The venture capital ecosystem in India is experiencing a complicated shift. Startup funding is on the rise, but the exit environment has become very low. The valuations are depreciating, the number of secondary transactions is increasing, and investors are re-evaluating their strategies. This transition indicates the age of the ecosystem and the difficulties of matching the growth stories with financial essentials.

Secondary sales and sectors divergence

Secondary sales, where current investors sell their interests to new ones, which are more common since the end of 2023, and at high discounts. In recent secondaries, companies such as Eruditus, Postman, and Exotel have been marked down by 20-40%. This kind of transaction is normally motivated by money that is about to close or investors looking to escape partially before IPOs. Distressed sales may no longer be the norm, but discounted exits have become a reality of tactical use.

The fix is not similar across sectors. Other ventures, including consumer brands, deeptech, edtech, and B2C fintech, that grew aggressively and did not have strong unit economics, have been cut more severely. These companies have been exposed to markdowns due to high costs of customer acquisition and fragility in their operations.

Other industries, such as industrial tech, logistics, healthcare, and regulated industries, have been relatively stable. These are the businesses, usually based on proven models and sustainable margins, which have responded to the reset of valuation more significantly.

Venture funds and transparency

The lifecycle of venture funds forms a major motivator of secondary activity. Most funds have a horizon of 8-10 years after which they are obliged to give capital back to their limited partners (LPs). The managers are being pressurized to leave, even at the expense of taking a discount as fund terms expire.

Massive funds are challenged, especially. They will have to value portfolio companies at $75 billion to generate a 3x on a $5 billion fund. The fact that most Indian unicorns are estimated to be worth between $1-5 billion creates a gap between expectation and reality. This is forcing certain fund managers to consider discounted secondaries to demonstrate distribution and cushion internal rates of return (IRRs).

The VC ecosystem in India is not transparent, even with the regulatory framework provided by SEBI. Performance is selectively disclosed in many funds, mostly based on paper IRRs or NAVs, which do not reflect the actual distributions. The LPs seldom make their appraisals public, and benchmarking in the industry is based on voluntary data.

Such a lack of transparency complicates how new investors evaluate fund performance. According to Anup Jain of BlueGreen Ventures, one investment with 20x does not imply that the whole fund had 20x. Decision-making is usually made on a relationship basis instead of data without standardized reporting.

Rise in AI in the investment sector 

Secondary transactions are becoming an important means of liquidity and risk management by founders and investors. Taking a 20-30% correction now could be better than having to wait on an IPO later and then application of the same correction.

The use of structured continuation vehicles, including GP-led continuation vehicles, is becoming popular. These enable cross-portfolio blended discounts, which provide portfolio liquidity and do not discount long-term upside. This trend resembles more mature markets such as the U.S. and indicates increasing institutionalisation in India, according to 3one4 Capital Pranav Pai.

As AI remains a focus of investor attention, India has not been in an AI-only hype cycle. However, manufacturing, semiconductors, fintech, and deeptech are among the other sectors that are attracting capital. Enterprises at the orchestration and solutioning levels of AI, which address issues of critical importance to the enterprise, are considered more feasible than generic productivity tools. Discipline in valuation is still important. Multiples exceeding 10x revenue are becoming seen as excessive, particularly by firms that do not have visible profitability prospects.

Conclusion

The VC exit puzzle in India is indicative of an ecosystem that is still developing and is coming to terms with the reality of scale, sustainability, and liquidity. Discounted secondaries are now considered to be a tactic in a more disciplined market, as opposed to being viewed as a sign of distress. The behaviour of the investor is still influenced by the sectoral divergence, fund lifecycle pressure, and transparency gaps. The ecosystem is dynamic with more than 1,900 active investors, and a total of $12 billion+ invested in 2024. In the case of the venture capital industry in India, the next stage will be determined not only by growth, but also by how it will solve the exit maze.