Since it was floated in January 2016, the government’s Rs 10,000-crore Fund-of-Funds for start-ups (FFS), launched in line with the Start-up India Action Plan of the Government, has made slow progress with only about Rs 70 crore having been disbursed to start-ups until the beginning of this month. The Fund, which aims to invest in local venture capital funds that would, in turn, back seed-stage and early-stage companies, has made commitments to 62 start-ups. All these 62 start-ups were backed by Alternative Investment Funds (AIFs) where state-owned SIDBI (Small Industries Development Bank of India) acted as a limited partner.
Under the scheme, about Rs 600 crore has been released by the Department of Industrial Policy and Promotion (DIPP) to SIDBI, which, in turn, has committed Rs 623.5 crore in 17 AIFs, according to official DIPP data updated till March 31, 2017. Of this, an amount of just Rs 33.63 crore had been disbursed to 62 start-ups until end-March. In response to queries sent by The Indian Express on the status of the FFS, a senior SIDBI official said that till September 10, the drawal made by funds had gone up to Rs 69.5 crore.
The SIDBI official said that the the organisation, in its previous funds, has succeeded in leveraging funds to the tune of four times its initial investments and hoped to replicate this with the FFS. “This will happen over a period of time. So far, among the 17 AIFs, 13 have achieved (financial) closure and four are supposed to achieve closure shortly. Drawal made by the funds that have achieved closure amounts to Rs 69.5 crore till now,” the official said.
DIPP officials said they expect the disbursements to pick up “in coming months” as guidelines have been revised based on feedback received from various stakeholders of the startup ecosystem to enable “quick and easy access” to funds.
Until the new guidelines were formulated in March this year, the conditions for raising capital from the Fund-of-Funds, were seen to be far too restrictive and discouraged investors.
The 17 funds include Mumbai-based early-stage investor Kae Capital, which raised its second $30-million fund in February last year and is reported to have got a commitment of Rs 45 crore from the FFS. Kae Capital has investments in about 16 start-ups, including Truebil, a used-car marketplace owned by Paix Technology; peer-to-peer business loan marketplace startup Loanzen; second-hand products marketplace ListUp promoted by Gijutsu Solutions and shopping portal Fynd run by Shopsense Retail Technologies.
Saha Fund, a venture capital fund focused on women entrepreneurs, has invested Rs 10 crore across 10 start-ups. Saha’s investment targets include including fitness application Fitternity, online food platform InnerChef and women’s garment venture Kaaryah.
Among the AIFs that have received funds are Mumbai-based Orios Venture Partners, early-stage investor Unicorn India Ventures, Ideaspring Capital and Pi Ventures. Stellaris Venture Partners, which in February announced a partial close of its $100-million fund, is reported to have got commitments of Rs 28 crore and investments in one start-up until March 2017.
The original Cabinet clearance on June 22, 2016, had decided that the corpus of Fund of Funds — along with counterpart funds raised by the AIFs in which FFS takes equity, would have to be invested entirely in start-ups. The investing community subsequently sounded out the government that investors in AIFs would prefer that the portfolio of AIFs is adequately diversified to manage investment risks and if the entire pool were to be invested in start-ups, it posed an unacceptable risk, sources said.
“The process of funding of start-ups by AIFs is long-drawn, which starts from pitching by a start-up, the firming up of commitments by the AIF and then release of funds in tranches,” a person privy to the start-up funding process told The Indian Express.
Under the revised guidelines, officials said that AIFs supported by SIDBI shall invest at least twice the amount of contribution received from FFS in startups and AIFs supported by SIDBI are now allowed to fund an entity even after it ceases to be a startup.
The biggest hurdle that startups in India face is the lack of funding — both debt and equity. Over the last decade, while angel funds have entered the space, there are too few of them. An AIF is any fund established or incorporated in India that is a privately pooled investment vehicle, which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.
It does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities.
The Union Cabinet, on June 22, 2016, formally approved the proposal to establish the Fund of Funds for start-ups with a total corpus of Rs.10,000 crore, with contribution spread over the Fourteenth and Fifteenth Finance Commission cycles based on progress of implementation and availability of funds. In order to qualify under the scheme, a startup should not be more than five years old as on the date of investment, with an annual turnover of less than Rs 25 crore during any one of the last five years and the entity should be working towards innovation driven by technology or intellectual property.
An amount of Rs 500 crore was provided to the corpus of FFS in 2015-16 and Rs 600 crore earmarked in the 2016-17. The Fund is expected to generate employment for 18 lakh persons on full deployment.