The Government’s Rs.10000 crore Fund of Fund for startups which was launched in accordance with the Startup India Action Plan of the government reports very slow progress with Rs.70 crore been disbursed to startups until the start of this month. This fund was started in January 2016and was started in order to invest in the local venture capital funds that need back seed stage and early-stage companies. It has already made commitments to 62 start-ups which were all backed by Alternative Investment Funds where SIDBI acted as a limited partner.
As per the scheme, about Rs.600 crore has already been released by the Department of Industrial Policy and Promotion (DIPP) by SIDBI which has until now committed Rs. 623.5 Crore across 17 AIFs as on 31st March 2017. Out of the 623.5 crores, an amount of only Rs.33.63 crore has been distributed to 62 startups until March. DIPP officials mentioned that the disbursements in the coming months will be picked up since the guidelines have been revised according to the feedback received from the different stakeholders of the ecosystem in order to ensure quick and easy disbursement of funds. After the new guidelines were formed in March 2017, the conditions for raising capital for a startup were seen to be very restrictive which discouraged the investors.
These 17 funds include the Mumbai based early stage investor Kae Capital that raised the $30 million fund for the second time in February last year. It has been given a commitment of Rs 45 crore from the specific funds. Kae Capital holds investments across 16 startups which include Truebil, Paix Technology, Loanzen and ListUp. Saha Fund, which is another venture capital fund that focuses on women entrepreneurs, has invested Rs.10 crore across 10 startups. Its investment targets include the fitness application Fitternity, women’s garment venture Kaaryah and online food platform InnerChef. Mumbai based Orios Venture Partners, Unicorn India Ventures, Pi Ventures and Ideaspring Capital have received the funds. Stellatis Venture Partners announced a marginal close of its $100 million funds in February, has got commitments of Rs.28 crore and investments in the one startup until March 2017.
At the time of the original Cabinet clearance in June 2016, it was decided that the corpus of this fund in addition to the funds raised by the AIFs in which the fund holds equity will have to be invested completely in startups. The investing community sounded out that the investors in AIFs look forward to having the portfolio of AIFs properly diversified in order to manage the investment risks. If the complete pool is invested, it posed a higher and unacceptable risk. The process is long drawn, which begins with the pitching by a startup, firming up of the commitments and then release the funds in parts.
The biggest challenge that the startups in India have to go through is the lack of funds, in the form of debt and equity. There are angel funds in the space which have entered in the last decade, but these are very few. An AIF is a fund established in India that is privately pooled and collects funds from the investors in order to invest it in accordance with a defined and well laid out investment policy for the benefit of the investors.
In 2016, the Union Cabinet approved the proposal for the establishment of the Fund of Funds for startups with a corpus of Rs.10, 000 crore and in order to qualify for a scheme, a startup should be less than five years old with an annual turnover that does not exceed Rs 25 crore in any of the last five years of operation, in addition, the entity should be working towards innovation that is driven by technology or intellectual property. It is expected that the fund will generate full time employment for about 18 lakh people.