Keynote on Startup India Initiative – promoting, funding startup culture in India

Background

The Startup India initiative was launched by Narendra Modi-led central government in 2016 with an initial corpus of Rs 10,000 crore to be deployed over the 14th and 15th Finance Commission cycles. Government of India (GoI) has created Startup India fund, also known as Fund of Funds for Startups (FFS) and is funding startups through AIF backed by FFS.

FFS was set up at SIDBI, which contributes to various Alternative Investment Funds (AIF). It is registered with the Securities and Exchange Board of India (SEBI), which in turn extends funding support to startups. GoI, at the time of launching FFS, had envisioned to create employment for about 18 lakh people.

SIDBI (that oversee FFS) has given a free hand in selection of startups, which is leading to a positive impact on the startup ecosystem. VCs backed by FFS have co-invested in startups where even Chinese VCs are investors (a positive sign, as capital should be encouraged to flow in from a capital-surplus country).

Progress so far

The Startup India initiative has disbursed over Rs 1,300 crore to Indian startups in the first half of 2019.  FFS has disbursed Rs 515 crore during the three months of the calendar year 2019 to various VC funds for further downstream investment into startups. In the April-June quarter, the FFS disbursed Rs 856 crore. Cumulatively, the Startup India initiative has disbursed more than 30 percent (Rs 3,123.7 crore) of the Rs 10,000 crore corpus so far.

SIDBI did not disclose the number of VC funds that secured funds from FFS as on June 30, 2019. But as of March 31, 2019, the total sanctioned amount has been allocated to 40 VC funds (Alternate Investment Funds), which in turn have invested part of this amount across 218 startups as on March 31, 2019.

According to SIDBI data, some of the VCs that have secured funds from FFS include Kae Capital, Orios Venture, Idea Spring, Pi Ventures, IvyCap, TVS Shriram, and others. Sabre Partners, Zephyr Peacock, Avaana Capital, Endiya Partners, and TVS Shriram are few of the VCs that have been sanctioned at least Rs 100 crore from FFS.

An investor who preferred to remain anonymous has said, “The government has also given a free hand to VCs as far as the selection of startups for funding is concerned. It doesn’t interfere in the process, and of late, even government representatives from SIDBI don’t sit in the investment committee of VCs”.

Currently, FFS invests in VCs, who in turn do their downstream investment in startups. When those VCs exit, they share the gains with the government. Apart from that, when a successful startup gets sold to a MNC, the country not only gets foreign investment; it also allows the government to get a whopping tax revenue.

Budget Expectations

Before the elections, the ruling BJP promised creating a ‘Seed Startup Fund’ worth Rs 20,000 crore. Even after the elections, there were reports that the Department for Promotion of Industry and Internal Trade (DPIIT) is planning to set up an ‘India Startup Fund’ with an initial amount of Rs 1,000 crore. It said the new fund would be offered to startups involved in priority areas such as high-tech and cutting-edge technology.

Working capital is often seen as a limitation to scale-up startups, and there are no institutions that provide the same to startups. Also, since startups are generally asset-light companies, they face difficultly to get working capital from financial institutions who ask for collateral.

The Indian startup community has also been bullish ever since the President Ram Nath Govind’s address at the joint sitting of Parliament, when he said the government will take steps to further improve the startup ecosystem in the country with an aim of having 50,000 such enterprises by 2024.

Road Ahead

The policies, plans, and taxation system should meet the expectations of budding entrepreneurs. Last year, Nirmala Sitharaman has indicated that she was planning to promote women entrepreneurs and increase their participation in defence production and procurement. While government procurement is one of the ways to encourage startup businesses, other methods include a forward-looking taxation system when it comes to angel funding and others.

The startup schemes started by the Indian government should be consistently followed without any disruption. Be it taxation related to angel funding, GST for startups, ecommerce policy, or data localisation, there needs to be clearer picture for both founders and investors to forecast their future cash flow. Maintaining consistency in government policies is key to supporting startups and economic growth. Only when a government is consistent does it earn the trust of investors (foreign and domestic), entrepreneurs, and traders.

Source Credit: https://yourstory.com/2019/07/startup-plan-budget-nirmala-sitharaman, https://yourstory.com/2019/07/startups-get-rs-13k-cr-funding-boost-from-govt-in-