Are Indian Startups Foundations Cracking As Funds Start Moving Out And Away? The Road Ahead, Dance Without Music?

Back in 2007, Chuck Prince, then CEO of Citigroup, famously remarked, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.” Not long after, the global financial crisis struck, leaving a trail of wreckage in its wake. Fast forward to today, and one can’t help but wonder—has the music stopped for India’s startup ecosystem?

For years, Indian startups have basked in the glow of investor money—both foreign and domestic—fueling a seemingly unstoppable wave of innovation, IPOs, and high valuations. The industry was even prominent enough for its top players to be invited to a high-profile dinner ahead of the 2024 elections, rubbing shoulders with BJP leaders in support of a third-term Modi government. But while the political scene has remained stable, the startup scene seems to be losing its sheen, even as India’s stock market faces continued FII outflows.

The Prolonged Winter

Rewind to the early 2000s, and it becomes evident that Indian startups have historically favored registering their headquarters abroad. A more favorable tax regime, better access to investors, and superior valuations made it a no-brainer to set up shop outside India while still capitalizing on the massive Indian market. However, the 2024 budget abolished the controversial angel tax, a move aimed at making India a more hospitable place for startups.

Introduced in 2012, the angel tax was designed to curb money laundering via inflated valuations. But its removal sparked a frenzy of “reverse flipping,” wherein Indian startups that had initially established themselves abroad began moving their legal headquarters back to India. The government hailed this as a major victory—proof that India had become a true startup powerhouse. But did the reversal have more to do with market conditions than actual confidence in India’s business climate?

IPO Bonanza. A Short-Lived Euphoria?

A bigger driving force behind the reverse flipping trend may have been India’s roaring IPO market. In 2024 alone, 13 new-age tech startups went public, raising over $3.4 billion. Companies like Swiggy, Ola Electric, and FirstCry rode the IPO wave, promising massive returns to early investors.

Pre-IPO funding became the entrée before the main IPO course. Investors—especially high-net-worth individuals and family offices—were eager to grab shares at a discount, hoping to cash in big post-listing. Meanwhile, startups received a fresh influx of diversified capital, and venture capital firms enjoyed lucrative exits. The numbers were staggering: venture capital exits shot up from $700 million in 2022 to $1.8 billion in 2024.

But the euphoria didn’t extend to retail investors. By the end of 2024, nearly 40% of newly listed companies were trading below their issue price. The correction intensified in early 2025, with even established names like Bajaj Housing Finance, Waaree Energies, and Mobikwik struggling. The BSE IPO Index itself plummeted 11% in January, signaling growing investor caution. Suddenly, the reverse flip didn’t seem quite so appealing.

Where Did All the Unicorns Go?

If a booming IPO market was meant to be a lifeline for Indian startups, its faltering momentum raises a crucial question – What now?

The Hurun Research Institute’s Global Unicorn Index for 2024 painted a grim picture—India’s startup ecosystem had contracted for the first time since the index’s inception six years ago. Even more concerning was the fact that Indian founders were creating more unicorns abroad than at home—over 100 outside India versus just 67 within the country.

This trend illustrates a critical issue – Even with regulatory reforms and stock market opportunities, India’s startup ecosystem is struggling to retain its best talent and capital. Founders continue to seek better prospects elsewhere, and investor confidence in domestic startups is waning.

The startup story in India isn’t over, but it’s certainly facing a reality check. The IPO boom provided a temporary high, but sustaining long-term growth requires more than just a few blockbuster listings. For startups, the biggest challenge now is to prove profitability and resilience in an environment where easy money is no longer flowing.

The list is now long and the days to “IPO” are short. The mood may have also soured with notable misadventures like Ola Electric, which is mired with leadership exits, regulatory scrutiny, and disclosure lapses, not to mention social media spats.

Underpinning it all is the great Indian consumption story. New-age tech startups need only look to their more staid brick and mortar peers in the consumer industry to gauge how tepid consumption demand has been, and how only a few are being able to skim the benefits of India’s demographics.

For all of it, here are circumstances as they stand-  a turn of sentiment in flows, acute uncertainty around geopolitics and work visas, and of course, a currency with a weak underbelly.

Does India’s startup ecosystem have the legs to remain standing when funds start gushing out and away? The truth is nobody knows. And if both consumption demand and fund flows deteriorate, all bets could be off the table.

The Last Bit. Dance Without Music?

The startup story in India isn’t over, but it’s certainly facing a reality check. The IPO boom provided a temporary high, but sustaining long-term growth requires more than just a few blockbuster listings. For startups, the biggest challenge now is to prove profitability and resilience in an environment where easy money is no longer flowing.

Will India’s startup ecosystem find its footing again, or will the cracks deepen as capital finds new, more lucrative pastures. The music may not have stopped completely, but it’s playing at a much slower tempo now. And that means the dance has changed.