The Orange Tree Theatre's new artistic director found out on his first day that all its Arts Council of England (Ace) funding had been cut.
Almost a quarter of its total income has been wiped from the balance sheet.
New artistic director Paul Miller, who took over from founder Sam Walters on July 1, received the news by email on his first day.
As part of Ace's National Portfolio Organisations, the theatre relied on the £365,000 each year to make up 24 per cent of its annual income.
But the Orange Tree failed to make Ace's list of 690 organisations to receive funding between 2015-2018.
Mr Miller said the theatre would have to make "under-the-hood changes" to its financial model when its funding is discontinued in April next year.
He said: "There was a little bit of rebalancing across the country and some money did leave London.
"But they have to give the new, younger companies the chance to get funding for the first time, just like the Orange Tree did at one time.
"It is important to note the arts council is in no way walking away from us as an organisation, we are discussing different ways of supporting us."
As well as the soon-to-be-lost Ace funding, the theatre relies on various revenue streams.
It receives £110,000-a-year from Richmond Council as well as box office takings, making 40 per cent of its income.
Fundraising accounts for 20 per cent of income, while trading and other streams make up the remaining 9 per cent.
The new artistic director believes the 172-seat fringe theatre will continue to thrive under his stewardship, saying "change can be good".
He added: "The fact is I have never lived with a steady grant so I know no difference anyway.
"Changes were inevitable under a new artistic director and this news has to be seen to accelerate that."
Councillor Meena Bond, former mayor of Richmond and current cabinet member for the arts, said the council would work hard to support the theatre.
She said: "Richmond Council is very disappointed that the Orange Tree Theatre will no longer be receiving funding from the Arts Council as part of the National Portfolio Organisations programme.
"The Orange Tree is a vitally important part of the rich cultural offer in the borough and plays an important role as a producing theatre, with an extensive education programme.
"We look forward to working closely with the new director Paul Miller through this time of change, and to encouraging the community to give their support to this much-loved theatre."
An Arts Council spokesman said: “Orange Tree Theatre’s application was assessed as making a contribution to the Arts Council’s goals, however the programme was highly competitive and other applications were felt to make a stronger contribution.
“In light of the limited funds available, and when balancing the portfolio we have had to make some difficult decisions.
“As an Arts Council funded organisation Orange Tree Theatre has produced a wide range of new work and re-discovered plays from different eras. Their community and education programme has created opportunities for children and young people to engage with theatre and the work remains important to us.
“We are in discussions with the organisation about future plans and to explore other options that may be available.”