The Floundering Startup India Boat – Only $848K Disbursed From $1.4 Bn Fund

Since PM Modi’s government took charge, a lot has been done to encourage the Indian startup ecosystem. From the Startup India mission to tax exemptions, tinkering labs and the addition of incubators, the government has tried to play a fair game in all areas, to date, and to make it a globally-recognised initiative. Even the ‘cursed’ demonetisation drive imparted innovation in the hearts (and business models) of entrepreneurs.

One such initiative under the Startup India Action Plan was the creation of the ‘Funds of Funds’ for startups. The announcement was publicised but what followed was a botched up execution of a government plan.

In May 2015, the Reserve Bank of India has allocated INR 10,000 Cr to the SIDBI in order to set up a VC fund to attract private capital for startups. In December 2015, the Union Cabinet cleared $140 Mn (INR 930 Cr) from the $302 Mn (INR 2,000 Cr) fund-of-funds under the SIDBI for contribution to various VC funds registered with the Securities and Exchange Board of India, as part of the Startup India Action Plan.

A recent Business Standard report reveals that with around $1.4 Bn (INR 10, 000 Cr) corpus sanctioned more than a year ago, to date, only $848K (INR 5.66 Cr) has been disbursed – sad but a true reality.

Lofty Promises, High Expectations…

The fund was targeted to be built-up in full by 2025. The SIDBI was given the responsibility to invest the corpus into alternative investment funds (AIFs), registered under the SEBI. These AIFs were then supposed to invest in startups, in categories such as Internet of Things (IoT), artificial intelligence, healthcare, consumer media, fintech, data analytics, cyber security, digital media, machine learning, agri-related businesses and more.

The fund of INR 10,000 Cr was allotted for four years, wherein the SIDBI was authorised to receive INR 2,500 Cr every year. It aims to generate employment for 18 lakh people on full deployment and to support seed-stage, early-stage, and growth-stage startups. Public sector bank SIDBI was given charge of managing the day-to-day operations of the fund.

Initially, around $194 Mn (INR 1,300 Cr) fund was approved – of which $75 Mn (INR 500 Cr) was released in FY 2015-16, while the remaining was earmarked for FY 2016-17. The Life Insurance Corporation (LIC) also committed to being a co-investor in the Fund of Funds.

The fund is also permitted to invest in private funds. However, this development is only possible if the private funds have raised 50% of the capital. In such a situation, the fund-of-funds can invest the remaining amount in them, for non-startups.

Earlier reports also suggested that the SIDBI sanctioned about $25 Mn (INR 168 Cr) to six funds – GVFL, Kae Capital, Orios Venture Partners, Ideaspring Capital, Parampara Early Stage Opportunities Fund, and the IFCI Venture Capital Fund.

In July 2016, the committee also recommended the proposals of eight funds for an aggregate corpus support of about $64 Mn (INR 428 Cr) from the fund. The total targeted corpus of these eight funds was about $470 Mn (INR 3,130 Cr). Earlier today, the SIDBI cleared sanction requests from nine funds aggregating to about $45 Mn (INR 300 Cr).

According to the Startup India status report, till February 16, 2017, a total of $19.3 Mn (INR 129 Cr) has been sanctioned by the SIDBI to the venture funds.

Business Standard recently filed an RTI query with the SIDBI on February 8, 2017. The query revealed that till date, since the setting up of fund in June 2016, the SIDBI has created a fund with only INR 1,315 Cr corpus.

Instead of the initial six venture funds, only four – Kae Capital, Orios Venture Partners Fund II, Saha Trust and Kitven Fund III –  were given allotments, a mere INR 110 Cr (out of INR 1,315 Cr).

Independently, Orios Ventures got the highest commitment – to receive INR 900 Cr from the total corpus. The SIDBI has, so far, allotted only INR 50 Cr to the venture fund.

Furthermore, Kitven Fund, backed by the Karnataka state government, has only been given INR 5 Cr by the SIDBI. The original commitment was for INR 50 Cr from the Fund of Funds. Saha Trust, a women-centric fund, was allotted only INR 10 Cr, of the committed INR 65 Cr.

Locally established investor Kae Capital was committed to receiving INR 300 Cr, but was given only INR 45 Cr. Moreover, it is the only fund to have invested INR 5.66 Cr in an undisclosed startup. The other funds are yet to make any investments from the allotted money.

Mohandas Pai, a Board Member, defends these developments. He said, “It is typical in a fund-of-fund structure to start like this and go up the J curve. The fund had actually invested INR 200 Cr and this would catalyse investments of INR 1,000 Cr.”

Also, as stated earlier, the Life Insurance Corporation (LIC) was supposed to be a contributor to the Funds of Funds. However, not a single penny has been contributed, to date, in the fund.

In another development, in March 2016, when applications were invited from the startups to receive funding under the Startup India action plan, only one out of the 250 startup applications were approved till June 2016. This decision raised questions on the success of the idea as well as government intentions. To combat the same, the DIPP then planned a strategy to upgrade the action plan and get more enterprises to take part in it.

With so many impediments on the path of a startup qualifying for status, and receiving investment, one has to wonder: Is ‘Startup India, Stand Up India’ too good a dream to come true?

Other Steps Taken So Far

Apart from setting up the ‘Funds of Funds,’ the Startup India action plan comprises several other initiatives such as Startup India hub, tax, and patent benefits, Atal Innovation mission and more. As of February 16, 2017, the government claims of the following achievements in the startup India action plan status report disclosed:

• Under the Startup India, Standup India initiative, 1662 applications were received. Out of these 636 had the required documents and were recognised as startups by DIPP.
• The Startup India hub has been able to handle 32,587 queries and facilitate more than 190 startups by providing advisory on business plans, pitching support, etc.
• A four-week free Learning & Development programme covering six modules was launched. 14,692 applicants signed up for the course and 17,105 hours of content was consumed within two weeks of launch.
• 257 Tinkering Labs have been approved and six challenges have been shortlisted under the Atal Grand Challenge.
• Of the 3,658 applications received, 15 new incubators would be set up, while six existing incubators have been sanctioned a scale-up grant. The aim was to set up 35 incubators.
• Of the seven research parks to be set up, one was already functional at IIT Kharagpur, while a new research park has been established at IIT Gandhinagar. For this purpose, the DST has also sanctioned INR 90 Cr and disbursed an initial installment of INR 40 Cr.
• INR 475 Cr for 2016-18 has been earmarked under the Ucchatar Aavishkar Yojana (UAY) and 92 research proposals from IITs have been approved under the same.

[The names of recognised and advised startups as well as newly set up incubators under the scheme could not be verified.]

The government’s intentions are noble, and the efforts have not been without results. But these initiatives, as all government undertakings, are taking a very slow route to the final destination – Making India truly digital. With three financial years under its reign, a visible improvement to the Indian startup scene is yet to be noted.

As Mohandas highlighted we have to wait for the ‘J curve’ to reach the top. But it is time for the Modi government to switch gears and drive the startup bandwagon from promises to reality – the sooner the better.

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