Can FFS 2.0 Solve India's Startup Liquidity Puzzle? Here’s Why It’s a Game-Changer

Startups are born from ambition—but they thrive on capital. And while India's startup story has been vibrant, it's not without its share of roadblocks. One of the most persistent hurdles? Liquidity—or rather, the lack of it.

Now, with the announcement of the Fund of Funds Scheme 2.0 (FFS 2.0) in Budget FY26, the government seems to be attempting a major reset. With a robust corpus of ₹10,000 crore, the scheme is being hailed as a potential game-changer for both startups and their investors, particularly those navigating the complex terrain of exits and secondary funding.

But what exactly is FFS 2.0? What makes it different? And how does it plan to tackle one of the Indian startup ecosystem's most pressing challenges?

TICE breaks it down.

What’s the Real Problem?

India’s startup landscape is full of promise—more than 1.6 lakh startups have been recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). However, early-stage investors continue to face significant hurdles in exiting their investments, which in turn affects the startups' ability to raise follow-on capital.

In simpler terms: investors are stuck, and startups are stalling.

One of the key reasons? There aren’t enough willing buyers when it’s time for early investors to cash out. This is especially true during economic slowdowns, global funding winters, or when startups haven’t yet reached massive scale.

Without a healthy exit pipeline, the ecosystem becomes clogged. New investments slow down. Startups with potential begin running out of fuel.

FFS 2.0: What’s New?

While the original Fund of Funds Scheme launched back in 2016 has already catalysed investments in over 1,197 startups, the second edition—FFS 2.0—is entering the picture with a fresh purpose: unlocking exits and bridging liquidity gaps.

So what makes FFS 2.0 different from its predecessor?

• Secondary Capital Focus: Unlike earlier schemes that mostly focused on primary investments, FFS 2.0 will back private sector funds that provide secondary capital. This means it will empower existing investors to exit, while also making room for new investors to step in.

• Cutting-Edge Tech Push: The core agenda of this fund is to support startups working in deep tech, AI, space-tech, advanced manufacturing, and other sectors that are not only capital-intensive but also need patient capital.

• Seamless Funding Cycles: By supporting Alternate Investment Funds (AIFs) that specialise in such secondary transactions, the government aims to ensure that the funding journey of a startup doesn’t come to a sudden halt due to lack of liquidity.

The Budget for FY26 has allocated ₹2,000 crore for the first year of FFS 2.0, with a total proposed outlay of ₹10,000 crore over time. The scheme will continue to be managed by SIDBI (Small Industries Development Bank of India), just like its predecessor.

And the previous edition has already shown promise:

• 1,197 startups funded

• 2 lakh direct jobs created

• Over ₹7,800 crore committed across AIFs till January 2025

These numbers are not just statistics—they reflect a clear momentum in startup support. Now, with a sharper focus on enabling exits and fuelling next-gen innovation, FFS 2.0 is expected to take this to the next level.

Why Secondary Capital Matters for Startups

In most global startup hubs—like Silicon Valley or Tel Aviv—secondary transactions are a norm. Early investors get to exit when the company reaches a certain stage, and new investors come in with fresh capital and fresh vision.

But in India, this has been a bottleneck. Often, founders and early backers are stuck together far beyond the ideal point, simply because no one is buying. And the longer capital remains locked in, the harder it gets for new investors to justify putting in money at higher valuations.

FFS 2.0 aims to fix this loop. By backing AIFs that specialise in secondary transactions, it hopes to offer a smoother journey for both startups and investors.

Deep-Tech and Patience: A Crucial Combination

One of the most important aspects of this scheme is its strong push towards deep tech and innovation.

Industries like Artificial Intelligence, advanced manufacturing, and space-tech are not your typical quick-turnaround businesses. They involve long gestation periods, expensive R&D, and the need for investors who are in it for the long haul.

FFS 2.0 understands this, and that’s where its real strength lies. It’s not just a band-aid—it’s a long-term prescription for innovation-led startups.

According to a senior government official, “It will address growing demand for patient capital in sectors that require long gestation periods… These industries hold immense potential for global competitiveness, IP creation, and technological self-reliance.”

The Bigger Picture: Deep-Tech Fund of Funds on the Horizon

What’s more encouraging is that the government isn’t stopping here. Alongside FFS 2.0, plans are in motion for a dedicated Deep Tech Fund of Funds. This aligns with the upcoming Deep Tech Startup Policy, which has been under formulation for over a year.

With these moves, it’s clear that India wants to position itself as a global deep tech hub, and not just a services-led economy.

It’s worth noting that FFS 2.0 is part of a larger startup-support vision under the Startup India initiative that was launched in 2016. Other active schemes under this umbrella include:

• Startup India Seed Fund Scheme (SISFS) – To support startups at the idea and prototype stage

• Credit Guarantee Scheme for Startups (CGSS) – To help startups raise debt without collateral

Together, these schemes cover a wide range of startup needs—from idea to scale to exit.

A Boost When It’s Needed the Most

India's startup ecosystem has seen a rollercoaster few years. From booming unicorns to funding winters, from global attention to homegrown resilience—entrepreneurship in India has proven its mettle.

But to keep the momentum going, access to capital—and exits for early believers—are non-negotiable.

FFS 2.0 comes at a time when liquidity crunch and funding fatigue were beginning to cloud the ecosystem's future. And by targeting both deep-tech innovation and secondary capital support, the government might have just introduced a much-needed catalyst.

Whether it will change the game for startups and investors alike—only time will tell. But for now, the signals are clear: India is doubling down on startups that can shape the future.