The department of industrial policy and promotion (DIPP) is set to overhaul its Rs10,000 crore start-up funding scheme by allowing venture capital (VC) funds to invest half of the corpus in start-ups and the rest of it in firms at a more mature stage to reduce capital risk.
The VC funds that manage the corpus on behalf of the government are currently mandated to invest the money only in start-ups.
The Union cabinet cleared the Fund of Funds for Start-ups under the Small Industries Development Bank of India (Sidbi) in June for contribution to various VC funds registered with the Securities and Exchange Board of India as part of the Start-up India Action Plan unveiled by Prime Minister Narendra Modi in January 2016.
The fund is intended to assist innovative start-ups through their journey to becoming full-fledged business entities. The Rs10,000 crore corpus could potentially be the nucleus for catalysing Rs60,000 crore of equity investments and twice as much debt investments, according to DIPP. “This would provide a stable and predictable source of funding for start-up enterprises and thereby facilitate large scale job creation,” DIPP had said last year.
An amount of Rs500 crore has already been provided as fund corpus in 2015-16 and Rs600 crore has been earmarked for the current fiscal year. The fund is expected to generate employment for 1.8 million people on full deployment.
“The problem with 100% allocation of funds to start-ups by Sidbi-funded VC is that it would restrict the number of companies in which the VC can invest, hindering the absorption of these funds,” said Anil Joshi, managing partner at Unicorn India Ventures, a Mumbai-based fund. The plan to reduce the allocation to 50% is a practical move, he added.
“This will attract more fund managers to get Sidbi’s participation and also allow VCs to invest in young start-ups now and give them growth capital four-five years later when those companies do not fall in the definition of start-ups (as given by DIPP),” said Joshi.
Cumbersome procedures to access funds from the corpus have, however, made the plan a non-starter and Sidbi has committed only Rs129 crore to VCs so far.
“We are planning to give them some relaxation so that they have to invest around 50% of the funds in start-ups. Rest they can invest in non-start-ups,” a DIPP official said on condition of anonymity. “VC funds have raised the matter holding that start-up investment is only a portion of their investments and there is more risk involved in investing in start-ups.”
The official said DIPP is also considering relaxing the norm that mandates VC fund managers to invest in start-up firms with an annual revenue of less than Rs25 crore. DIPP defines a start-up for availing of government incentives as an enterprise that has been registered not more than five years ago and has an annual revenue of Rs25 crore or less in a fiscal year.
“Start-ups find it exceptionally hard to raise seed and Series A funding, especially when overall funding is reduced,” said Akshay Mehrotra, co-founder of Early Salary, a fintech firm certified under the Start-up India action plan. “Sidbi’s decision to allow VCs to allocate 50% of the funds to start-ups will give confidence to VCs for the cause of early stage start-ups. As the number of start-ups applying to the scheme will increase, the number of VCs who would want to associate with Sidbi will also go up.”
Commerce and industry minister Nirmala Sitharaman last week said after holding talks with incubators and accelerators that DIPP has called a meeting of Sidbi officials, VC funds, incubators and accelerators on 2 February to make the process of funding start-ups simpler, quicker and more purposeful. “Funding should also be made available to start-ups which are slightly more advanced,” she said.
At present, an eligible VC fund has to make a presentation before Sidbi’s Venture Capital Investment Committee (VCIC) to avail of funds from the corpus. The panel has seven external experts, including former Nasscom president Kiran Karnik, Naukri.com founder Sanjeev Bikchandani and former Infosys Ltd board member and chief financial officer T.V. Mohandas Pai.
Based on VCIC’s recommendations, the fund makes an application to Sidbi, which is put before its executive committee. Upon sanction, a letter of intent is issued and a contribution agreement is signed with the VC fund.
Arushi Chopra contributed to this story.