New Delhi: The commerce ministry has asked states and Union territories to stop building parallel startup funding vehicles and instead co-invest through the newly approved ₹10,000-crore Startup India Fund of Funds (FoF) 2.0, as India seeks to widen access to capital beyond the country's biggest startup hubs, according to two people aware of the development.
The move is designed to concentrate public capital under a single national framework while extending venture funding to startups in India's smaller cities and towns and capital-intensive sectors such as deep technology and advanced manufacturing.
Rather than setting up separate state funds, the ministry has asked states to leverage the FoF 2.0 framework, align incubators with its priority sectors, build investment-ready startup pipelines, conduct awareness campaigns for founders and investors, expand outreach through workshops in smaller cities, and encourage public sector undertakings (PSUs) and industry bodies to co-sponsor sector-specific alternative investment funds (AIFs), the people said.
Over 15 states have their own startup funds.
The recommendations come after the Union cabinet in February approved the ₹10,000-crore Startup India Fund of Funds 2.0, the successor to the original Fund of Funds launched in 2016 under the Startup India initiative. The revamped scheme aims to address funding gaps in capital-intensive sectors while expanding venture capital access in emerging startup hubs.
- The commerce ministry is urging states and Union territories to stop creating separate, parallel startup funds and instead co-invest through the newly approved ₹10,000-crore Startup India Fund of Funds 2.0.
- The move is designed to concentrate public capital under a single national framework while extending venture funding to startups in India's smaller cities and towns and capital-intensive sectors such as deep technology and advanced manufacturing.
- Compared to the first edition, FoF 2.0 introduces four specific investment segments, raises the government's maximum AIF contribution from 25% to 40%, and extends the maximum investment tenure for deep tech/manufacturing from 12 to 18 years.
- Startup India Fund of Funds 2.0 aims to address funding gaps in capital-intensive sectors while expanding venture capital access in emerging startup hubs.
- Compared with the original scheme, FoF 2.0 introduces four investment segments—deep tech, manufacturing, micro venture capital and agnostic funds—replace the sector-agnostic structure under the first Fund of Funds.
- As part of the implementation roadmap, DPIIT has asked states to strengthen incubators working in deep technology, manufacturing and other innovation-led sectors, improve startups' investment readiness through support on documentation, compliance and capital table management, and organize outreach programmes connecting startups with investors beyond metropolitan centres.
An email sent to the commerce ministry and the Department for Promotion of Industry and Internal Trade (DPIIT) on Wednesday evening remained unanswered till the time of going to press.
A broader funding model
Compared with the original scheme, FoF 2.0 introduces four investment segments, including deep tech, manufacturing, micro venture capital and agnostic funds, replacing the sector-agnostic structure under the first Fund of Funds.
It also raises the government's contribution to AIFs from 25% to up to 40%, extends the investment tenure for deep-tech and manufacturing-focused funds from 12 years to 18 years, and shifts implementation from a SIDBI-only model to a multi-agency framework, with additional implementing agencies expected to be onboarded.
The new framework will be overseen by an empowered committee chaired by the secretary, DPIIT. It also places greater emphasis on strengthening startup ecosystems in tier-II and tier-III cities through an umbrella co-investment platform and earmarks 5% of investment returns for ecosystem development through a consolidated Fund of India structure.
As part of the implementation roadmap, the second person aware of the development said DPIIT has asked states to strengthen incubators working in deep technology, manufacturing and other innovation-led sectors, improve startups' investment readiness through support on documentation, compliance and capital table management, and organise outreach programmes connecting startups with investors beyond metropolitan centres.
“PSUs, industry associations and anchor institutions co-sponsor sector-specific AIFs under the new Fund of Funds to improve capital availability in strategic sectors,” said one of the people.
Industry response
“The decision by the commerce ministry to allow states to co-invest under Startup India Fund of Funds 2.0, therefore, is a much needed step to offer necessary capital to deeptech startups,” said said Sharat Chandra, founder, EmpowerEdge Ventures, a Bengaluru-based venture-building firm for fintechs and startups.
Chandra added that Karnataka has already launched a ₹75 crore Beyond Bengaluru Cluster Seed Fund to support innovation in Mysuru, Mangaluru and the Hubballi-Dharwad region. But for the initiative to have a meaningful impact, states should move away from siloed funding models and align behind the new framework in the true spirit of competitive federalism.
According to DPIIT data reviewed by Mint, more than 235,000 entities have been recognized as startups as of 31 March 2026, creating over 2.4 million direct jobs across more than 55 sectors.
Of these, nearly 50% of recognized startups are located in non-metro regions, highlighting the spread of entrepreneurship beyond major cities. More than 112,000 recognized startups have at least one woman director or partner, while over 30 states and Union territories have notified dedicated startup policies.
The data also highlights the performance of the first Fund of Funds for Startups (FFS 1.0). Since its launch, the government has committed more than ₹10,000 crore across more than 145 AIFs, which have collectively invested over ₹27,600 crore in startups. More than 1,450 startups have received investments through these AIFs, of which nearly 90% have been successful.
The programme has also generated over ₹1,179 crore in investment income distributed by AIFs and channelled more than ₹4,000 crore into more than 215 women-led or co-led startups.
“The enhanced focus on deep technology, advanced manufacturing and micro venture capital is particularly important for India's ambition of becoming a global innovation and manufacturing hub…We also welcome the proposal for industry bodies to co-sponsor sector-focused AIFs, which can help channel patient capital into strategic sectors,” said Vinod Kumar, president, India SME Forum.