As India’s FDI Plunges 96%, Startup Ecosystem Enters Reset Mode
The Indian startup ecosystem is set to face a stark reality as the country’s net foreign direct investment (FDI) dropped by a whopping 96.5% in FY2025. According to the RBI, it fell from $10.1 billion the previous year to just $353 million in May. The FDI has been on a steady sliding track since 2019. The drop was attributed to increased repatriation, with $49 billion withdrawn from India in FY25, compared with $41 billion the previous year. The outflows are substantial due to numerous private equity sales and initial public offerings (IPOs). Meanwhile, AI startups in the country raised $780.5 million in 2024, up from  $280 million in 2023 and  $560 million in 2022. While cautious investor sentiment and economic uncertainties drove the funding market, the growth in funding in 2024 reflected a strong interest in scalable AI applications across sectors. The decline in FDI and cautious investment scenarios, however, raises concerns about India’s AI startup funding environment, even as it remains at the forefront of the country’s tech ambitions. Industry leaders suggest a strategic reset rather than a wholesome retreat. “The 96% drop in net FDI isn’t a retreat — it’s a reset. Global capital is not exiting India’s tech ecosystem but reassessing entry points, risk thresholds, and long-term return profiles in light of shifts like AI platformisation and digital sovereignty,” Greyhound Research CEO and chief analyst Sanchit Vir Gogia said in conversation with AIM. A recent Greyhound Fieldnote details how a European AI platform evaluating expansion into India halted application layer investments in favour of long-term infrastructure for AI agents. Similar trends are visible across sectors, signalling a measured and focused shift towards meaningful growth supported by AI. Despite India’s digital transformation and a remarkable 8.2% GDP growth over four years, industry leaders like Mohandas Pai of Aarin Capital warn that regulatory burdens, excessive documentation and tax complexities deter investors. “India must improve regulations to ease the process for investors and stop harassing them,” he added, particularly regarding income tax assessments. Commenting on the drop in FDI, Pai told AIM that much of that money was invested earlier and is now being withdrawn. “These exits are considerable, but as long as the inflows continue, the net flow may fluctuate based on the amount of money going out,” he added. He further noted that global markets have faced high interest rates and geopolitical challenges, making it difficult for large funds to enter India. Pointing fingers at the government, Pai noted that not much has been done by the government to favour the sector. “I think it is important for regulators like the RBI and SEBI to ease the process of accessing funds,” he said. Shift in Investor Sentiment According to Greyhound, 71% of founders in India’s Deep Tech ecosystem believe that investor expectations are shifting from a focus on speed to an emphasis on specificity. “The slowdown in Deep Tech funding is not a red flag — it’s a realignment. AI is rewriting the rules of capital efficiency, product maturity, and defensibility,” Gogia said. Investors increasingly lean towards businesses with strong technical capabilities and the potential for scalable applications. Greyhound Research asserts that this change is vital for India’s transition from merely a surge of startups to realising significant strategic innovation. Pivoting to IPOs With big VCs evading the Indian market, Indian startups increasingly turn to IPOs as a strategic capital route. The Greyhound Founder Pulse 2025 reveals that 63% of IPO-ready tech startups in India actively engage with global asset managers, despite the lack of new FDI. The founders use IPOs to attract long-term capital, enhance governance, and expand their international investor base. “As AI-native and SaaS-first companies mature, they are accessing capital markets earlier to align with global peers,” Gogia said, noting that this trend fosters greater discipline among founders, who now view IPOs as a means to build with a public mindset from day one. “Additionally, as FDI evolves towards strategic participation, IPOs serve as a confidence mechanism, showcasing product-market fit to institutional and retail investors.” Unlike before, Gogia explain that 64% of surveyed AI startup leaders noted that investors are asking more focused questions about explainability, computing economics, and policy alignment. This change has led to fewer term sheets but improved founder-investor alignment, allowing promising ideas to connect with suitable long-term capital partners. However, following a three-month hiatus, the primary market for Indian equity capital indicates a comeback. Seven companies are set to launch IPOs in May, and another 10 to 12 intend to enter the market in June. Fintech unicorn Moneyview has joined the rush to launch an initial public offering, looking to leverage the growing Indian startup ecosystem and booming IPO market. According to the Economic Times, the startup, backed by Tiger Global, has enlisted Axis Capital and Kotak Mahindra Capital to help raise over $400 million. “India’s tech IPOs are rising not because funding dried up, but because founders are diversifying their capital stack. In the face of recalibrated FDI and late-stage VC caution, IPOs offer strategic liquidity and brand elevation,” Gogia emphasised. Greyhound Founder Pulse 2025 has found that 57% of founders choosing to pursue IPOs consider it a strategic decision to align capital with public visibility, particularly within the enterprise SaaS and fintech sectors. The CEO added that this approach should not be seen as a substitute for foreign direct investment (FDI) but rather as a complement to the evolving landscape of India’s capital markets. In another example, according to a Greyhound Fieldnote from a Mumbai-based enterprise automation company, the leadership team characterised their IPO as a “growth enabler, not an exit strategy.” The listing facilitated new CXO contracts and assisted in recruiting top tech talent. “While compliance burdens increased, so did credibility. The company continues to attract global interest, not because it went public, but because it proved it could perform publicly. This is the kind of maturity FDI investors are watching for — and will likely reward in the next cycle,” Gogia concluded.
‘The slowdown in Deep Tech funding is not a red flag — it’s a realignment. AI is rewriting the rules of capital efficiency, product maturity, and defensibility.’
‘The slowdown in Deep Tech funding is not a red flag — it’s a realignment. AI is rewriting the rules of capital efficiency, product maturity, and defensibility.’
["FDI drop", "Startup ecosystem"]
["Go", "API", "AI", "digital transformation", "Scala", "Git", "RAG", "Aim", "Startup ecosystem", "ViT", "FDI drop", "R"]
["AI", "Aim", "RAG", "R", "Go", "Scala", "Git", "API", "ViT", "digital transformation"]
Smruthi brings over two years of experience in reporting on the global energy industry. They hold a Master's Degree from the University of Leeds in International Journalism and a Bachelor's Degree from Christ University in Media Studies, Economics and Political Science.