The entrepreneurs of India can feel happy not being a part of the Rs 100-crore club and let that be the insignificant dream-number for the film-industry. The 2014 Union Budget has recognized the value of the entrepreneurship sector to be way beyond that and made a budgetary allocation of Rs 10,000 crores towards startups (amidst a long-list of Rs 100-crore allocations to other areas). The Government has taken notice of the growing entrepreneurial movement in the country and more than done its bit to try fueling it further.
“In order to create a conducive eco-system for the venture capital in the MSME sector it is proposed to establish a 10,000 crores fund to act as a catalyst to attract private capital by way of providing equity, quasi equity, soft loans and other risk capital for start-up companies”, announced Mr. Arun Jaitley, Finance Minister, Government of India.
Reading it carefully (and conveniently), it is interesting to see that the Government seemingly wants to act as a catalyst for the venture capital (industry) and attract private capital rather than being a fund-manager itself (I’m reading it as “fund-of-fund” structure!). This is in contrast to the UPA-2 regime where – under Mr. Sam Pitroda’s able leadership – the Planning Commission and its National Innovation Council set out to create the “India Inclusive Innovation Fund” – an equally bold initiative but afaik was planning to make direct investments in startups (vs. catalyzing the venture capital industry).
The Israeli Yozma
Back in the 1990s, a similar intervention by Israel Government (Yozma Program) to catalyze the venture capital industry played a crucial role in helping Israel become an innovation hub (of course, several other factors were at play). While Yozma was aimed at providing a matching Shekel for every Shekel being committed by commercial investors, out here at IIM Ahmedabad’s Centre for Innovation Incubation and Entrepreneurship (CIIE) we have reasons to believe that Government funding can have an even greater leverage. [Sadly, there are also several instances of how the Governments’ attempts to catalyze venture capital and entrepreneurship sector across the world have gone wrong and the impact has been the reverse! The book “Boulevard of Broken Dreams” by Josh Lerner makes a very interesting read for anyone interested in the topic.]
The Possible Multiplier Effect
Over the years, the Government of India has been kind enough to provide academic incubators in India with much smaller seed-funds to deploy into startups (in form of debt or equity of upto Rs 25 lacs per company). A recent analysis of our incubation portfolio suggests that for every Rupee invested by us (out of Government–sponsored grants), within a period of 2-3 years of our investment, our companies had attracted on an average Rs 11-12 from other investors in the form of equity or loans.
While sectors like information technology are attracting mainstream investors (except at very early stages where incubators/accelerators have an important role to play), others like cleantech, medical devices, hardware, agriculture and social ventures do not find as many takers because of the perceived risk in these sectors (by the VCs and their investors). The Government has a critical role to play in mitigating this perceived risk.
A couple of years back – to bridge the early-stage equity gap in the cleantech sector – we partnered with the Government of India’s Ministry of New and Renewable Energy (MNRE) to create Infuse Ventures as an early stage VC fund. When we set out to create Infuse in partnership with MNRE, the original intent was that we would leverage a Rupee for every Rupee being committed by MNRE. As we speak, we have already managed to leverage it way beyond that – for every Rupee committed by MNRE, we have a commitment of over Rs. 4 from marquee investors like International Financial Corporation, BP, Godrej Industries, ICICI Bank, SIDBI and many others. It is important to also note that most of the investors in Infuse are investing in an early-stage cleantech fund in India (or for that matter exposing themselves directly or indirectly to the risk of investing in cleantech startups) for the first time. The Government’s signal and commitment (to startups and the sector) has been crucial in helping these investors take the plunge and attracting funds into an otherwise ignored sector. So, the Rs 4 unlocked for every Govt. Rupee through this approach would otherwise not have been available to early stage cleantech entrepreneurs.
Going by our experience, the Rs 10,000 crores allocation by the Government has the power of unlocking 4-5 times more capital (assuming regulators don’t play a spoilsport)! Even if one was to assume that it will leverage just 2x more capital, a whopping Rs 30,000 crores can become available for startups in India? Hoping that these funds shall be deployed in seed and early stage ventures with an average ticket size of Rs 2 crores per venture (vs. later stages where a lot more private capital is already available) and routed through early-stage focused VC funds/banks (operating at a ~2% p.a. management fee, 10-year term structure)– the move by the Government has the potential of catalyzing ~ 12,000 startups over the next 4-5 years?? Too good to be true, but not impossible.
Forget 12,000, even if 2000 startups get seeded with Rs 2 crores each over the next 5 years and the initiative does get implemented well, it may just be a matter of time before the next Elon Musk or Steve Jobs will emerge out of India.
Indian entrepreneurs ki Jai ho!
– Kunal Upadhyay