Author: Amit Kumar, Entrepreneurship and Innovation Expert, Ex Programme Manager GIZ India
Funding and Assistance Landscape
Startup promotion framework in India has undergone massive overhaul during the last 3 years, since the launch of “STARTUPINDIA”-a flagship mission mode programme launched in 2016 by the Department of Industrial policy and promotion (DIPP), Government of India. The programme aims to create an enabling startup promotion ecosystem in India and offers funding and other support for different stakeholders i.e. startups, incubators, mentors, investors etc. Before 2016, Department of science and Technology, Government of India along with select state governments were at the forefront of running funding and assistance programme for the startup. However, in the last 3 years many central government ministries and majority of Indian states have launched their own startup support schemes and programmes, which complement the efforts spearheaded by DIPP. In short, “startup funding and assistance ecosystem”in India is currently thriving but the landscape is very vast and one need to navigate their way as per the geographic presence and thematic focus. www.startupindia.gov.in provides a good overview and can act as the information gateway for German startups interested in setting up their India operation. Before taking a peek into the vast landscape of funding and assistance for startups, it is important to understand the term “startup” in the Indian context of government support schemes.
Definition of Startup:
As per DIPP, Startup means an entity, incorporated or registered in India:
– Up to a period of seven years from the date of incorporation/registration or up to ten years in case of Startup’s in Biotechnology sector
– As a private limited company or registered as a partnership firm or a limited liability partnership
– With an annual turnover not exceeding Rs. 25 crores (Approx. 3.4 Million Euro) for any of the financial years since incorporation/registration
– Working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. A business is covered under the definition if it aims to develop and commercialize a new product or service or process; or a significantly improved existing product or service or process, that will create or add value for customers or workflow.
The definition also outlines that the mere act of developing products or services or processes which do not have potential for commercialization; or undifferentiated products or services or processes; or products or services or processes with no or limited incremental value for customers or workflow would not be covered under this definition. An entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
Basis this definition, DIPP awards recognition to startups – which make them eligible for “tax incentive and other benefits”.
Startup support agencies:
As stated in the beginning, startup funding and assistance landscape in India is vast. Public support programmes are offered both at the Government of India and the State government level. At the central level, DIPP, Ministry of commerce and industries, Government of India is the coordinating department and is also responsible for “STARTUPINDIA” mission as well as providing registration to the startups for claiming tax incentives and other public benefits. Atal Innovation Mission managed by NITI Aayog, Government of India is another important ecosystem enabler. In addition to these two, there are 50+ starup schemes administered by different sectoral ministries. Department of science and technology (DST), Department of biotechnology (DBT), Biotechnology industry research assistance council (BIRAC) and Ministry of agriculture, Department of electronics and IT, Ministry of MSMEs, Ministry of skill development and entrepreneurship are few of the main players at central level. Small Industries Development Bank of India (SIDBI) is the apex development financial institution responsible for many of the “fund of fund” and “guarantee” programme.
At the state level, most states have their own “startup promotion policy”, being implemented through their science and technology departments or state innovation council or industries department. Some of the state have also created special entity on public private partnership mode to spearhead startup promotion in their respective states. States like Karnataka, Telangana, Andhra Pradesh, Tamilnadu, Maharashtra, Kerala, Gujarat, Rajasthan, Goa, Delhi have been successful in creating an enabling ecosystem for the startups.
Funding and Assistance:
Startup promotion framework in India consists of an array of tools being practiced worldwide, ranging from direct grant to loan to tax incentive to enabling policy. Startups meeting the definition criteria and registered with DIPP are eligible for following benefits under “STARTUPINDIA”
Ease of Operation
– Self-Certification and compliance under 9 environmental and labour laws to reduce the regulatory burden and compliance cost for startup’s
– To enhance the market opportunities and access, startups are exempted from “past experience/turnover criteria” in all central government public procurement tenders. They are also exempted from submission of “earnest money deposits or bid security” in public procurement tenders.
– Winding up of company in 90 days under solvency and bankruptcy code to provide an easy exit mechanism.
To alleviate the funding constraints during the early as well as growth stage, DIPP has set up a 1400 Million Euro corpus “Fund of fund”. The fund supports a broad mix of sectors such as health, agriculture, education and manufacturing. To reduce the perceived high risk and also to encourage banks and other lending institutions to provide venture debts to startups, “credit guarantee facility” has also been initiated by the DIPP.
Tax based incentives
Income tax exemption for any 3 consecutive years out of the initial 7 years as well as tax exemption on capital gains and investments above fair market valuation by the angel investors are available for the DIPP recognised startups. Start up need to apply to an inter-ministerial board for getting the exemption. In addition to the above-mentioned benefits under “startup India”, supports available from other central ministries and state governments can be broadly categorised in
Most of the startup funding and assistance programme has a strong focus on creating incubation facility for the startups. Generally, grant support to meet capital and or operational expenditure for three to five years is made available to eligible agencies for setting up of incubation facilities. However, in many support programmes there also exist provision of seed funding/idea support/rebate on incubation rental/reimbursement of incubation lease rental for the startups.
To provide early stage funding to startups, various agencies and departments offer seed funding grant support ranging between 15000 Euro to 70000 Euro. Support is available for validation of idea, prototype development, go to market strategy. Mode of application varies between call-based approach to rolling application. While most of the seed fund support are non-refundable grant, there are also a few which is in the nature of interest free ten-year repayable loan. Disbursement also varies from scheme to scheme i.e. one-time disbursal to milestone-based approach.
Grant challenge is another popular support instrument used by different startup promotion agencies, both at the central and state level. They are similar to seed fund but differ from it by way of largequantum of funding, specific thematic focus, geared towards a particular social challenge, research and innovation and mode of implementation. Implementing agencies follows a call-based approach and run these challenges every year for a fixed period. Though direct grant support is available for all stages i.e. proof of concept to commercialisation but there has been an increasing trend to provide support for scale up and commercialisation. Atal Innovation Mission (AIM) is a flagship initiative within the overall startup India framework, it incentivises innovation in the areas critical to India’s growth such as health, hygiene, housing, energy and water. AIM runs a “new India grant challenge” call for innovators to (a) help create products from existing technologies relevant for national and social causes (productization); (b) help new deep-tech products find markets and early customers (commercialization) in the context of India. Bio technology, agriculture, e mobility, semiconductor, defence, artificial intelligence is some of the other key thematic areas of grant challenge.
Angel and Venture Funding
In addition to the “startup India fund of fund” from DIPP, state governments and central ministries runs their own “fund of fund” or “venture fund” programme to enhance availability of angel and venture funding for the startups. They forge partnership with angel investor network, large incubators, registered funds for making the investments. Some state governments have created their own venture funds e.g. Gujarat Venture Fund Limited. Many of these funds also have special thematic/ sectoral focus as per the mandate and priority of respective states and ministries.
Corporate Social Responsibility (CSR) Funds
In addition to funding and assistance available from the government agencies, India is also witnessing an increase in spends from the large corporate on startup promotion. This funding is being made available from their “corporate social responsibility” budget- 2 percent of average three years net profit, as mandated by the company act. Corporates tie up with incubators and provide funds to run accelerator programmes on identified technology/ thematic area as well as to provide seed funds to selected startups. Corporates also provide mentoring support to select startups. In addition to above mentioned startup specific support programmes, there also exist support programme which support innovation enabling services such as patent, design, quality, training etc for all type of enterprises including startups.
German Startups interested to enter India can refer to the links below for additional insights and information.