The Rise of SME and Pre-IPO Venture Funds in India's Growth Story

Understanding a Trans-formative Shift

Here's what's happening: companies that have moved past their startup phase but aren't quite ready for the big leagues now have dedicated investors backing them. We're talking alternative investment funds that specifically hunt for opportunities in that middle ground – after the initial venture capital round but before the grand stock market listing, i.e, Pre-IPO

The growth trajectory is staggering. All AIFs had assets under management of approximately ₹45,000 crores in 2020. By June 2025, that figure exceeded ₹14,17,961 crores. (You can do the math-it's approximately 28% per year). Anyway, it is all about the numbers.

What's really driving this boom? Well, for starters, SEBI hasn't been sitting idle. The regulatory authority is making it easier for companies to access capital while ensuring investors aren't walking into disasters. Then there are the dedicated SME platforms on BSE (BSE SME) and NSE (NSE Emerge) – these weren't around a decade ago.SEBI reports that by September 2025, over 1,353 small and medium enterprises (SMEs) have been listed on the BSE SME and NSE Emerge platforms and raised more than ₹31,538 crore. This is happening as India pursues becoming a $5 trillion economy, at which micro, small, and medium-sized enterprises (MSMEs) contribute almost 30 percent to GDP, and 45 percent of exports..

Source: Chittorgarh

* indicates till September 2025

The Regulatory Evolution That Made This Possible

Let's be honest – regulations can either kill innovation or nurture it. In India's case, SEBI has managed to strike a decent balance, though it hasn't always been smooth sailing.

When BSE rolled out its SME platform in March 2012, followed shortly by NSE's Emerge, sceptics were everywhere. Would smaller companies really benefit? Would investors trust these platforms? Turns out, they would. These platforms weren't just token gestures; they came with thoughtfully designed frameworks.

Year	What Actually Happened	Real Impact
2012	SME platforms went live	Smaller firms finally had realistic listing options
2015	AIF regulations got an overhaul	Funds could finally invest in pre-public companies legally
2021	Pre-IPO rules became friendlier	Companies could raise 20% of their IPO size beforehand
2024	Disclosure norms tightened	Investors got better information without excessive red tape

How the Rules Changed Over Time: Alternative Investment Avenues under the Alternative Investment Funds categorizing into I, II & III, AIFs framework deserves special mention here. Before these regulations, investing in unlisted companies was murky territory – legally complicated and practically difficult. Now, both venture capital and private equity funds have clear guidelines. They can invest in companies up to 12 months before their IPO, which creates a perfect window for Pre-IPO investing.

For companies eyeing SME listings, requirements are reasonable rather than burdensome. You need ₹3 crores minimum in paid-up capital after your fundraise, and you must offer 25% to public investors. Since its inception, over 600 SMEs have successfully listed through these platforms, collectively raising more than ₹12,000 crores. That's real capital reaching real businesses doing real things.

Market Reality Check: What's Actually Happening

Let me share some data that really brings home how dramatically this space has transformed.

The SME IPO Journey:

Year	How Many Listed	Capital Raised (₹ Crores)	Average subscription	Average First-Day Return(%)
2020	27	159	18.5x	42%
2021	59	746	32.7x	68%
2022	107	1874	45.2x	54%
2023	182	4686	52.8x	61%
2024	240	8760	48.5x	58%
2025*	212	9228	54.4x	64%

Source: Chittorgarh

* indicates till September 2025

Look at that progression. We went from 27 companies in 2020 to potentially over 240 in 2024. That's not incremental growth; that's explosive adoption. And those over-subscription numbers? They're telling us that demand consistently outstrips supply.

The Uncomfortable Truths About Risks

Every investment opportunity comes with downsides, and pretending otherwise does everyone a dis-service. This space has genuine challenges that deserve honest discussion.

The Liquidity Problem Is Real

The funds invested in Pre-IPO opportunities, liquidity is always a risk-reward factor. You can't suddenly decide you need cash and sell your shares next week. You're committed until the IPO happens or any other exit opportunity, and sometimes IPO bound companies have faced delays in IPO. Market conditions deteriorate, companies need more time, and regulators ask questions – delays happen for countless reasons.

Even after companies list on SME exchanges, problems persist. About 40% of SME-listed companies see daily trading volumes below ₹10 lakhs. Try exiting a ₹2 crore position when daily liquidity is ₹8 lakhs. You'll move the price significantly just trying to sell.

Valuation Is More Art Than Science

Unlike listed stocks, where markets determine prices every microsecond, Pre-IPO valuations are negotiated privately. Different investors use different methodologies and arrive at wildly different numbers. Roughly 25-30% of companies end up pricing their actual IPOs below their last Pre-IPO round. If you invested in that final round, you're immediately underwater.

Information Gaps Are Frustrating

Listed companies must report quarterly results, disclose material developments, and maintain transparency. Pre-IPO companies? Not so much. You're essentially investing while partially blind. Unless you have direct management access or employ sophisticated research teams, you're at a significant information disadvantage compared to insiders.

Market Timing Can Wreck Everything

IPO windows open and close based on factors often beyond anyone's control. Interest rates rise, global markets crash, regulatory environments shift – suddenly that 18-month investment timeline becomes 30 months or longer. Your capital is stuck earning zero returns while you wait for conditions to improve.

The SME segment carries additional baggage. Quality varies tremendously. About 35% of SME listings actually deliver negative returns one year post-listing. That's not great. There have been manipulation instances too, though SEBI actively pursues violators.

Experienced investors protect themselves through diversification – spreading capital across 15-25 different companies, multiple sectors, and staggered time periods. Partnering with proven fund managers who have successful pre-IPO track records also significantly improves odds.

Future Outlook: Where Things Are Heading

This sector is not mature, and there are a number of interesting trends developing that could significantly reshape the environment.

The industry is predicting that total Pre-IPO fund assets could reach the range of ₹3,00,000- 3,50,000 crores by 2027. SME IPOs should settle at 250-300 per annum and will raise between ₹6,000-8,000 crores collectively. Those are tough, but realistic targets, based on where things are at currently.

Sectors Worth Watching

Digital infrastructure companies building fintech, healthtech, and edtech platforms are drawing serious capital. Manufacturing companies benefiting from global supply chain diversification and government PLI schemes are also looking good. Clean energy businesses addressing the challenges of climate change represent huge opportunities. Healthcare service providers reaching India's growing middle class are also seeing increasing interest from investors.

What Smart Players Are Doing

Successful fund managers are creating deep sector expertise as distinguished from being generalists. They are building strong and vibrant deal-sourcing networks, and are providing real value-adds, rather than simply providing capital alone.

Companies going public are enhancing their financial and governance structures earlier rather than rushing to do this close to the due diligence and offering. They are being realistic about their valuations and developing relationships with quality institutional investors.

Individual investors are doing thorough homework on fund managers' track records. They're diversifying aggressively and accepting that this capital is illiquid for extended periods.

SEBI will likely continue refining regulations – better disclosures, standardised valuations, stricter eligibility criteria are all possibilities.

Conclusion

The rise of SME and Pre-IPO funds is a real step forward for Indian finance. These funds provide talented businesses with growth capital and provide investors with compelling entry points into India's growth narrative. As the ecosystem advances with more thoughtful regulation, improved infrastructure and increased investor sophistication, it will play an even more central role in our economic development.

Success, depends on engagement from all sides - companies being transparent, fund managers being diligent and investors being prudent. If everyone commits to the highest possible standards, this asset class can preserve its ability to create wealth while supporting India's entrepreneurial aspirations.