The Department of Industrial Policy and Promotion (DIPP) has launched Rs. 10,000 crores startup funding scheme to fund and promote startups in India. Under this scheme, Venture Capital (VC) funds/firms are allowed to invest half of the corpus on startups and the other half on more mature firms to reduce capital risk. The VC firms whose corpuses are funded by the Government of India are required to invest their corpuses only on startups. The Union cabinet had allotted Rs. 10,000 crores (Fund of Funds scheme) to Small Industries Development Bank of India (SIDBI) to fund various VC firms registered under the Security and Exchange Board of India (SEBI) as a part of PM Narendra Modi’s Startup India Stand Up India scheme, launched in January, 2016. Read more on SIDBI
The Rs. 10,000 crores funds provided by SIDBI could attract Rs. 60,000 crores worth of debt and equity investments from VC firms on startups in India. “This would provide a stable and predictable source of funding for start-up enterprises and thereby facilitate large scale job creation”, DIPP said. Full utilization of the Rs. 10,000 crores fund is expected to generate 1.8 million jobs for the youth of this country. “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 VC firm. “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.
Complicated and elaborate procedures to get funds from the corpus have reduced the effectiveness of this scheme and SIDBI has provided only Rs. 129 crores to startups so far! “We are planning to give them some relaxation so that they can invest around 50% of their funds on startups. Rest they can invest on non-start-ups”, a DIPP official said. “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 added. According to DIPP, the definition of a startup is a company that has been registered with the Indian Government not more than five years ago and has an annual turnover of less than Rs. 25 crores.
“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 registered under the Startup India Standup India Scheme. “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 startups. As the number of startups applying to the scheme will increase, the number of VCs who would want to associate with SIDBI will also go up”, Akshay Mehrotra added. Commerce and industry minister, Nirmala Sitharaman held a conference among SIDBI officials, VC firms and startup incubators last week to facilitate easier funding of startups. “Funding should also be made available to start-ups which are slightly more advanced”, she said. Currently, a legal VC firm has to make a presentation before SIDBI’s Venture Capital Investment Committee (VCIC) to avail of funds from the corpus. Depending on VCIC’s recommendations, the VC firm sends an application to SIDBI, which is evaluated by its executive committee. Upon sanction, a letter of intent is issued and a contribution agreement is signed with the VC firm.
It is heartening to see that the DIPP (through SIDBI) has allowed VC firms to invest half of their corpus on established firms. When there was the law that the VC firms should invest their corpus only on startups, more than half of the VC firms in India refrained from investing on even promising startups, since the Venture Capital risk was high. This hindered the growth of startups in India with 67% of the Indian startups, launched during 2016, shutting down their operations within the first six months of their launch. With this new provision by DIPP and SIDBI, startups will be encouraged to approach VC firms for funds and VC firms will be encouraged to invest on promising startups since the risk of Venture Capital has now reduced. This is truly a useful and a brilliant move by the Government of India. Read more on Startup News