Startup India Seed Fund Scheme – Switching up The Startup Game?

What is Startup India?

The Startup India initiative of the Government of India envisages building a robust Start-up ecosystem in the country for nurturing innovation and providing opportunities to budding entrepreneurs.

In a move that endeavors to foster growth and development in the startup sector, the Central Government recently notified a sector-agnostic ‘Startup India Seed Fund Scheme’ (“SISFS”).

The SISFS is projected to disseminate approximately INR 945,00,00,000 (Indian Rupees Nine Hundred and Forty-Five Crores) into the startup ecosystem.

What is Startup India Seed Fund Scheme?

Easy availability of capital is essential for entrepreneurs at the early stages of the growth of an enterprise.

Funding from angel investors and venture capital firms becomes available to startups only after the proof of concept has been provided.

Similarly, banks provide loans only to asset-backed applicants. It is essential to provide seed funding to startups with innovative ideas to conduct proof of concept trials.

Department for Promotion of Industry and Internal Trade (DPIIT) has created Startup India Seed Fund Scheme (SISFS) with an outlay of INR 945 Crore to provide financial assistance to startups for Proof of Concept, prototype development, product trials, market-entry, and commercialization. It will support an estimated 3,600 entrepreneurs through 300 incubators in the next 4 years.

The Hon’ble Prime Minister of India announced the scheme in his Grand Plenary address of Prarambh: Startup India International Summit on 16th January 2021. After approval of EFC and Hon’ble Finance Minister, the scheme has been notified on 21.01.2021.

The Seed Fund will be disbursed to eligible startups through eligible incubators across India. Startup incubators are institutions that help entrepreneurs to develop their business, especially in the initial stages.

Background:

Minister of Railways, Commerce & Industry, Consumer Affairs, and Food & Public Distribution Shri Piyush Goyal launched the Startup India Seed Fund Scheme (SISFS).

The Fund aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market-entry, and commercialization.

The SISFS was drafted to address the primary obstacle faced by up and coming startups, which is the lack of access to adequate capital particularly at the product trial/ proof of concept stage.

The SISFS is just one in a series of measures being implemented by the government to bolster the startup sector, for instance, the recent union budget extended the eligibility period for startups to March 31, 2022, to avail the tax exemption under Section 80-IAC of the Income Tax Act, 1961.

The implementation of such measures is of utmost importance given the prevailing market scenario where it is difficult for most startups to raise capital particularly in light of the slowdown caused by the pandemic.

Accordingly, the enforcement of the SISFS comes at the most opportune time and we identify some of the key takeaways from the SISFS.

Key takeaways from the Startup India Seed Fund Scheme

Establishment of an Experts Advisory Committee (“EAC”)

The SISFS envisages the establishment of an EAC which will oversee the implementation and management of the SISFS.

The primary responsibility of the EAC will be to assess and select incubators (who fall within the eligibility criteria specified in the SISFS) with the objective of granting seed funds.

After the incubators have been selected, the EAC will supervise the process of dissemination of the seed funds to the selected incubators. The seed fund will be disbursed by the EAC to the incubators on the condition that certain targets relating to the utilization of the funds are met.

In addition, the EAC is also expected to ensure that the incubators are on the right track in relation to achieving the milestone-based objectives as set by the EAC.

Assistance to Incubators

The EAC shall disseminate INR 5,00,00,000 (Indian Rupees Five Crores) to the selected incubators over a series of milestone-based installments (as determined by the EAC).

The installments will only be disbursed to the incubators upon submission of proof to the EAC that the milestones have been accomplished.

In excess of the seed fund, the incubator will also be provided with a management fee (5% of the total commitment granted to the selected incubator) which is to be utilized for the operational expenditure incurred by the incubators in conducting due diligence and shortlisting Startups.

The seed fund grant provided to the incubator is to be used in full, within three years from the date of receipt of the first installment by the incubator.

Incubator Seed Management Committee (“ISMC”)

The selected incubators that are participating in the SISFS will need to establish an ISMC. The ISMC is an organ that will assess and shortlist suitable Startups for the provision of seed support.

The ISMC shall comprise of a nominee from the incubator who will act as chairman; representative from the State Government’s Nodal Team; representative of a venture capital fund or angel network; a domain expert from the industry; a domain expert from academic; two successful entrepreneurs and any other relevant stakeholder as deemed appropriated by the incubator.

Disbursement of Seed Funds to Startups

The incubators may onward disburse the seed fund to the Startups selected by the ISMC in the following manner:

1. Up to INR 20,00,000 (Indian Rupees Twenty Lakhs) (milestone based payments) as grant for validation of proof of concept, or prototype development, or product trials;
2. Up to INR 50,00,000 (Indian Rupees Fifty Lakhs) of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments.

There also seems to be an express prohibition on the Startups to use the seed fund for any purpose for which it has not been granted for.

The amount disbursed by the incubator to the Startup shall not exceed 20% of the total grant provided to the incubator.

Apart from monetary assistance, the incubators shall also equip the Startups with the physical infrastructure and equipment required to develop, research and test product prototypes and offer networking opportunities to the Startups by providing a marketing platform for the Startups to display the products developed to potential investors.

Indicators of Successful Implementation

The parameters for measuring the success of the Startups as assessed by the incubator will include progress of proof of concept; progress of prototype development; progress of product development; progress of field trials; progress of market launch; quantum of loan, angel or venture capital funding raised; jobs created by the Startup; turnover of the Startup and any other parameter as established by the incubator.

The status of progress under each of the above-mentioned parameters will be relayed from the Startup to the incubator and subsequently to the EAC.

Eligibility Criteria of the Scheme

1. A startup, recognized by DPIIT, incorporated not more than 2 years ago at the time of application.

Eligibility Criteria for Startup Recognition:

1. The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership
2. Turnover should be less than INR 100 Crores in any of the previous financial years
3. An entity shall be considered as a startup up to 10 years from the date of its incorporation
4. The Startup should be working towards innovation/ improvement of existing products, services, and processes and should have the potential to generate employment/ create wealth.
5. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”.
6. The startup must have a business idea to develop a product or a service with a market fit, viable commercialization, and scope of scaling.
7. The startup should be using technology in its core product or service, or business model, or distribution model, or methodology to solve the problem being targeted.
8. Preference would be given to startups creating innovative solutions in sectors such as social impact, waste management, water management, financial inclusion, education, agriculture, food processing, biotechnology, healthcare, energy, mobility, defense, space, railways, oil and gas, textiles, etc.
9. A startup should not have received more than Rs 10 lakh of monetary support under any other Central or State Government scheme. This does not include prize money from competitions and grand challenges, subsidized working space, founder monthly allowance, access to labs, or access to prototyping facility.
10. Shareholding by Indian promoters in the startup should be at least 51% at the time of application to the incubator for the scheme, as per Companies Act, 2013 and SEBI (ICDR) Regulations, 2018.
11. A startup applicant can avail of seed support in the form of grants and debt/convertible debentures each once as per the guidelines of the scheme.

How much seed funding can a startup receive under the scheme?

Seed Fund to an eligible startup by the incubator shall be disbursed as follows:

1. Up to Rs. 20 Lakhs as a grant for validation of Proof of Concept, or prototype development, or product trials. The grant shall be disbursed in milestone-based installments. These milestones can be related to the development of prototypes, product testing, building a product ready for market launch, etc.

2. Up to Rs. 50 Lakhs of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments

3. A startup applicant can avail of seed support in the form of grants and debt/convertible debentures each once as per the guidelines of the scheme.

Analysis and Conclusion:-

The SISFS has been structured to operate like a well-oiled machine with each component (the EAC, the incubator, and the Startups) playing a pivotal role in the holistic game plan.

The efficiency of the sector-agnostic scheme in attaining its objective of bolstering the startup sector will entirely depend on how well the respective organs function in synchronization.

The primary issue with SISFS is that there exists ambiguity concerning several facets of the implementation of the SISFS.

For instance, one of the eligibility criteria for Startups as established by the SISFS is that the “Startup must have a business idea to develop a product or a service with the market fit, viable commercialization, and scope of scaling.”

However, the SISFS does not establish the thresholds for what is to be considered as “market fit” or “viable commercialization.”

This is indicative of a larger problem with the SISFS which is that a lot of discretionary power is wielded by the EAC and the incubators in shortlisting “suitable” incubators and Startups respectively.

At the moment, the initiatives being ushered in by SISFS should be welcomed, however, the success of the SISFS will depend entirely on the administration and operation of the EAC, the incubator, and the Startups which is yet to be seen.

To apply for the scheme, Get in touch with a professional consultant. Drop a Whatsapp at https://wa.me/message/QJG5ISIMSXWZC1

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