What’s Driving Startup Investors’ Shift Towards Domestic LPs?

Amid an increasingly volatile macroeconomic situation and geopolitical uncertainty, Indian venture investors are leaning towards domestic capital as against the traditional foreign limited partners (LPs).

According to Inc42’s ‘Indian Investor Ranking & Sentiment Survey’ (Q1 2026), about 74% of over 70 institutional investors said that they would prefer Indian-origin LPs in the next funding cycle.

For fund managers navigating an uncertain fundraising environment, a stronger base of domestic LPs is emerging as a key buffer against global disruptions while ensuring capital deployment remains aligned with the realities of the domestic startup ecosystem.

However, investors Inc42 spoke with highlight a deeper trend propelling this shift. They highlighted the ease of doing business with Indian LPs when compared to foreign ones, simply due to proximity and familiarity, along with better understanding of regional and regulatory complexities and operating realities. 

The managing director of an Indian AIF, on the condition of anonymity, said that foreign LPs tend to compare the growth of Indian startups with those operating in more matured markets like the US, the UK and Europe. Thus, foreign LPs expect similar returns and operating standards in India. 

“At the same time, foreign LPs can face skewed IRRs due to rupee price fluctuations and weakening because of which AIFs prefer Indian LPs as then the whole cycle works to perform in an Indian context based in rupee,” he added.

The shift away from foreign LPs has been further accentuated by the ongoing West Asia conflict, which has rattled the global economy. Most investors are facing issues in attracting capital commitments from foreign investors amid the risk-averse environment.

Investors noted that diversifying LP pools ensures they are hedged against future disruptions. “I think from a security and solidity standpoint, having a stronger, tighter local capital market is vital,” Artha Group’s head of family office relationships Jashank Pohani noted.

Amid this disruption in foreign investor interest, capital deployment in the Indian startup ecosystem tanked in the first quarter of 2026. Fresh capital infusion in the Indian startup ecosystem fell 26% YoY to $2.3 Bn during the quarter.

Despite the reduction in fresh capital infusion, the number of funding deals in the quarter surged 17% YoY to 271. Unique investor participation increased to 634 in Q1 2026 from 562 in the previous quarter.

These numbers highlight a shift in the funding landscape that points to VCs giving equal weightage to stability as well as scale. And, for many, this stability is ensured by increasing domestic LP participation.

But, what’s in it for domestic investors? Let’s find out.

Key Reasons Behind Increased Domestic Investor Participation

Investors highlighted that much of the current jump in Indian LP participation is rooted in the desire of family offices and high-net-worth individuals (HNIs) to diversify their investment portfolios beyond the stock market and real estate. 

“A key driver for domestic LP participation has been the sharp rise in the number of family offices in India, which has grown from roughly 45 in 2018 to over 300 as of 2024. Alongside this, many of these offices now approach VC investments as a structured asset class rather than an opportunistic allocation,” Artha Group’s Pohani noted.

As per Unicorn India Ventures’ founder and managing partner Bhaskar Majumdar, the growing appetite among domestic investors is being driven by their search for portfolio diversification. In this context, several LPs that earlier limited their participation to pre-IPO rounds to test the waters are now also allocating capital to early-stage funds, encouraged by the strong returns that patient, long-term investments can deliver. 

Another factor behind increased participation from these investors is the emergence of strategic startup investments to gain sectoral expertise, access to new technologies and M&A opportunities aligned with their own businesses. 

On top of this, the government has launched its own investment vehicles to support the growth of startup funding in India. Most recently, the Central government approved the second phase of the Startup India FoF scheme with a corpus of ₹10,000 Cr. The fund of funds scheme was first launched by the Centre in 2016 under the ‘Startup India’ action plan, with a similar corpus.

However, the biggest catalyst has been the government’s push to unlock capital flows into private markets, beginning with SEBI’s introduction of the AIF Regulations in 2012. The framework enabled private investment vehicles such as VC and PE funds to scale in India. 

This also opened the door for non-institutional investors like HNIs and family offices to participate in the startup ecosystem. As per 247VC’s founder Shashank Randev, regulatory oversight from the SEBI has helped increase confidence in domestic LPs investing in AIFs.

Over time, these regulations have brought into the fold private and public entities and eased their ability to invest in the startup ecosystem. Now, entities like insurance companies, private and public sector banks and pension funds can invest in AIFs. 

These institutional investors have unlocked a huge flow of capital for Indian startups. For instance, the National Pension Scheme announced last month that it will set aside 1% of its ₹1.7 Lakh Cr corpus for investments in AIFs.

Fund managers now want more such institutions, especially foundations, educational institutions and university endowments, to become meaningful contributors to the ecosystem as well through further easing of regulations. 

Investors pointed out that increased participation from existing domestic institutional investors would ensure technological sovereignty, especially in critical areas like spacetech and defence tech, which have been recently opened up for startups. 

“This is an exciting opportunity for pension funds, banks and insurers to increase their allocations towards alternative assets. Homegrown general partners will benefit from this focused LP capital, as will Indian entrepreneurs. There are additional nation-building benefits of R&D, deep tech innovation, defence, space systems, advanced manufacturing,” Sameer Nath, CIO & head of VC and PE at 360 ONE Asset said.

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