To help India’s chip design startups overcome a chronic shortage of patient capital, the government plans to co-invest alongside venture capital (VC) funds, at least in the early funding rounds, under its ₹1.27 trillion Semicon 2.0 programme. Under the scheme unveiled on Wednesday, the government will match private investments in eligible startups in return for equity to reduce funding gaps in one of the country's most capital-intensive technology sectors.
Amitesh Sinha, additional secretary at the ministry of electronics and information technology (Meity) and chief executive of India Semiconductor Mission, told Mint that the equity-based co-investment plan is designed to fill up a lack of ample deep-tech funds available to semiconductor design startups in the country.
“The Centre will offer grants under the current proposed incentivization structure, through which startups can create chip design prototypes," said Sinha. "These prototypes will be vital for them to raise funding from venture capital and private equity investors. For those that do, the government will offer to match the net private capital raised in a single funding round, for the same amount of equity.”
In simple terms, if a chip design startup needs $10 million in early-stage capital, the government will offer to fund $5 million, with the startup having to raise the rest from a private investor.
“This way, the burden of raising enough funds to take a chip from concept to production also reduces for startups. The government will also not go into this with an expiry date or a plan to exit the startup within a stipulated number of years," he said. "Once a semiconductor startup starts generating revenue, the Centre will offer it the option to buy its shares back from the government, if that’s what they desire.”
Sinha, however, did not detail the quantum of funds that would be allocated to the “equity co-investment” plan that Semicon 2.0 has proposed for companies.
Chip design is a fundamental stage in the semiconductor value chain as this is where the technology behind a chip is developed. These companies do not have manufacturing plants, but they own the designs, capture more value and have a greater control over the technology.
At a roundtable on Wednesday, IT minister Ashwini Vaishnaw had said chip design companies will form a key part of Semicon 2.0, as India looks to generate intellectual properties (IPs) in the space.
To boost sovereign capability in chip design, for the first time ever, the government is also expected to support larger corporations in the segment.
“Large conglomerates that have already ventured into the space have the might of capital already with them to design, test and produce their own chips. The incentives from the Centre, based on the royalty that they earn from their chips, is in order to give private companies the confidence of investing in R&D, and subsequently take their products to market,” the official added.
The design challenge
The concept for the new design-linked incentive (DLI) scheme is somewhat similar to the government’s ₹1 trillion research, development and innovation (RDI) fund for startups, wherein VCs are looped in as co-investors.
India, so far, is yet to see any chip design startup become a unicorn or cross the valuation benchmark of $1 billion. Bengaluru-based Tessolve Semiconductor, which raised $150 million from US private equity investor TPG at a valuation of $450 million, is currently India’s most-valuable semiconductor startup.
A reason for a weak response to the first design scheme under the 2021 India Semiconductor Mission was the inadequate funding support of ₹15 crore per startup compared to capital-intensive nature of semiconductor design, particularly at stages like prototype production and tapeout. A lack of market demand and orders also affected commercial production for many startups.
An enabler state
“Under the new scheme, equity in exchange of funding will ensure accountability of outcomes for a startup. This move will allow free market dynamics to play out, with VCs evaluating ideas for their quality, and the government sharing a part of the total risk capital,” said Ankush Wadhera, managing director and partner, and India lead for semiconductors practice at Boston Consulting Group (BCG).
Wadhera said, funding under the new scheme is expected to be large enough for startups to build a commercial runway. In fact, the government will be able to channelize the innovation engines at these startups towards end use cases targeted at meeting sovereign demand.
Aisha Ali Hussaini, semiconductor tax partner at EY India echoed Wadhera’s views. “Given the long gestation period of semiconductor projects, venture capital investors have traditionally been hesitant to invest in this sector. Government participation through co-equity can help bridge this funding gap and encourage greater private investment,” she said.
According to Hussaini, countries such as the US and Taiwan have adopted models where the government supports strategic technology sectors through equity or co-investment mechanisms, helping catalyze private capital and strengthen the semiconductor ecosystem.
Industry stakeholders said a key part of this scheme will be the government playing the role of an anchor customer.
“The government should act as a buyer and mandate that a certain percentage of components be locally created and consumed in areas such as defence, aerospace, surveillance systems,” said Navin Bishnoi, chairperson of India Electronics and Semiconductor Association (IESA).
Bishnoi said that the government can act as a market enabler by providing incentives and other benefits to end-product companies that choose to buy from Indian chip companies. This is because startups still struggle with how to scale and sell their products to volume production in a market crowded by global competitors, he said.