The New Rules of Startup Funding? From BluSmart Crisis to New Norms

In today’s rapidly evolving startup landscape, the fine print has become the real battleground.

Across India’s vibrant startup ecosystem, a clear shift is underway. Investors no longer settle for glossy pitch decks and promises of future growth. They now demand a deeper, clearer view into the financial and operational realities of the businesses they back — and they are baking these demands into the very DNA of investment contracts.

Founders, take note: Investment contracts today are far tougher, stricter, and more detailed than ever before.

What’s Changing Inside Investment Contracts?

Gone are the days when a term sheet was a straightforward agreement. Investors now push for:

• Full disclosure of founders' and promoters' income sources: Investors want to know exactly where the money comes from — personal, professional, or otherwise. Any undisclosed liabilities or shady financial linkages raise immediate red flags.
• Veto rights on risky expenditures: If a startup decides to splurge on an expensive acquisition, enter a high-risk geography, or make speculative investments, the investor demands the power to say no.
• Deferred payment options: Instead of handing over capital upfront, many investors structure deals where disbursements link to performance milestones. For example, startups may need to hit specific revenue targets, onboard a certain number of customers, or complete successful beta tests.
• Expanded definitions of "Bad Leaver" events: A bad leaver clause once applied mainly to misconduct or gross negligence. Today, the net has widened — founders walking away prematurely, underperforming, damaging reputations, or even creating strategic misalignment could trigger severe penalties.
• Heightened due diligence processes: Background checks no longer stop at the company’s books. Investors now scrutinize founders' personal histories, social media footprints, litigation records, and secondary business interests.

Is This a New Trend?

This tightening of norms doesn't happen in a vacuum. Over the last few years, India’s startup ecosystem has witnessed a series of high-profile controversies — from financial misreporting to founder misconduct. Investors, once seen chasing “growth at all costs,” have learned some hard lessons.

BluSmart Crisis

The Gensol Engineering-BluSmart controversy acted as a major catalyst. Allegations of governance lapses and questionable business practices between BluSmart (an EV ride-hailing company) and Gensol (a listed entity) sent shockwaves through the ecosystem. Investors who once turned a blind eye to deep operational ties, related-party transactions, or opaque fundraising practices realized the reputational and financial risks involved.

Funding Trends

In 2025, Indian startups raised $6.7 billion in funding during the first quarter, a 30% drop compared to the same period in 2024. This decline reflects a cautious investment climate, with investors prioritizing startups that demonstrate strong governance and operational transparency.

Sector-Specific Allocations

Between 2018 and 2023, climate tech startups in India received $7.2 billion in funding, with 55-60% allocated to EV OEMs and battery technology. Meanwhile, SaaS startups continued steady growth, leveraging their scalable business models.

Union Budget 2025

The government extended the tax holiday for startups until March 2030, signaling a strong commitment to fostering innovation. However, this support comes with stricter compliance requirements, including enhanced transfer pricing regulations and new measures to expedite mergers and acquisitions.

What This Means for Founders

If you’re a founder seeking funding (or already backed by investors), understand that:

• Transparency is non-negotiable: Hiding personal liabilities or external interests no longer works. Full disclosure builds credibility.
• Expect oversight on spending: Investors will demand visibility into how you use their capital. Discretionary spending without investor buy-in could breach contracts.
• Prepare for milestone-based funding: You must be ready to hit specific operational or financial targets to unlock subsequent tranches of funding.
• Governance practices will be under a microscope: Having an independent board, clean financial records, proper audit trails, and conflict-of-interest policies will shift from “good to have” to “must-have.”
• Exit terms are getting harsher: If you choose to leave or breach agreed conditions, you could face crippling penalties — including loss of vested shares and repayment obligations.

Tip for Founders: Prepare a founder background dossier — including financial disclosures, related-party business interests, and legal histories — before entering funding conversations. It can significantly speed up due diligence and boost investor confidence.

Why Founders Shouldn't Fear This

These stricter norms may seem daunting, but they ultimately build better, more sustainable businesses.
Robust contracts create clarity, alignment, and protection — not just for investors, but also for ethical founders.

Startups built on strong governance, transparent operations, and responsible financial management will find it easier to attract serious investors, command better valuations, and expand globally.

In a world where trust is currency, good founders have everything to gain from this new era of accountability.

Adapt or Be Left Behind: The New Reality for Startup Founders

Founders must adapt to this new reality or risk getting left behind. Gone are the days of informal handshake deals and unchecked founder control. In today’s market, trust must be verifiable, not just spoken. If you want to build a company that lasts — and secures capital to fuel its growth — start treating corporate governance, transparency, and accountability as your biggest competitive advantages. Because when the next big wave of investments rolls in, only the startups built on rock-solid foundations will ride it to success.