Indian Angel Network, the largest with 450 odd members, invests barely Rs 100 crore in some 30 to 40 companies each year. India receives around $20 billion of venture capital and private equity money annually but 90% of this is from foreign investors who prefer later stage risk, less than a tenth goes to early stage and just a trickle to startups.
The government’s move to create a domestic source of capital for seed and early-stage companies is therefore very welcome. This money is being disbursed by the Small Industries Development Bank of India (Sidbi) through the India Aspiration Fund and the Fund-of-Funds for Startups. In addition, capital is also channelled into downstream venture funds which are independently managed.
This is the best way for the government to deploy and disburse the funds and is the approach adopted by all countries. Investing in startups is a very high-risk activity best left to professionals rather than attempted by government officials.
Since Sidbi only commits to 15% of the corpus of each fund, fund managers need to raise the balance from private sources, this has the benefit that the government’s money is leveraged almost seven-fold. So far, Sidbi has sanctioned contributions to almost 40 funds and more is on the way.
However, a necessary corollary to this approach is that it takes some time before the capital finds its way into startups. There is a structured process where venture funds apply to Sidbi for funding and go through a vetting process.
Moreover, no money can be drawn down from Sidbi unless the venture capital fund has signed contribution agreements from other investors for the balance 85%.
This is not easy and often takes time, as there are a very limited set of domestic investors for such funds and the global environment today is somewhat challenged. And investments in companies can only start once the fund has done a “first close”, which is at least 25% of its target corpus.
Based on learnings over the past year, several measures are under way to speed up the process. There was a condition in the fund-of-funds scheme that if it invested any amount (say 15%) in a venture fund, then the entire corpus of that fund could be invested only in startups as per the government definition. The government is already working on relaxing this condition.
Because of delays in funds drawing down capital, the amount sanctioned by government has not been exhausted and so further allocations have been delayed till that happens. However, the government has assured that funds will not be a constraint and we are certainly banking on that assurance as this can transform the startup scene in India.
( By – Saurabh Srivastava)
Source: The Economic Times