Startup Fund will Boost ‘Make in India’

Rajiv Chawla

Start up capital refers to the money that is required to start a new business, whether for office space, permits, licenses, inventory, product development and manufacturing, marketing or any other expense. Start up capital is also referred to as "seed money."

The money can come from a bank, in the form of a business loan; or from an investor, group of investors, or venture capitalist(s). In the case of a bank loan, the business will be expected to make monthly payments to pay down the debt plus any interest and/or fees. In the case of an investor, he or she will negotiate to provide that start up capital in exchange for a certain stake in the company.

Venture capital is financing that investors provide to start up companies and small businesses that are believed to have long-term growth potential. For start ups without access to capital markets, venture capital is an essential source of money. Risk is typically high for investors, but the downside for the start up is that these venture capitalists usually get a say in company decisions.

Capital investment refers to funds invested in a firm or enterprise for the purposes of furthering its business objectives. Capital investment may also refer to a firm's acquisition of capital assets or fixed assets such as manufacturing plants and machinery that is expected to be productive over many years.

In the late 1990s, the most common type of start up company was a dotcom. Venture capital was extremely easy to obtain during that time due to frenzy among investors to speculate on the emergence of these new types of businesses. Unfortunately, most of these internet start ups eventually went bust due to major oversights in their underlying business plans, such as a lack of sustainable revenue.  However, there were a handful of internet start ups that did survive when the dotcom bubble burst. Internet bookseller Amazon.com and internet auction portal eBay are examples of such companies.

The Prime Minister of India, Shri Narendra Modi had in his Independence Day speech for 2015 announced the “Start-up India” initiative. This initiative aimed at fostering entrepreneurship and promoting innovation by creating an ecosystem that was conducive for growth of Start-ups. The objective was that India must become a nation of job creators instead of being a nation of job seekers. This initiative was formally launched in January, 2016.    Government of India had organized a global workshop on “Innovation and Start-ups” on the launch event with a view to provide a platform to bring together all stakeholders, stimulate dialogue on key challenges that the Indian innovation ecosystem faced, and provide the potential solutions to address those issues.  The other important objective of this initiative was to foster a fruitful culture of innovation in the country and to reiterate the Government of India’s commitment to making India the hub of innovation, design and Start-ups.

Start-up has been the buzz word since then.  Students, professionals, women and almost everyone – young and old alike with a dream and vision to be a entrepreneur started working around their thoughts, proposals with a structured approach and roadmap.  There’s no dearth of fresh, innovative ideas, business models, talent, enthusiasm and hardwork.  However, funding has always been a problem for start-ups. With the seed money, the startups can approach venture capitalists or other funding agencies,

In line with the Startup India initiative, a five-fold hike was made by the government in the Union Budget 2016-17 for seed funding to start-ups in the next fiscal. The government also announced opening of 25 new technology-business incubators to provide relevant training. Incubators are a major source of funding to these new ventures.  The government has also earmarked Rs 10 crore for creating "world class" incubators.

In a push to the government’s Startup India campaign, a ‘Fund of Funds for Startups’ (FFS) at Small Industries Development Bank of India (SIDBI) for contribution to various Alternative Investment Funds (AIF), registered with SEBI which would extend funding support to startups, was established recently.  The objective of this FFS worth Rs 10,000 crore is to provide a stable and predictable source of funding for startup enterprises and thereby facilitate large scale job creations.  A corpus of Rs 10,000 crore could potentially be the nucleus for catalysing Rs 60,000 crore of equity investment and twice as much debt investment.  Further provisions are expected to be made as grant assistance through gross budgetary support to monitor and review performance in line with the ‘Start up India Action Plan’.  SIDBI has ramped up the start-up funding operations to boost 'Start-up India' initiative with the launch of funds like unique India Aspiration Fund and Fund of Funds operations.

In line with the objectives of Startup India Action Plan and to accelerate its operations, the Venture Capital Investment Committee (VCIC) has considered proposals from 16 venture capital funds for contribution under the proposed FFS.

While many entrepreneurs were excited by the announcements made by Prime Minister as part of the Startup India Action Plan and there’s no doubt the measures were significant, but there’s big question, and that is - are all the startups eligible for the benefits that were announced?

In addition, for a start up to be recognized as one,

*It must be an entity registered/incorporated as a) Private Limited Company under the Companies Act, 2013; or b) Registered Partnership firm under the Indian Partnership Act, 1932; or c) Limited Liability Partnership under the Limited Liability Partnership Act, 2008.

*Five years must not have elapsed from the date of incorporation/registration.

*Annual turnover (as defined in the Companies Act, 2013) in any preceding financial year must not exceed Rs. 25 crore.

*Startup must be working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

*The Startup must aim to develop and commercialise: a) a new product or service or process; or b) a significantly improved existing product or service or process that will create or add value for customers or workflow.

*The Startup must not merely be engaged in: a) developing products or services or processes which do not have potential for commercialisation; or b) undifferentiated products or services or processes; or c) products or services or processes with no or limited incremental value for customers or workflow

*The Startup must not be formed by splitting up, or reconstruction, of a business already in existence.

*The Startup has obtained certification from the Inter-Ministerial Board, setup by Department of Industrial Policy & Promotion (DIPP) to validate the innovative nature of the business, and a) be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an incubator established in a post-graduate college in India; or b) be supported by an incubator which is funded (in relation to the project) from Government of India as part of any specified scheme to promote innovation; or c) be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an incubator recognized by Government of India; or d) be funded by an Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network duly registered with SEBI that endorses innovative nature of the business; or e) be funded by the Government of India as part of any specified scheme to promote innovation; or f) have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.

DIPP dons the hat of a matchmaker between government’s various ministries and start-ups where it handholds the start-ups and bring them in touch with the government.  Many arms of the government are scouting for innovative ideas to address their unique problems while there are many start-ups which have these solutions but are either unaware of their requirement or don’t have access to the government.  DIPP aims to act as a facilitator between the two.

Beyond this, smallB.in is SIDBI’s attempt to inspire all individuals to look at the business opportunities all around and to demystify and simplify the process of establishing a business in India.  Realising the Promotion of Entrepreneurship as an important means of unleashing the productive and innovative potential of the youth, and its contribution to job creation, economic competitiveness and prosperity, smallB.in focuses on addressing the needs primarily of budding entrepreneurs. It helps the entrepreneurs unravel   the process of identification  of business opportunities, generate ideas and  learn from some of the most successful Start-ups in the world, find links and resources for franchise opportunities available in India access technologies from IITs and other premier Institutions for Commercialization, and to learn how to go about evaluation of  the right business opportunity and discover the essential steps involved in incorporating a new business in India.

It provides information on various forms of business organisations,key steps, regulations & procedures involved in setting up of a new enterprise, access to policy measures, schemes and incentives offered by Central and the State governments, various sources of finance, how to capitalise a business, essentials of accounting, capital budgeting, cash flow management, insurance and taxation,  "do's" and "don'ts" of approaching a bank/financial institution/venture capital organisation, what constitutes a typical Bank's lending criteria, why a Business Plan is essential and how to go about it,  how to prepare a Detailed Project Report for a Bank / Financial Institution, the process of Disbursement of Sanctioned Assistance, how to access Collateral Free Loans from Banks in India, Venture Capitalists in India and how to approach them, etc. – all at one place.

Similarly Standup India is another great initiative by the Government of India with an objective to facilitate bank loans between  10 lakh and  1 Crore to at least one Scheduled Caste (SC) or Scheduled Tribe (ST) borrower and at least one woman borrower per bank branch for setting up a New Enterprise (also termed as greenfield enterprise).   Under Standup India financing the rate of interest would be lowest applicable rate of the bank for that category (rating category) not to exceed (base rate (MCLR) + 3%+ tenor premium).  Besides primary security, the loan may be secured by collateral security or guarantee of Credit Guarantee Fund Scheme for Stand-Up India Loans (CGFSIL) as decided by the banks.  The loan is repayable in 7 years with a maximum moratorium period of 18 months. For drawal of Working capital upto  Rs.10 lac, the same may be sanctioned by way of overdraft. Rupay debit card to be issued for convenience of the borrower.  Working capital limit above  10 lakh to be sanctioned by way of Cash Credit limit.  The Scheme envisages 25% margin money which can be provided in convergence with eligible Central / State schemes. While such schemes can be drawn upon for availing admissible subsidies or for meeting margin money requirements, in all cases, the borrower shall be required to bring in minimum of 10% of the project cost as own contribution.

More details about the Startup India and Standup India are available on the Government of India portals namely startupmitra and standupmitra respectively, being managed by SIDBI.There are many other organizations working on providing knowledge and support to Start-ups.  Start-up Exhibitions with an aim to link the start-ups and investors under one roof are also commonly visible from time to time.  Such platforms act as strong bridges for both money seekers as well as investors.

The author is Chairman of IAMSMEofIndia (Integrated Association of Micro Small & Medium Enterprises of India) email: rajivchawlaindia@gmail.com, info@iamsmeofindia.com