In his Budget proposal, Finance Minister Arun Jaitley announced the setting-up of a Rs 10,000 crore fund to provide equity and soft loans for start-ups. Though setting funds aside for micro, small and medium enterprises (MSMEs) or start-ups has been happening, what has excited industry is Jaitley’s intent to use the route of ‘fund of funds’ to disburse this amount.
“A lot depends on the implementation. In the past, we have had several programmes that had sufficient funds too, like the DST, technology entrepreneur promotion etc. Of the total outlay in these funds, only 25 per cent of the money would have been disbursed so far. Reason being early starts-ups are risky in nature and government agencies want to play safe,” said Sharad Sharma, co-founder of software product association iSpirt.
However, he feels if the government is now taking the fund of funds route, it is finally following global standards. “In both, the US and in Israel (Yozma programme), such programmes have given a huge impetus to the start-up ecosystem. If the government is taking this route, it will mean the government would have to identify a few funds that they will go along with to fund start-ups. The risk element of investing in start-ups reduces from the government’s stand point,” he added.
Sources within the industry added that the finance ministry would identify one or two banks, ideally one each from the private and public sector, which would, in turn, shortlist funds along with which the government will participate in investing. Industry experts believe that the current size of the corpus will mean an increase of early stage capital for start-ups and MSMEs by 50 per cent.
“Assuming that even a quarter of this goes into equity, the government could be a potential stakeholder in over 1,000 enterprises. With this amount adding to the already buoyant venture capital funds, Indian early-stage ecosystems should hopefully be able to surpass China in terms of magnitude as well as activity, to be second only to Silicon Valley,” said Sateesh Andra, managing partner, Vetureast.
He added further: “The intention of providing soft loans is a welcome step as it will address the working capital needs of several businesses that are not on the target list of venture capitalists. There is also a clear crunch of funds in the early stages of product conceptualisation, validation and prototyping. The allocation of a fund of Rs 100 crore for technology development could play a significant role in nurturing early-stage product development and enhancing the emergence of more IP or innovation-led start-ups.”
Several industry players, though, wanted to know more about the implementation. “The announcement is a positive for small and new ventures and entrepreneurs across the country. The size of the fund also signifies that there is intent within the government. But I am more interested in the fund’s structure and disbursement period,” said Ravi Gururaj, chairman of Nasscom Product Council.
Many also highlighted that the Budget did not even address or promise to address the removal of taxation on angel investment under Section 59.
R Chandrashekhar, president of Nasscom said that for a start-up, it was not just a question of equity funding. Funding through venture capital came at a later stage while angel funding came early and seed funding came even prior to that. While seed funding was not available in the country, in the case of angel investment, there were a whole lot of taxation issues.
“For instance, the government has increased the capital gains tax to 20 per cent and the lock-in period has been upped to three years. This will negatively impact seed investors as their investments in start-ups are mostly bought out by venture capitalists within three years. Capital gains tax is applicable on seed funding too. Some of these issues need to be aligned with international practices,” said Chandrashekhar.
He added that it was yet to be seen how the Rs 10,000 crore fund was split towards addressing various aspects of the start-up eco-system such as incubation facilities, accelerators, training and skills. It was also yet to be seen how the government planned the entire exercise in terms of structuring the initiative and choosing the right people and private bodies to pick the companies etc.
“Since this involves a high risk of failure, these kind of programmes are mostly run by private companies, with government providing some financial support which gives private partners the confidence to take risks,” he added.