Caution in Venture Capital Funding for AI Startups as Investors Demand Clear Value and Returns

Caution in Venture Capital Funding for AI Startups as Investors Demand Clear Value and Returns

Indian venture capital firms are adopting a more cautious stance on funding artificial intelligence (AI) startups, placing increased emphasis on robust business models with evident returns and practical impact. According to a report by Mint, this trend indicates a shift from initial enthusiasm to a selective, value-focused approach. Adith Podhar, general partner at Gemba Capital, noted that AI investment enthusiasm is stabilizing, with investors now prioritizing companies offering a compelling value proposition over those solely riding the AI trend.

Investment strategies within the AI sector have matured, moving beyond the initial trend-driven phase to a disciplined phase where AI models must prove their impact, measurable growth, and market relevance. Abhishek Prasad, managing partner at Cornerstone Ventures, pointed out that investors have become more strategic, now directing funding toward sectors that can demonstrate tangible, lasting value. Vikram Chachra, founding partner of 8i Ventures, highlighted that this shift promotes sustainable growth by encouraging startups to refine their offerings, ensuring both financial and operational resources are invested in high-impact ventures.

In the wake of this shift, several AI-focused startups—including Toplyne, Nintee, and InsurStaq.ai—have recently shut down operations, with founders returning capital to investors. Industry sources estimate the closure of thousands of AI startups amid a tightening market. Nonetheless, interest in Generative AI remains high, and valuations for AI startups, particularly those focusing on generative models, are substantially higher compared to other tech firms. Seed-stage AI startups are now seeing valuations about 20% higher than their non-AI counterparts, with Series B valuations rising by as much as 59%.

Preeti N Sampat, partner at Eximius Ventures, noted that models providing “agents,” “co-pilots,” and enterprise AI readiness solutions continue to be attractive to investors, indicating significant growth potential in these areas as businesses push toward more autonomous operations.