With $1.7B fund budget booster, Indian startups on a roll?
Union Budget 2014 is encouraging for Indian startups, but it remains to be seen how the government will ensure speedy implementation of its ambitious plansBy Twishy Shahi 15 Jul, 2014
Promises, big investments and setting up of startup initiatives, the Indian Union Budget 2014 has certainly made noise in all the right places. India today needs disruptive ideas and massive fundings and the Budget has been extremely encouraging to the Indian startup community. This is definitely an interesting time to be an entrepreneur in India.
In order to create a conducive ecosystem in the MSME sector, the Finance Minister proposed to establish approximately US$1.7 billion fund to act as a catalyst to attract private capital by way of providing equity, quasi equity, soft loans and other risk capital for startup companies. According to the Minister, the promotion of entrepreneurship and startup companies remains a challenge. While there have been some efforts to encourage, one principal limitation has been availability of capital by way of equity to be brought in by promoters.
To establish technology centre network in order to promote innovation, entrepreneurship and agro-industry, the Budget proposed to set up a fund with a corpus of US$33 million (INR 200 crore).
It also announced that the definition of MSME will be reviewed to provide for a higher capital ceiling, and an entrepreneur-friendly legal bankruptcy framework will also be developed for SMEs to enable easy exit. This move signals that the government is serious about issues faced by startups.
A pan-India ‘Digital India’ programme will promote digital inclusion with broadband connectivity up to the village level, thereby enabling improved access to services through IT-enabled platforms.
R Chandrashekhar, President, NASSCOM said, “The announcements on a pan India digital initiative, funding for startups, district level incubator network and leveraging technology for good governance are welcome steps. These measures along with the initiatives on skilling, smart cities and ease of business, reflect the thrust on role of technology in Budget 2014.”
Who will benefit from the US$1.7 billion fund? Will the government turn VC?
“There is some lack of clarity on how exactly this is to be achieved. At one point in the Budget speech, it was mentioned that this would be via a “fund of funds” approach. This means the government would seek out VCs and other players who invest in the space, and become LPs or Limited Partners in such funds, and these funds would do what they do best — identify, mentor and grow startups to exit. This is a very welcome move, given that traditionally, Indian institutions are shy of investing in venture capital funds,” said Mahesh Murthy, Managing Partner at Seedfund.
“However, at a different point in the speech it was mentioned that it would be a “fund of USD 1.6 billion” for startups. This could mean a few things; either that the government would in effect become a VC and have its own processes, people and funding guidelines — something I’m not too enthusiastic about, as I can’t quite imagine ‘babus’ from the Finance Ministry listening to startup pitches. Or it could mean that they are simply continuing a programme put in place by the Congress called CGTSME and administered via SIDBI, which set aside US$0.4 billion (INR 2,500 crore) for putting US$0.1 million (INR 1 crore) into each company. This also, for many reasons, is a sub-optimal approach,” he added.
Experts believe that there has been a more than expected focus on startups. It signals that the government believes that entrepreneurship will be a growth driver in India over the coming years, but the government should have thrown some light on the implementation of these policies.
“The quantum of the allocation suggests that the government is taking this programme seriously. I have always maintained that government capital should only venture where private capital doesn’t. If you read the Budget announcement carefully, what is interesting is that the government views this not as a standalone effort, but as an as effort to stimulate the movement of private capital into startups,” explained Ashwin Raguraman, Chief Operating Officer, India Innovation Fund.
“I also believe that the government has killed many birds with one stone through this proposal. First, there is a stimulus provide to innovation, in the country, which is closely related to entrepreneurship. Secondly, more entrepreneurs with early-stage capital leads to the rapid generation of employment, which the government has called out as one of its priority items. Third, by using this programme to also stimulate private capital investment in startups, the government will be encouraging greater inflow of foreign capital through venture capital funds or FDI. Fourthly, higher capital availability at the early stages translates to higher salaries and disposable incomes which should boost consumption. Finally, if this helps spawn entrepreneurs with global impact, there will be a positive impact on brand India,” he added.
In how many years this fund will be disbursed over and the mechanics of management of the fund are key parameters that will determine the success of the initiative. Many questions related to its structure and focus need to be answered. The experts are hopeful that the fund is put into operation with speed.
“Finally, it is important that the fund is run professionally with a return attached to the investment and not in ‘grant’ mode. This promotes a greater effort from the entrepreneurs to direct their firms towards profitability. It is good to see that the original intent announces specifies such ‘return based’ instruments,” Raguraman stated.
This fund should invest in multiple sectors with the intention of creating world class companies. According to the experts, any company which can provide solutions to a problem in India or across the global should qualify for this fund.
Will this address the issue of early-stage funding in India?
The biggest challenge for Indian startups is to secure early-stage funding. The startups have yet not enjoyed easy access to capital. This fund might address the burgeoning issue, however, the devil is in the details.
“Traditionally, the government has done well in providing the capital but calling on private partners for implementation. Ticket sizes should be optimised to ensure the promotion of risk taking amongst entrepreneurs and exploration of establishing global footprints, once they have met with early success in India. Also, though this is touted as a startup fund, it remains to be seen if this will address only early-stage startups, or will fall to the temptation to invest in established startups,” Raguraman explained.
“What will determine the success of this fund is also the ability of its investees to attract private capital, either as co-investments or in follow-on rounds. This will be determined not only by the quality of investments made by the fund, but also by the additional support it is able to provide. Early-stage companies need high-touch investments for success. The programme should therefore evolve a holistic approach that supplements capital with mentoring and access to markets,” he added.
Is the District level Incubation and Accelerator Programme a boon for startups?
The most encouraging move was the announcement to set up a nationwide ‘District level Incubation and Accelerator Programme’ for incubation of new ideas and providing necessary support for accelerating entrepreneurship. This initiative will increase the base of entrepreneurs to the smaller cities and towns and bring in a culture of professionalism and organisation to entrepreneurs emerging from smaller cities, towns and villages. This will arrest migration from smaller towns to big cities in search of employment.
“This is a brilliant step taken by the government. What I would have liked to see is that there are already several incubators and accelerators in the cities. The success ratio of these has not been very good. It would have been great if there was an announcement related to improving the quality at these and creating a model incubator and accelerator programme that could be replicated across the country,” Raguraman shared.
“Another aspect which has been perennially overlooked or ignored is the government as a customer. There are a host of startups today in India that could service the government in multiple areas. However, they do not qualify due to stringent capitalisation and track-record requirements. Startups, which could service the government, could be separately incubated and funded through this programme and in conjunction with the proposed venture capital programme, and actively encouraged to bid for government projects, besides being trained with the wherewithal to do so,” he added.
Will the US$1.7 billion fund rightly reach startups?
The startup community cheered the various proposals in the Budget however everyone is curious to know how will the government execute the US$1.7 billion fund. There have been initiatives similar to this in the past but the startups have hardly benefitted from them.
Ronak Kumar Samantray, Co-founder, NowFloats thinks that this budget showcases the fact that Indian government is serious about the startup ecosystem. “The US$16 million (INR 100 crore) for Startup Village entrepreneurship for rural population is also a great step to promote innovation at grassroot level. This will push a lot of people to think about solving rural problems which is important for development of the country,” he said.
Leveraging technology for access and governance was another key highlight of the Budget. The Ebiz initiative, E-kranti, Virtual classroom, E-visas, Financial Inclusion Mission and many others will help to enhance technology usage in the India market. Travel booking startups are expected to receive a boost as the Budget proposes to launch e-visas.
Startups in the insurance sector such as PolicyBazaar and Bankbazaar are likely to benefit as the FDI cap in insurance sector has been raised to 49 per cent.
The statements on providing a stable tax regime, reducing litigation related to tax and providing a conducive regulatory environment for startups and companies to establish, operate and where necessary, close businesses would help improve the business environment in the country.
“The important execution challenge is to create linkages between programmes. There are announcements related to technology research centres and biotechnology clusters in the Budget. If the commercialisation of technology emanating from the research centres becomes a focal point as they are upgraded, it could spurn high-tech entrepreneurship. Similarly, with the cluster programmes, a key targeted beneficiary should be startups in that space,” Raguraman said.
The much-awaited Budget from the new government has placed the startup community at the centre of national economic discourse, but what remains to be seen is how will the government ensure speedy and transparent implementation of these innumerable promises.