In a major boost to India’s startup ecosystem, the government will allocate the bulk of the ₹10,000 crore (US$ 1.16 billion) startup fund—announced in the 2025 Union Budget—to Artificial Intelligence (AI), machine building, and other cutting-edge technology sectors. According to an official from the Ministry of Commerce and Industry, this move is aimed at encouraging innovation, nurturing future-ready startups, and positioning India as a global technology powerhouse.

This is part of the government’s second Fund of Funds Scheme (FFS), intended to complement its flagship Startup India initiative, which has been driving entrepreneurial growth since January 16, 2016. The renewed focus on new-age technologies under the revised FFS is not only strategic but also a reflection of the shifting dynamics of India’s startup investment landscape.

New Fund of Funds Scheme: Strategic Realignment

Unlike the first Fund of Funds Scheme launched in 2016, which had a broader mandate to promote startups across various sectors, the second iteration will narrow its focus to emerging tech, including Artificial Intelligence, machine learning, machine building, deep tech, and high-end product manufacturing. These sectors have been identified as critical drivers of next-generation economic growth.

The ₹10,000 crore fund, to be deployed over a period of years, is not a direct grant but rather capital routed through SEBI-registered Alternative Investment Funds (AIFs). These AIFs, in turn, will invest in promising startups—mirroring the model of the 2016 FFS, which saw substantial success in increasing startup capital availability in the country.

Role of SIDBI in Fund Management

The Small Industries Development Bank of India (SIDBI), which had been tasked with managing the 2016 FFS, is once again expected to play a pivotal role in implementing the new version. SIDBI's experience and robust mechanism for assessing AIFs, evaluating disbursements, and ensuring due diligence make it a logical choice for fund administration.

As per available data, the original FFS facilitated investment into hundreds of startups by partnering with over 80 AIFs, thus catalysing private capital inflow into the startup sector. SIDBI’s involvement ensures accountability, transparency, and alignment with national economic goals.

Targeted Support to Innovation-Led Sectors

The government’s decision to channel most of the new fund toward AI and technology-focused sectors is driven by the need to secure India’s leadership in the global innovation race. Here’s how this sectoral preference can reshape the entrepreneurial landscape:

• AI and Machine Learning: As industries automate and digitise, startups leveraging AI are critical to sectors like healthcare, agriculture, logistics, and cybersecurity.

• Machine Building and Robotics: Indigenous development of high-precision machinery will help India become self-reliant in manufacturing under the Make in India initiative.

• Deep Tech and IoT: High-tech innovation in sectors like defence, climate tech, and industrial automation will attract global investment and reduce import dependence.

These choices resonate with India's ambitions under initiatives like Digital India, Atmanirbhar Bharat, and IndiaAI, which emphasize homegrown technological advancement.

Startup India’s Expanding Impact

Since its launch in 2016, Startup India has transformed into a central pillar of India’s innovation economy. Over 1.5 lakh startups across 55+ sectors have been officially recognised under this initiative. Recognition not only lends credibility but also unlocks access to:

• Income tax exemptions for three consecutive years out of the first ten years since incorporation.

• Exemptions from Angel Tax, encouraging early-stage investments.

• Easier public procurement norms, especially in government and defence sectors.

• Access to incubators, accelerators, and dedicated mentoring platforms.

Incentives under Startup India have contributed to a surge in the number of unicorns and soonicorns, firmly placing India as the third-largest startup ecosystem in the world, after the United States and China.

Policy Synergy and Ecosystem Maturity

The rollout of this second FFS is part of a broader strategy to ensure policy synergy between tax reforms, digital economy initiatives, and financial inclusion programs. With GST simplification, direct benefit transfers (DBTs), and the UPI ecosystem, the groundwork has been laid for tech-driven startups to thrive.

The government’s support is not only financial but also institutional, with regulatory simplification, IP protection mechanisms, and ease of doing business reforms now taking centre stage.

Catalysing Venture Capital Activity

One of the major objectives of the Fund of Funds model is to crowd in private capital. By de-risking early investments through partial government capital, the scheme attracts larger follow-on funding from institutional investors. This has the following cascading effects:

• Helps startups scale faster through infusion of working capital.

• Encourages the emergence of sector-specific AIFs, including deep tech and biotech funds.

• Boosts India's profile as an investor-friendly destination for foreign venture capital firms.

As per SIDBI’s own reports from the previous scheme, for every ₹1 invested from the FFS, over ₹3.50 was mobilised from private and institutional investors.

Future Outlook: What’s Next for Indian Startups?

With the new ₹10,000 crore allocation, startups focused on cutting-edge technologies will likely see a surge in valuations, funding activity, and policy tailwinds. The industry is watching closely for:

• Final fund disbursement timelines and the list of selected AIFs.

• Specific eligibility criteria for startups to qualify for investments via AIFs.

• Sectoral split of fund utilisation, including how much is earmarked for AI, manufacturing, and other verticals.

• Integration with state-level startup missions, ensuring nationwide coverage and decentralised innovation hubs.

There is also growing anticipation for international partnerships, where India’s FFS-backed startups can collaborate with global tech players, R&D institutions, and innovation hubs.

Conclusion

The government's decision to allocate a major share of the ₹10,000 crore startup fund to AI and technology sectors reflects a strategic long-term vision to transform India into a global tech innovation hub. By channelling investments into future-ready industries, the new Fund of Funds Scheme not only supports high-potential entrepreneurs but also accelerates India's journey toward technological sovereignty.

The role of SIDBI, alignment with the Startup India mission, and emphasis on deep tech sectors are all steps in the right direction. As startups gear up to tap into this capital infusion, the move could mark a new era of deep tech entrepreneurship, making India’s startup story more impactful, inclusive, and globally competitive.

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