Why Growth Stage Startup Funding Outpaced Late Stage Investments In Q3

While the funding trends in the Indian startup ecosystem have been showing signs of stability over the past few months, investor appetite for startups operating across different sectors and stages is varying significantly.

Although Indian startup funding in the July-September quarter increased 5% YoY to $2.2 Bn across 210 deals, the startup investment story is increasingly turning into one of growth stage capital rather than late stage backing. 

As per Inc42’s Indian Tech Startup Funding Report Q3 2026, capital deployed at the growth stage jumped 46% YoY to $1.1 Bn during the quarter. Meanwhile, funding lapped by late stage startups remained flat at $994 Mn. 

Beyond the headline funding numbers, investors seemed to be more active in evaluating startups at the Series B and C stages as compared to late stage ones. During the quarter, growth stage deal count rose 38% to YoY 90, whereas late stage deals declined 10% to 27.

The divergence is also visible in cheque sizes. The median growth stage ticket size rose 4% to $8.3 Mn, while the median late stage check dropped 18% to $18 Mn.

The data points to a funding market where capital is flowing more readily into startups that still have substantial growth ahead, while investors are becoming more cautious about committing large sums to mature startups.

Investors highlighted a combination of factors behind this shift, including a growing pool of early stage capital, more inflated valuations at the late stage, greater scrutiny of business fundamentals and exit visibility, and a changing sector thesis.

Why More Capital Is Flowing Into Growth Stage Startups

One explanation lies in the expansion of India’s startup ecosystem, which now comprises about 2.5 Lakh businesses. A growing pool of investors backing startups at their earliest stages is creating a larger pipeline of businesses seeking subsequent rounds.

Vikram Gupta, founder and managing partner at IvyCap Ventures, said the number of early stage and micro VC funds in India has increased substantially, helping create this pipeline of capital as startups progress towards Series A and Series B rounds.

“If the number of early stage funds has increased, very naturally you will see a growth in the early to growth stage investments,” Gupta said.

The changing sector mix is also reinforcing this trend, with investor interest broadening beyond ecommerce, fintech and consumer internet startups towards frontier technologies such as AI, deeptech and cleantech.

AI emerged as the top funded sector in Q3 with $438 Mn, up 265% YoY, followed by cleantech at $433 Mn, up 267%, and deeptech at $290 Mn, up 176%. In contrast, fintech funding declined 11% and ecommerce funding fell 31%.

The quarter also saw some of the largest funding rounds concentrated in these newer categories. AI startup Emergent raised $130 Mn, EV startup River raised $120 Mn and spacetech startup Pixxel raised $100 Mn. 

Gupta said the newer sectors — AI, spacetech, EVs — have longer gestation periods, meaning investors often wait for technology validation, customer adoption and other milestones before committing larger sums.

However, the growth of these newer segments doesn’t necessarily translate into investors shying away from more established segments like fintech, ecommerce or consumer companies, said Apoorva Ranjan Sharma, cofounder of Venture Catalysts. “Those are now more mature sectors and investors expect stronger numbers from them.”

Why Late Stage Capital Pool Remains Thin

Even as more startups reach the growth stage, the pool of investors capable of funding them at scale remains relatively small.

IvyCap’s Gupta believes that India has a limited number of investors capable of writing large late stage cheques. 

Prior to the funding winter, India’s late stage ecosystem relied heavily on global investors such as SoftBank, Tiger Global, Insight Partners and Sequoia Capital, which were among the most active sources of large growth stage cheques.

“The larger dollar capital comes from the US and other geographies,” Gupta said, adding that changes in US policies and market conditions have made overseas deployment more difficult. 

He said US government securities have also become more attractive as a lower-risk investment, making it harder for funds to raise and deploy capital in markets such as India.

While family offices, high-net-worth individuals and government-backed funds have stepped in to bridge some of the gap, Gupta said India would need at least $100 Bn of capital to become globally competitive.

This has created a funding asymmetry. India now has a growing base of early stage investors backing startups through initial rounds, but a much smaller pool of capital available when those companies need substantially larger cheques to scale further.

Why Late Stage Investors Are Holding Back

The availability of capital is only part of the problem. Investors active at the late stage are also becoming more selective.

According to Venture Catalysts’ Sharma, Series A and B investors can assess a startup’s product, revenues, customers and execution while the business still has significant room to grow. By Series C and beyond, valuations are substantially higher, leaving investors with less room for error and making the potential return harder to justify.

Several startups that raised capital at high valuations in earlier rounds are still working to deliver the business performance needed to justify the premiums, Gupta said. This is particularly relevant for deeptech companies, where technology development and commercialisation may take longer.

“If an investor is putting in $30-50 Mn, there has to be a clear plan for how that money will be used and what the company will achieve,” Sharma said. “Growth continues to be important, but growth alone is no longer enough.”

The shift is also changing how late stage rounds are structured. Gupta said investors may commit less capital upfront and release additional funds only when startups meet specific milestones. An investor capable of writing a $25 Mn cheque, for instance, could invest $15 Mn initially and reserve the remaining $10 Mn for a later tranche.

Similar structures of investment deals are also seen at early and growth stages as well. For instance, Fireside Ventures committed ₹100 Cr capital to Arovia Consumer, a new ecommerce rollup venture by ex-Soulfull MD Prashant Parameswaran, with investments flowing as and when the startup closes acquisitions.

Founders, meanwhile, are becoming more cautious about dilution and raising only what they need, Sharma said.

What Could Unlock The Next Funding Wave?

The current funding mix could eventually help narrow the late stage gap. The startups attracting Series A and B capital today — particularly in AI, deeptech, climate and manufacturing — could become a larger pipeline of companies seeking Series C, D and pre-IPO funding as they prove their technology, build markets and demonstrate commercial traction.

Gupta said AI-funded companies are now entering a phase where investors will be able to assess how much of the sector’s promise translates into actual business performance. Some could emerge as major winners, while others may struggle to justify their valuations.

Deeptech companies are also moving towards commercialisation, with recent public-market milestones providing investors with evidence that some of these businesses can scale beyond the venture stage. The bumper IPOs of SEDEMAC and ESDS Software Solution, along with Skyroot’s progress towards its next funding round, point to a broader pipeline of deeptech companies moving towards larger capital requirements.

The number of companies requiring late stage capital is also on the upward trajectory. Inc42’s investor survey found that 72% of investors have late stage startups in their portfolios that are at some level of IPO readiness.

But IPO readiness does not necessarily mean these companies will need another large private round. Sharma said mature startups can instead raise smaller amounts, facilitate secondary transactions or move towards public markets.

Gupta said greater visibility on a public market exit can itself unlock late stage investor interest, as investors become more comfortable when a company has a clearer path to an IPO.

Successful listings could therefore become an important catalyst for the next phase of late stage funding. Gupta expects more capital to return as investors see successful outcomes, while Sharma said stronger profitability, more realistic valuations and successful IPOs will be important for rebuilding confidence.

The bigger question is whether the companies now raising Series A and B capital can build the scale, profitability and exit visibility needed to attract the much larger pools of capital required at Series C, pre-IPO and beyond.

Edited by Akshit Pushkarna
Creatives by Abhyam Gusai

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