steps together can help emerging managers grow into trusted specialist funds that channel long-term capital into India's startup and innovation ecosystem.
With inputs from IANS