Fund flow: Technology start-ups to get a shot in the arm

Funding tech incubators in academic institutions will soon be treated as CSR expenditure

With the corporate affairs ministry set to issue a notification asking companies to spend two  per cent of their average net profits on corporate social responsibility (CSR) programmes, there could be a rush by the latter to set up technology incubators at education institutions.

In the Budget 2013-14, Finance Minister P Chidambaram said funds provided to technology incubators located within academic institutions and approved by the ministry of science  and technology or ministry of micro, small and medium enterprises will qualify as CSR expenditure.

“The ministry will shortly issue a notification on this. Out of their entire kitty, companies can look at spending one per cent on incubators and another one per cent on other CSR initiatives,” said a senior official from the ministry of science & technology.

Clause 470 of the new Companies Bill makes it mandatory for companies clocking an average profit of at least Rs 5 crore or with a net worth exceeding Rs 500 crore, or turnover exceeding Rs 1,000 crore in the last three years, to spend two per cent of the net profit on CSR.

“Companies used to take their problems to education institutions. This initiative will motivate companies to reach out to institutions not only to get solutions to their problems, but also to support them financially,” the official said.

According to a report by SMC Global Securities Limited, during FY13, the combined net profit of listed companies in India stood at Rs 4.37 lakh crore. At two per cent of this, the CSR amount would be around Rs 8,700 crore.

“This is a good move and is necessary for our start-up ecosystem. While companies can pick up their areas of interest and look for innovation in the same, incubators can not only have investments and commercial knowledge, but also mentoring from companies,” said the official.

There are four types of incubators — business incubators, technology incubators, technology innovation centres and technology business incubators.

According to a study by the Department of Science and Technology (DST) in 2010, the success rate of incubated companies in India stood at 60-70 per cent, which is comparable to that in the US. The status report stated 20 to 30 per cent of incubated companies make it big. The survey was based on the responses of 28 incubators supported by the DST.

The study also noted that the rise of ‘angel funding groups’, such as Indian Angel Network, Mumbai Angels and TiE Chennai Fund, has given an impetus to entrepreneurial ventures. “This will be important not only for institutions but also for companies. What incubators are able to do in terms of helping companies at an early stage, other for-profit ventures can’t do. The risk-taking ability of for-profit ventures is not high,” said Sushanto Mitra, former CEO of SINE (Society for Innovation and Entrepreneurship), Indian Institute of Technology Bombay.

Mitra added there are not many technology start-ups in India, though there are several internet and software start-ups. “A prime reason for this is that there is no one to fund technology ventures. We require funds to create new capabilities and products.”

A successful entrepreneur or business is one that has managed to survive for five years and above after they graduate from an incubation centre. The 20-30 per cent who manage to make it big are the ones with a turnover in excess of Rs 100 crore.
WHAT IT MEANS
For companies

• Fund research in areas they want
• Avail of tax exemptions

For institutions

• Avail of funding, commercial knowledge and mentoring
• Can have their alumni fund started
• Start-ups located in remote areas can also seek funding