Startups are the driving force in disrupting traditional industries and introducing innovation. However, they often face challenges when it comes to securing adequate funding. Notably, the Government of India has committed Rs. 7,385 crores under Fund of Funds for Startup India Investment, launched in 2016, for 88 Alternative Investment Funds (AIFs). These AIFs have invested Rs. 11,206 crores in 720 startups till date.
An Overview of Fund of Funds for Startup
Fund of Funds is essentially a mutual fund scheme that invests in other mutual fund schemes. This strategy allows the fund managers to hold a portfolio of such funds instead of directly investing in equities or bonds. This approach extends support to Securities and Exchange Board of India (SEBI) registered Alternative Investment Funds (AIFs), which in turn invest in startups. The Fund of Funds was announced with a corpus of Rs. 10,000 crore, to be accumulated over 14th and 15th Finance Commission Cycles (FY 2016-2020 and FY 2021-2025). The Department for Promotion of Industry and Internal Trade (DPIIT) provides budgetary support.
It has been successful in making capital available for startups at different stages of their development. The Fund of Funds has influenced the domestic capital, reducing dependence on foreign capital and encouraging homegrown venture capital funds.
Performance Metrics of the Fund of Funds
Since its launch, the committed amount under the Fund of Funds has grown significantly, recording a Compound Annual Growth Rate (CAGR) exceeding 21%. The Small Industries Development Bank of India (SIDBI), responsible for executing the scheme, has implemented reforms recently to speed up the disbursements, which resulted in a 100% surge year-on-year in drawdowns. This fund has also played a crucial role in anchoring 67 out of 88 AIFs supported, helping achieve its core objective.
Alternative Investment Funds (AIF)
Alternative Investment Fund refers to any fund established or incorporated in India that acts as a privately pooled investment vehicle. It collects funds from sophisticated investors, both Indian and foreign, for investing it in accordance with a defined investment policy to benefit its investors.
The Startup Ecosystem in India
Startups, by definition, are companies in the initial stages of their operations. These companies typically start with high costs and limited revenue, which leads them to seek capital from various sources like venture capitalists. India stands as the third-largest startup ecosystem globally after the US and China with around 75,000 startups to its name.
Global Innovation Index and Other Rankings
India’s ranking on the Global Innovation Index (GII) has improved significantly from 81st place in 2015 to 46th in 2021 among 130 global economies. Moreover, India ranks first among Central and Southern Asian economies and second among 34 lower-middle-income economies on the GII.
In addition, India holds the third position globally for quality of research publications as per the National Science Foundation database. The country is also ranked ninth globally concerning resident patent filings.
Government Initiatives for Startups
The Indian government has introduced several initiatives to bolster the startup ecosystem. Some of these include the National Initiative for Developing and Harnessing Innovations (NIDHI), Startup India Action Plan (SIAP), and Ranking of States on Support to Startup Ecosystems (RSSSE). The Startup India Seed Fund Scheme (SISFS) provides financial aid for various startup development phases, while the National Startup Awards reward outstanding startups contributing to economic dynamism.
Venture Capital and Its Significance
Venture capital is a form of funding for new or growing businesses, typically coming from firms that specialize in creating high-risk financial portfolios. This investment type involves the risk of losing money if the venture fails but can also result in substantial rewards if the startup succeeds. Venture capitalists provide this crucial financing which aids in the evolution and growth of startups.