New fund a great idea, but devil is in the details

Entrepreneurs have welcomed Union Finance Minister Arun Jaitley's proposed Rs 10,000-crore fund, which will act as a catalyst to attract private capital. But it is clear from their observations that how the fund is managed, and by whom, will be crucial.

In his Budget speech, Jaitley said that the promotion of entrepreneurship and start-up companies remains a challenge, because of the limited availability of start-up capital by way of equity to be brought in by promoters.

"In order to create a conducive eco-system for venture capital in the MSME sector it is proposed to establish a Rs 10,000 crore fund to act as a catalyst to attract private Capital by way of providing equity, quasi equity, soft loans and other risk capital for start-up companies," Jaitley said.

Entrepreneurs are certainly excited. Jeyappriadhevi (who goes by one name), founder and managing director, Kriyative Learning Solutions International Private Ltd, a Chennai-based start-up that specialises in educational research and development, said, "This is a fantastic opportunity for entrepreneurs. Now they can get money against ideas, not only against machines. The government's decision will take India to Silicon Valley," she says.

But she added a caveat: "Execution is what we are looking forward to. I hope this fund will not be one of those funds that are still far away from entrepreneurs' reach, launched on previous occasions by the government." Jeyappriadhevi suggested that the fund should be managed by partnerships of banks, private equity funds and venture capitalists (VCs).

J James, Coimbatore district president of the Tamil Nadu Association of Cottage and Micro Enterprises, suggested that the new fund should not be run by existing government institutions, which he said mainly support large and medium-sized companies which can borrow more than Rs 50 lakh.

Anand Narayan, senior managing director, Creador Advisors India Private Limited, a leading PE fund, said that the proposed fund could supplement already available funds and thereby potentially provide a longer "runway" for investee companies. He suggested an independent, professional body to run the fund, define short-term and long-term objectives and performance criteria, and provide operational freedom and link compensation to performance.

Vijay Karunakaran, the CEO of InGage, a start-up that has developed a multi-brand augmented reality mobile application named InGage, said, "They will have to bring in a proven leader in managing funds, such as a private equity or venture capital fund manager, and will have to build up the ecosystem. You cannot give the responsibility to banks. Managing equity funds and mentoring start-ups is different. A government servant also many not be a healthy option. You have to first build credibility so that start-ups will come to you for funding."

R Balachandar, founder and CEO of Chennai-headquartered Laundry Project India Pvt Ltd, a professional laundry service start-up that runs the retail laundry brand Wassup - Just Laundry, said, "The fund should be managed by a board which has a combination of industry, bureaucracy, and eminent venture capital investors and educationists, to ensure proper implementation. It should have a five-year horizon or more, to give it a proper structure, as entrepreneurship is a long-term affair. At present, there are lots of loose ends."

But the government will have to look at other factors too, that could hurt the new fund's effectiveness - such as the fact that almost 90 per cent of start-ups in India fail within three years from incubation, and the fact, says Balachandar, that new businesses need 20-30 approvals to start operations.