Why VCs Are Betting Big on Startups—But Leaving MSMEs in the Cold

Image Source: Economic Times

Venture capitalists (VCs) in India are pouring record sums into tech startups, yet MSMEs—despite being the backbone of the economy—are struggling to attract equity funding. What’s driving this divide?

Key Highlights:

•⁠ ⁠In FY24, India’s VC funding surged to $13.7 billion, with most investments flowing into technology-driven, scalable startups. Less than 5% of the country’s 63 million MSMEs received any equity funding, and under 10% of angel investments reached traditional MSMEs.

•⁠ ⁠MSMEs face hurdles like low scalability, limited digital adoption, and high-risk perceptions, making them less appealing to VCs seeking rapid growth and clear exit routes.

•⁠ ⁠The small size, non-corporate structure, and lack of formal financial documentation among MSMEs increase transition costs and complicate exits for investors.

•⁠ ⁠Traditional funding sources remain out of reach for many MSMEs due to stringent collateral demands and complex loan processes, pushing them toward informal lenders or self-financing.

•⁠ ⁠Policy reforms and budget initiatives in 2025—like enhanced credit guarantees and sector-focused funds—are beginning to address these gaps, but the VC ecosystem for MSMEs still trails global standards.

Outlook:

While government measures are improving credit access, MSMEs need more VC-friendly policies, simplified funding processes, and greater digital adoption to attract equity investors. Bridging this gap is vital for balanced, inclusive growth in India’s entrepreneurial ecosystem

Image Source: economic Times