The missing middle in India’s startup ecosystem

The broader narrative around Indian startups remains binary.

By Ujwal Sutaria 

India’s startup success is often judged by the number of unicorns, billion-dollar valuations, and headline-grabbing fundraises. These companies dominate media narratives and reflect the aspirational energy of Indian entrepreneurship. But behind the noise, another kind of story is quietly unfolding. One that is no less impactful yet often overlooked.

This is the story of capital-efficient startups. These are founder-led companies that scale steadily to ₹100–₹200 crore in revenue, operate with tight fundamentals, and create meaningful value through well-timed exits. While they may not feature on magazine covers, they are quietly building the foundation of a more sustainable and mature startup ecosystem. I call this segment the “missing middle.”

Why the Missing Middle Matters

As a micro-VC focused on early-stage investing, I have seen this segment produce some of the most reliable, risk-adjusted returns. These businesses are built on strong unit economics, not vanity metrics. They solve specific problems, operate with discipline, and grow without relying on excessive capital. In a market where funding is harder to raise and exits remain elusive, the missing middle is emerging as a credible path to value creation.

For a fund writing ₹1–3 crore cheques, a ₹300 crore exit that delivers 10x returns is far more meaningful than holding a diluted stake in a unicorn that may never list. Repeat this outcome three or four times across a portfolio, and you have returned the fund with solid credibility. Let’s break that down. If a ₹20 crore fund invests ₹1 crore each in 20 companies, a 3x return requires ₹60 crore in total exits. If even 5–6 of those portfolio companies achieve ₹50–100 crore in revenue and exit at ₹300–500 crore valuations, and the fund entered at a ₹20–30 crore valuation, a 10x return per winning company is well within reach — even after accounting for dilution.

These companies are often less prone to failure because they focus on fundamentals, not fundraising momentum. More importantly, these exits create a compounding effect.

Why Early Exits Matter

India has already seen several success stories that validate this thesis. Minimalist, a skincare brand founded in 2020, was acquired by Hindustan Unilever for ₹2,950 crores. With a lean structure and a ₹500 crore run rate, it delivered stellar returns to founders and investors while maintaining capital efficiency.

Yogabar’s phased acquisition by ITC showed how niche brands with a clear mission and limited funding can build loyal audiences and exit on their own terms. ZingHR, a B2B SaaS platform acquired by Tata Capital for ₹500 crore, and Pickrr, acquired in a deal that highlighted the growing value of logistics tech, are further proof points. Clovia, Sportskeeda, and Togai have also delivered meaningful returns through strategic exits.

These companies share a few things in common. They are customer-centric, operationally focused, and built with purpose. Their exits were strategic and well-aligned with acquirers seeking to expand capabilities or enter new markets. These are not one-off wins. They are the result of deliberate execution.

Yet the broader narrative around Indian startups remains binary. A company is either a unicorn or it is not. It either scales to a billion dollars or is considered a missed opportunity. This narrow view overlooks many successful outcomes and discourages founders from optimizing for sustainable growth. It also limits how LPs, accelerators, and co-investors evaluate success.

Why Micro-VCs Have an Edge

Micro-VCs are often closest to the founders. We are involved early, without the burden of large fund dynamics. When a startup exits for ₹300 crores, it can create life-changing wealth for the founding team and meaningful returns for early investors. These are outcomes worth celebrating.

However, over the last decade, Indian venture capital has often focused on backing category leaders at all costs. This has sometimes come at the expense of profitability and discipline. The funding slowdown in 2022 and 2023 forced a reset. Down rounds, flat rounds, and investor fatigue became common. Unicorns became harder to fund, and liquidity for early-stage investors became even more scarce. This shift led to a growing recognition. A ₹100 crore revenue business generating ₹10 crore in profit and exiting at ₹300–₹500 crore can be a better outcome than a ₹5,000 crore unicorn with no clear path to IPO.

While IPOs are seen as the ultimate exit, they often require a fund to hold on for 8 to 10 years. Though lately, we are seeing this timeline shrinking as well and expect it to continue shrinking further. However, during that time, pro-rata investments, bridge rounds, and dilution can erode value. In many cases, companies now go public at valuations lower than their last private round, leaving late-stage investors with losses and early-stage investors with little to show.

For the missing middle to thrive, three systemic shifts are needed. First, limited partners should evaluate fund performance based on DPI and time to liquidity, not just the number of unicorns. Second, accelerators and incubators must start celebrating ₹100 crore businesses as wins, not fallback stories. Third, founders must start thinking like owners. They need to recognize when to take money off the table instead of raising the next round by default.

At TDV Partners, we guide founders to build with optionality. We encourage them to focus on business fundamentals, while also being open to strategic exits. We tell them it is perfectly okay if the journey ends at ₹200 crores, as long as they own enough of it and know when to step back.

A New Playbook for the Next Decade

The next wave of Indian startup success will not be written by unicorns alone. It will be shaped by founders who build disciplined ₹100–₹200 crore businesses, and by early believers who had the conviction to back them. The missing middle is not a flaw in the system. It is a powerful and under-recognized engine of startup growth in India.

Early exits are not a step down. They are milestones. They unlock capital, create new entrepreneurs, and strengthen the ecosystem. Over the next decade, India will likely see more such stories — not just in consumer and SaaS, but in fintech, healthtech, climate tech, and manufacturing. The smart capital will follow founders who build with intention, who optimize for outcomes, and who are willing to exit when the timing and value are right. Micro-VCs must learn to recognize when to cash in and move forward. It is not just about identifying potential but knowing when to realize it.

With growing interest from private equity firms, family offices, and secondary funds, the exit landscape is stronger than ever. A timely exit is not just about liquidity. It enables faster capital recycling, builds a track record for general partners, and frees up time and energy to support the next generation of winners.

(Ujwal Sutaria is the Founder and General partner at TDV Partners.)

Views are personal, and do not represent the stance of this publication.