Is Indian Startup ecosystem really flourishing, or is it just one of those things that looks rosy on the surface but is slowly rotting underneath? Well, if recent data from Startup research firm Venture Intelligence is to be believed, India's startup ecosystem picture might be leaning more towards the latter.

According to the research firm, out of more than $1,900 million that were pumped into India focused private equity and venture funds (PE/VC) this year, nearly $15 billion are still lying as dry powder. Unfortunately, this $15 billion is the highest amount of fresh cash that has been sitting outside doing no good, just waiting to be invested in the third largest Startup ecosystem in the world.

The whole jibber jabber around Indian startups and the promotion that the Modi government has been doing about the sector since taking charge has ensured that there's an uninterrupted flow of capital for funds working for the sector. Interestingly, this cash is now on a desperate lookout for avenues for investment.

In the recent times, several sectors, especially the ones on the consumer side, have been hitting maturing, and with the number of startup shutdowns just increasing by the day, the PE/VC funds have been forced to become careful than ever in their investments. Now their focus is more on quality rather than on quantity.

The question that arises here is, what does it mean to have $15 billion sitting as dry powder?

One this is for certain. This high amount of cash just lying around as dry powder spells a period of worry for fund managers. Most of the private equity funds functioning in India have been operating on a seven to nine year cycle. During the first three years, they are required to deploy more than 60-70 per cent of the amount that they have raised. Then, in the third to fifth year, the fund spends more of the amount raised. In the sixth year, it comes down to managing portfolios.

High amount of cash just sitting out as a dry powder can have multiple consequences. For starters, there is a lower internal rate of return (IRR), which might lead managers under pressure to deploy the capital in investment opportunities that are less than attractive. Whether the situation worsens to that, only time will be able to tell.

Though the fund managers also have an option of returning the money to the investors if at any point they think that there are no good investment opportunities in vicinity after a three-year period.

It is important to note that PE/VC investments in India finally rebounded last month after hitting a 12-month low in July. The month of August saw a total of $440 million in investments, which made it the second highest month after March's $625 million haul.

In 2008, India saw a similar high dry powder, and low funding situation. Considering that ten years later, the sector is still up and running, we can be rest assured that the country can survive this spell, too. Though the country will have to watch its back when it comes to China as recent times have shown that India as a market for funds has been losing its edge to China. According to a statement given by Vijay Anand, CEO of The Startup Centre, an accelerator for tech startups, to Times of India, this might have something to do with the imitation nature of Indian entrepreneurs and the copy-cat trend that they have adopted.

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