Inside Q1 2026’s Mega Deal Drought: War, LP Shift & Growth Capital Gap

The second quarter of 2026 has begun on a strong note for the Indian startup ecosystem, with KreditBee raising $280 Mn in a unicorn-minting round. However, the preceding quarter painted a far less optimistic picture for India’s startup funding landscape, as geopolitical tensions dampened investor appetite.

Overall capital inflows into Indian startups fell 26% YoY to $2.3 Bn during the quarter. More strikingly, the world’s third-largest startup ecosystem failed to record a single mega funding round.

While the number of mega deals has fluctuated across quarters in recent years, a complete absence of $100 Mn+ rounds is a rarity. This is the first time since 2022 when a quarter has seen no mega deal.

Despite the slowdown in large funding rounds, overall deal activity increased in the March quarter of 2026. Over 271 startup funding deals materialised during the quarter, up 17% from 232 in the same period last year. The rise in deal count suggests that investors are increasingly shifting focus towards early stage bets rather than doubling down on late stage startups.

So, what triggered this shift in investor behaviour?

Why Indian Investors Are Inclining Towards Domestic LPs

The West Asian conflict, which has now been paused for 15 days, hit the capital raising plans of Indian startups and VC firms in Q1 2026. The macroeconomic instability caused by the military conflict led many global as well as domestic investment firms to tread carefully with their disbursals.

This realignment reflected in the late stage funding trends in the quarter. In Q1, 32 late stage startups raised $782 Mn, a 16% decline from the same quarter last year. 

Large startup funding rounds in India have traditionally been backed by a mix of domestic and international investors. For instance, KreditBee’s unicorn-minting round was led by Motilal Oswal Alternates, while global investors such as Hornbill Capital and Dragon Funds also picked up stakes in the IPO-bound fintech major.

However, the global capital environment has shifted in recent months. With geopolitical uncertainty persisting, interest rates remaining elevated, and comparable investment opportunities available in their home markets, several global investors are now deploying capital closer to home.

“The US accounts for about 70% of VC and PE deals globally, and most mega deals are led by crossover funds,” Alkemi Growth Capital partner Mansi Aggarwal told Inc42. “If those funds are finding similar opportunities in the US, particularly with higher interest rates, the incentive to take Indian risk reduces significantly.”

As international investors pull back from India, domestic VC firms are increasingly turning to local limited partners (LPs) to raise fresh capital. According to Inc42’s survey of 70+ investors, about 74% said they plan to raise capital from domestic LPs in the upcoming funding cycle, signalling a structural shift in LP preferences.

Aggarwal added that the several factors are making domestic capital easier to access. “With rupee depreciation, increasing participation from HNIs, and the emergence of government-backed funds such as SIDBI, raising domestic capital has become easier. At the same time, the overall pool of global capital available for Indian startups has shrunk.”

That said, domestic capital still has its limits. Arkam Ventures’ managing director Rahul Chandra noted that while India now has several growth stage funds which write cheques in the range of $30 Mn-$50 Mn, larger rounds still require international participation.

“There are some large domestic funds in India that can write growth cheques in the $30-$50 Mn range. Up to that level, founders can piece together capital locally, but the pool doesn’t widen significantly beyond that,” Chandra said. 

“For larger rounds, companies still need to tap both India and the US. However, dependence on foreign capital has reduced, and raising $30-50 Mn within India without relying on global investors is now possible.”

How Profitability Push Is Redrawing Late Stage Funding Playbook

Beyond the structural shifts in India’s VC ecosystem, the startup landscape itself is evolving into a more fundamentals-driven, growth-with-profitability environment.

Arkam Ventures’ Chandra believes that founders and investors are increasingly misaligned on the financial trajectory of startups. According to him, investments exceeding $100 Mn are now largely driven by a startup’s demonstrated viability rather than just projected growth potential.

In other words, private market investors are beginning to mirror the expectations of public market investors – prioritising profitability and sustainable business models over rapid expansion.

“The private market now has the same expectation as the public market – profitability,” Chandra said. “So founders are left choosing between profitability-driven private capital and going public sooner, as the original point of staying private is no longer being met.”

This shift is nudging late stage startups towards public markets instead of raising large private rounds. This is reflected in the strong startup IPO pipeline. Notably, five startups have gone public in 2026 so far – Aye Finance, Fractal Analytics, Amagi, Shadowfax and SEDEMAC. 

Besides, several late stage startups such as OYO, Zepto and boAt are preparing to raise fresh capital through IPOs after raising multiple large private rounds in previous years.

However, the shift toward public markets is unfolding amid heightened volatility. Escalating geopolitical tensions have weighed on investor sentiment, causing fluctuations in Indian equity markets and prompting companies to reassess listing timelines. While Nifty 50 has plunged 8% to ₹23,123.65 since the beginning of the war, Sensex has slumped 8% to ₹77,562.9.

The turbulence has already resulted in delays in IPOs. For instance, fintech major PhonePe temporarily paused its public listing plans, citing geopolitical uncertainty and market conditions.

However, Chandra expects mega deals to return in the second quarter of the year due to the delay in IPO plans of many late stage startups due to geopolitical tensions.

[Edited By Akshit Pushkarna]

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