Startup India Seed Fund Scheme to give Financial Boost for the Indigenous Startups

Starting a venture is a well-planned and disciplined exercise that takes into account both internal and external factors that may impact the venture's sustainability. A successful start-up cannot start a business just with passion and an idea. There are a lot of challenges that startups may face which include infrastructure, government regulations, and the availability of finance at various stages of growth.

The availability of finance is critical for startups, and it is always a challenge to obtain sufficient amounts. There are numerous financing options available, including family members, friends, loans, grants, angel funding, venture capitalists, crowdfunding, and so on, but still, several startups fail due to insufficient revenue generation as the company grows. As operations expand, expenses rise with lower revenues, forcing startups to focus on the funding aspect. Hence revenue generation is very critical, necessitating effective management of the burn rate, which is the rate at which startups spend money in the early stages.

The Indian government is committed to promoting entrepreneurship at the startup level and has implemented a number of initiatives to ensure adequate support. Prime Minister Narendra Modi announced the Startup India Seed Fund scheme in January. It aims to provide funding to startups for proof of concept, prototype development, product trials, market-entry, and commercialization.

The Startup India Seed Fund Scheme gives a boost to the government's seed funding initiative. Over the next four years, the government has allocated $9.25 billion (US$125 million) to the scheme fund. Around 3,600 startups and 300 incubators will benefit from the programme.

To carry out and monitor the scheme, the Department for Promotion of Industry and Internal Trade (DPIIT) has formed an expert advisory committee. Grants of up to Rs 5 crore will be given to eligible incubators chosen by the committee, according to the guidelines. Startups will be able to receive grants of up to Rs 20 lakh from the selected incubators for the validation of proof of concept, prototype development, or product trials. Startups will receive investments of up to Rs 50 lakh through convertible debentures or debt-linked instruments for market entry, commercialization, or scaling up.

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

Startups that meet the eligibility requirements will be able to apply to the scheme via the government's Startup India portal. The scheme will benefit startup companies that have been accepted by the DPIIT, have been in operation for less than two years, and have more than a 51 percent stake in the company.
Before the first installments are released, the incubators and selected startups must sign legal agreements. These should include the seed fund's terms and conditions, particularly those pertaining to fund disbursement milestones. The establishment 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 is a welcome proposal in the guidelines. This will ensure that a system of checks is in place at each stage of the scheme.

On Monday, Commerce and Industry Minister Piyush Goyal stated that the government's recently announced Seed Fund Scheme for new-age firms will ensure adequate availability of funds, particularly for startups with good ideas in a variety of fields.

The minister also said that often good ideas are bought out by international venture capitalists at throwaway prices.

“I hope good ideas don’t get sold very cheap, particularly to foreign investors, who are able to identify a good idea…I hope this scheme supports our domestic entrepreneurs and their business ideas who often cannot take off due to the absence of critical funding at an early stage,” he added.

“The Seed Fund Scheme also envisions to promote virtual incubation for startups by enabling 300 incubators to support startups from all corners of the country. The impact of this will be visible by the spur of innovations in tier 2 and tier 3 regions of India,” an official statement said.

Goyal further said that the scheme will create a robust startup ecosystem, particularly in tier two and tier three towns of India, which are often deprived of adequate funding. “Would like to especially encourage innovators from rural areas to come forward and benefit from this scheme,” he added.

India's current economic situation is one of expansion. The Indian government is increasingly enthusiastic about increasing the GDP rate of growth from the ground up, with the introduction of liberal policies and initiatives for entrepreneurs such as ‘Make in India,' ‘Startup India,' MUDRA, and so on.

Seed Fund scheme is an effort by the government not only to encourage the next generation of entrepreneurs but also to build a robust startup ecosystem that will generate jobs, particularly in smaller towns. The fund is likely to support startups in industries that have received less venture funding in the past, such as e-commerce, food technology, travel, and education. By establishing an online mechanism, the scheme will promote virtual incubation for startups. This will expand the scheme's reach and allow it to deal with the ongoing pandemic situation. At the same time, the scheme's complex eligibility criteria and bureaucratic processes may make implementation difficult.