Funding winter gives way to hyper-active VC ecosystem

New funds flood in but geopolitical concerns remain

Bengaluru: There has been a notable rise in the number of new venture capital (VC) funds announced in the last two quarters, along with an increase in funding amount. This signals a potential recovery from the last several quarters of tepid investing in startups.

Over 25 funds have been announced by VCs in the October 2024 to March 2025 period (H2FY25), against only around 10 launched in the same time period of the previous fiscal. Almost $8 billion has been invested by private equity (PE) firms and VCs in Q4FY25 (January-March 2025), up from $7.3 billion in the Q4FY24, according to data by Venture Intelligence.

“In response to evolving market conditions and liquidity demands from limited partners (LPs), many general partners are creating new fund structures. This includes continuation vehicles and deal structures aimed at accelerating deployment of capital, which may also contribute to the surge in newly announced funds,” said Neha Singh, co-founder, Tracxn.

Singh noted that there is potential for growth, driven by pent-up demand and improving macroeconomic conditions. At the same time, VC investors and experts also pointed to new challenges such as adjustments in fund sizes, potential overcrowding, and headwinds from US trade policy shakeups.

“The global market correction initiated in 2022 has acted as a crucial test for VC portfolios worldwide,” said Pranav Pai, Founding Partner and Chief Investment Officer at 3one4 Capital.

While some firms have been able to demonstrate consistent performance, others including top-tier global managers have recalibrated, trimming fund sizes and adjusting fee structures in response to market realities. The fundamentals of capital compounding apply universally; no firm is immune to the constraints that determine sustained top-tier performance, stated Pai.

One recent example is Peak XV Partners reducing the size of their $2.85 billion fund by 16%, or $465 million.

Another trend is the emergence of micro VC funds, particularly in India. The competition amongst funds may even factor into sluggish fundraising, particularly for smaller or emerging managers, warned Singh.

Over-supply in the market

Parag Dhol, General Partner at Athera Venture Partners, cautioned, “The number of people working in the VC segment is considerably more than the opportunity deserves. There is more competition than there should be. Look around and ask how many of them have had an IPO (initial public offering) exit, or something meaningful to show in the market even after a decade. There is clearly an oversupply of capital, some of which will settle down over time. While there are people doing several deals, there also remains caution in the wind.”

Analysts and VCs also noted the uptick in late-stage investments, which may be due to a preference by LPs towards private equity and midmarket funds.

“Thanks to those companies that have listed, people are beginning to see their money back. Some of these companies have done well on the exchanges as well, so the questions regarding money returning from India are now becoming less severe than earlier. Another factor is lack of choice, thanks to China being kind of closed. There is global caution as well, but much more interest in India than before,” Dhol explained.

While the long-term funding deployment for FY26 looked steady, the recent tariff announcements have led to global volatility, which poses significant risk.

However, for now, the ecosystem is optimistic. “When companies went public and the market was doing well, VCs got exits and are today sitting on massive capital. They have new funds already signed off or partially committed. VCs consider this the best time for investing - because now is when we get them cheap and right. When the market turnaround happens, we will be in the opportune space to gain from that,” said Abhijeet Pai, co-founder at Gruhas Venture Capital.