India’s turn to test the VC cycle

This article is authored by Aditya Singh, co-founder and partner, All In Capital.

Artificial Intelligence (AI) can bring a change. Deep technology can be tactical. Indian people can increase consumption for years. People who bet their money on all three simultaneously can expect losses.

AI (iStock)

The story of venture capital (VC) in history teaches us an unpleasant truth: Sometimes it’s the technology that is good but the time is bad.

Indeed, the Internet changed the world. However, the American venture funds established at the peak of the dot com boom didn’t take benefits from that. Cambridge Associates commented that American VC funds created in 1999 continue to show a negative overall internal rate of return (IRR) even after years. It should be noted that 2021 and 2022 American VC funds established in the years of extreme supply of money and high valuations started to show median net IRRs of around 1% only now.

Due to the fact that people have high technology in their hands does not mean that they will profit from their investments. The market price, competition, and follow-on financing are also important.

It is concerning that India seems to be slipping into certain times of old, but this has nothing to do with the slowing down of Indian entrepreneurship. It should be kept in mind that three major developments – namely, AI, deep technology, and consumer brands – are taking place at the same time. All of these innovations are leading to the concentration of capital in their respective segments while requiring businesses to prove their high market value.

In brief, AI is the first distortion in question.

The debate about the reality of AI has ended, and now we only wonder whether the financing received by companies in the field is reasonable given their market price.

As Sam Altman put it, investors are "over-excited about AI," even though he believes AI is one of the most revolutionary technologies of the last decades.

Check out the situation of the American VC that rose to the occasion to check the status of where AI stood. In 2025, AI accounted for 65.5 % of the US VC deal volume. The remarkable figure of 88.8% of the US VC deal volume went to AI in Q1 2026. In 2025, the US invested around $222 billion in AI whereas the entire VC market of India in the same year stood at around $16 billion.

We are trying to play a game where our entire ecosystem is smaller than a single component of the American ecosystem.

The key takeaway from this is not that India can’t produce world-class AI companies. Instead, it has the potential to create world-class SaaS companies. At Bain's estimates, by 2022 around 14 Indian SaaS firms making more than $100 million in annual recurring revenue existed, whereas Freshworks earned $839 million in revenue in 2025.

The lesson is more nuanced: Indian investors are unable to apply the model of fundraising for tech startups that has been successful in Silicon Valley to AI.

Any generic AI app devoid of any proprietary data, advantageous distribution or workflow can be created in a very short time. At the same time, American companies have access to bigger rounds of financing, clients sitting nearby and an ecosystem in which money changes hands faster than it ever does in India.

Even Indian venture firms are starting to look towards the West. According to ET, this year Peak XV, DeVC and Activate among others had increased their investments in AI companies based in the US. Peak XV, Accel and Elevation among them financed over ten US-based AI startups in 2025.

The winners from the Indian side will not be companies that simply attach AI to their products.

The situation could become worse and every company risks getting less profitable than companies with superior funding potential.

The interesting aspect of deep tech is that it entails numerous contradictions. The fund of ₹1 lakh crore set up by the government is the most significant initiative in India's innovation history. It was developed to cover high-risk research by providing long-term, low-cost financing.

However, good industrial policy and good venture investment do not mean the same thing.

The government's goal is to create a strategic sector encompassing rockets and semiconductors as well as biotechnology, robotics, military and power technologies while the goal of VC funds is to make high profits within the lifespan of their investment project.

Though the two objectives overlap, they do not refer to exactly the same thing. India has over 3,600 deep tech startups at this point. The new government capital, the newly launched specialised vehicles and the traditional-style VC investments have all started to flow into the industry. However, it generates a new risk – investments get allocated much faster than scientific talent becomes available. If a fund allocates its resources to searching for investable deep tech companies, it can no longer be afraid that good science will not receive support. The main risk is that mediocre science will get funding just because funds need to be invested somewhere.

And science risk is not subject to due diligence in the manner similar to SaaS.

SpaceX was set up in 2002 and successfully launched its first Falcon 1 rocket in 2008. Skyroot opened its doors in 2018 and launched Vikram S in 2022, but its most significant contract was concluded only in 2026, that is to say, eight years after the foundation of the company. These stories are impressive but serve as a reminder of the long way every deep-tech company needs to go before achieving satisfactory results.

There is no doubt that deep tech can deliver venture returns. Market behavior provides an indication as to how deep tech might be able to perform better than ‘regular’ technology. However, this requires specialist underwriting as well as patient capital. Traditional VC structures typically have their fund life at more than 10 years, with issues around fund life constraints and the need for specialist expertise being mentioned directly by McKinsey as significant factors for deep tech investing.

The ₹1 lakh crore RDI programme can be a boon for India and at the same time can create challenges for the investors who are unable to follow strict investment disciplines. These statements are not contradictory.

Lastly, the consumer. In this case, the bubble has a different look.

India’s consumption story could be making headlines nevertheless what worries me is the cost of creating numerous digitally native brands based largely on the same platforms for acquisition, the same marketplaces and similar consumer pools.

Funding is abundant during the initial phase. However, funding during the subsequent stages is very selective.

D2C funding in India peaked in 2022 at $1.6 billion, declined to $ 824 million in the following years and recovered to $ 898 million in 2025. However, the important number here is the 69% decline in funding in D2C companies in the late stage between 2022 to 2025, even as the funding at seed and early stage accounted for 70% of the total funding in the sector.

We finance a large number of firms at the seed stage because modern technologies facilitate their emergence. Subsequently, they reach the Series A and B and require a lot of money in addition to that because they realize that just having access to the Meta platform is not enough, customer acquisition is expensive, COD and RTO are taking away all profits, and traditional offline distribution requires additional investments.

The large consumer firms will survive this phase of development and the biggest labels in India could very well be born right now. However, while there is a prosperous consumer market, not every consumer startup is worthy of VC investments.

The main concern is that this situation is only evident in three industries named above. This may be one of the most underreported implications of the current phase of economic development. Money has not disappeared, it has just changed its concentration level.

In the US, it is AI that absorbs an increasing amount of venture funds. In India, AI and deep technologies have already started to dominate investment minds. Big funds are still on the rise along with well-established managers. Of course, many worthy businesses of such industries as healthcare, fintech, enterprise software, logistics, etc. may not be the trendiest sector and thus may fail to find VC.

In the first half of 2026, India's investments in private equity (PE) and venture capital (VC) fell by 36% when compared to the previous year, even though the US reached the highest levels of venture capital investment. This isn't an ordinary winter; it's a monsoon, hitting three specific areas and remaining dry for the rest of the world.

The cause of concern is precisely what makes such vintages more dangerous.

Every bubble opens with the truth, which, in conjunction with other observations, validates it. Everything was true back in October 2000: The Internet and smartphones were true, software as a service was true, and so is AI in December 2023. India’s deep tech opportunity is true. The market for Indian consumption is perfectly valid.

(The views expressed are personal)

This article is authored by Aditya Singh, co-founder and partner, All In Capital.