West Asia conflict tightens the tap on India's startup funding options

Escalating tensions in West Asia have made investors more cautious, dragging India's startup funding 43% lower since March

The West Asia conflict is weighing heavily on India’s startup funding options, with investors turning cautious, delaying deployments and becoming increasingly selective amid heightened geopolitical uncertainty. 

Data reviewed by Business Standard shows startup funding between March 1 and June 15, 2026, fell 43 per cent year-on-year (Y-o-Y) to $7.81 billion, compared with $13.7 billion during the same period last year. 

The slowdown was most pronounced in late-stage deals, where funding declined 61 per cent to $1.5 billion from $3.8 billion. Seed-stage funding also dropped sharply to $292 million from $714 million; early-stage funding remained relatively resilient at $1.96 billion, compared with $2.01 billion a year ago. 

Navneet Kaushik, founder and managing partner at Jamwant Ventures, said the West Asia crisis had amplified global risk perceptions and reshaped capital allocation priorities. 

“For venture capital specifically, the crisis has tightened liquidity as LPs (limited partners) and institutional investors reassess exposure to high-growth, high-risk segments due to additional risks arising from the West Asia crisis,” he said. 

Siddarth Pai, founding partner at 3one4 Capital, said the conflict could be held responsible for a significant share of the recent decline in late-stage funding, particularly over the past four to five months. “The conflict triggered a sharp depreciation in the rupee, making it difficult for global investors to underwrite returns,” Pai said. 

 

“However, the slowdown is also the result of structural changes already underway, as many Indian startups have become more capital efficient, are moving towards profitability, relying more on debt than equity, and increasingly looking towards public markets instead of remaining private,” he added. 

According to Pai, a significant share of global growth capital has also shifted towards artificial intelligence (AI) and foundation model companies in the US Echoing Pai’s views on rupee depreciation, Sunil K Goyal, managing director and fund manager at YourNest Venture Capital, said international investors were holding back due to the significant fall in the Indian currency over the past three months. 

“We hope that, with relaxations in the bond market, India will start seeing its foreign exchange reserves remain positive week after week. That will bring international investors back to start committing, without waiting for the rupee to depreciate further,” he said. 

The rupee’s annual average exchange rate for FY26 was 88.9 per dollar. But at the end of March the domestic currency was trading around 94.8 per dollar. 

While investors said the conflict had prompted them to conserve cash for their own businesses and existing portfolio companies, Padmaja Ruparel, cofounder, IAN group, noted startups with West Asia expansion plans had also faced disruptions. 

“The crisis led investors to conserve liquidity as there is uncertainty in the market. The startup companies themselves have been impacted due to the West Asia crisis. Their West Asia business plans have gone into disarray: Travel became difficult, customers in the region were not too keen to try new products, and costs increased,” she said. 

Some investors, however, argued that the decline in funding could not be attributed solely to the West Asia conflict. “The decline is almost entirely explained by a drop in very large late-stage rounds that were unusually concentrated in FY25 and simply did not repeat,” said Manu Iyer, cofounder and general partner at Bluehill.VC. 

However, he added that geopolitical developments had affected LP sentiment, particularly among Gulf Cooperation Council (GCC)-based investors who had been warming up to India. As a result, some investors slowed their timelines, while others paused commitments. 

Similarly, Amit Chand, founder of BYT Capital, called the crisis “an accelerant, not the cause”. He said geopolitical shocks typically make investors more cautious about large cross-border investments but added that India continues to remain among the world’s most-funded startup ecosystems. 

Despite the broader slowdown, investors remain optimistic about sectors such as AI, defence, deep-tech, semiconductors, space-tech, cybersecurity and advanced manufacturing. “Capital is increasingly moving away from cash-intensive consumer businesses towards strategic technology areas such as AI infrastructure, deep-tech, space-tech and climate-tech,” said Anil Joshi, managing partner at Unicorn India Ventures. He added that the ongoing uncertainty had reinforced the importance of domestic innovation, resilient supply chains and indigenous technology development. 

Ruparel of the IAN group said uncertainties around tariffs, trade issues and geopolitics were driving greater disruption and reorganisation across technology and supply-chain ecosystems, creating opportunities for India. “We feel that sectors such as deeptech, manufacturing, defence and AI can capitalise on this, and we are continuing to back companies that will be able to withstand the storm,” she added.