Can the Startup India Seed Fund Scheme be a game-changer?

By Dipti Lavya Swain and Tanvi Tekriwal, HSA Advocates
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The Startup India Seed Fund Scheme gives an impetus to the seed funding initiative of the government. The policy and guidelines were released after the scheme was announced in January 2021. The government has allocated ₹9.25 billion (US$125 million) to the scheme fund over the next four years. The scheme will benefit around 3,600 startups and 300 incubators.

Dipti Lavya Swain, Partner, HSA Advocates
Dipti Lavya Swain
Partner
HSA Advocates

The objective of this sector-agnostic scheme is to provide financial assistance to early-stage startups. A major challenge faced by startups is sourcing seed funding in the early stages of the business. Many startups with innovative business ideas lack the financial means even to test the viability of those ideas, develop prototypes or conduct product trials. Angel investors and venture capital funds usually take the risk of investing in a startup only after verification of the practicality of an idea and banks require security for loans. This scheme aims to overcome capital inadequacy and provide capital for proof of concept, prototype development, product trials, market entry and commercialisation to selected startups through incubators across India.

The Department for Promotion of Industry and Internal Trade (DPIIT) of the Ministry of Commerce and Industry has issued a set of guidelines. The scheme envisages a selection process for the startups and the incubators based on detailed eligibility criteria. Startups that meet the eligibility criteria will be able to apply to the scheme through the government Startup India portal. The scheme will benefit startup companies that are accepted by the DPIIT, have been incorporated for less than two years and in which the promoters hold more than a 51% stake.

The DPIIT has set up an Experts Advisory Committee (EAC) to monitor and execute the scheme. The EAC comprises representatives of the DPIIT, representatives of other departments and six expert members nominated by the secretary of the DPIIT from the startup ecosystem, that is investors, experts in R&D, technology development and commercialisation, and entrepreneurship. The EAC will evaluate and select the incubators, monitor the allocation of funds and ensure that the funds are efficiently and effectively used.

Tanvi Tekriwal, Associate, HSA Advocates
Tanvi Tekriwal
Associate
HSA Advocates

After the incubators have been selected by the EAC, they will be responsible for selecting the startups in accordance with the rules of an Incubator Seed Management Committee. The eligible startups will be evaluated according to such factors as the ease of use, the potential impact and the novelty of their ideas, their fund utilization plans and the makeup of their teams. Funds will be channelled from the EAC to the incubators in milestone-based instalments with a maximum of50 million (US$675,000). The incubators will provide grants to selected startups in milestone-based instalments of up to ₹2 million for validation of proofs of concept, prototype development and product trials. Investments of up to ₹5 million will be available to the selected startups through convertible debentures or debt-linked instruments for market entry, commercialisation and scaling up.

The incubators and the selected startups are required to execute legal agreements before the release of the first installments. These should contain the terms and conditions of the seed fund, especially those that deal with the milestones for the disbursement of funds. A welcome proposal in the guidelines is the setting up of a grievance unit at the DPIIT to address issues such as delays in the evaluation of applications or delays in the disbursement of funds by the incubators. This will ensure that a system of checks will operate at successive stages of the scheme.

This scheme is an effort by the government not just to promote the new generation of entrepreneurs, but also to create a robust startup ecosystem which will generate employment, particularly in smaller towns. The fund is likely to support startups in sectors that have received less help from venture funding than those such as e-commerce, food tech, travel and education. The scheme will promote virtual incubation for startups by setting up an online mechanism. This will enable the scheme to have a wider reach, and allow it to cope with the ongoing pandemic situation. At the same time, the complex eligibility criteria and bureaucratic processes may make the implementation of the scheme challenging.

Dipti Lavya Swain is a partner and Tanvi Tekriwal is an associate at HSA Advocates

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