STARTUP INDIA SEED FUND SCHEME – AN INITIATIVE TO SPUR ENTREPRENEURSHIP ACROSS INDIA

[Mr. M. GOVINDARAJAN]

Start up

A startup is a young company founded by one or more entrepreneurs to develop a unique product or service and bring it to market. By its nature, the typical startup tends to be a shoestring operation, with initial funding from the founders or their friends and families.  Startup companies have little or no revenue coming in.  It takes considerable money, and startup owners have several potential sources to tap-

• traditional funding sources include small business loans from banks or credit unions, government-sponsored Small Business Administration loans from local banks, and grants made by nonprofit organizations and state governments;
• so-called incubators, often associated with business schools and other nonprofits, provide mentoring, office space, and seed funding to startups;
• venture capitalists and angel investors actively seek out promising startups to bankroll in return for a stake in the company once it gets off the ground.

Startups are typically online or technology-oriented businesses that can easily reach a large market. To operate a small business, on the other hand, one doesn't need a big market to grow into. One just needs a market and one need to be able to reach and serve all of those within his market in an efficient way.

Seed funding

Seed funding or seed-stage funding is a very initial investment. Generally, investors often get an equity stake in exchange for the capital invested. In case the founders use their savings to start up a business, it is called bootstrapping. 

A startup normally has to move through four distinct phases of investment before it is truly established-

• seed capital,
• venture capital, 
• mezzanine funding, and
• an initial public offering (IPO).

The seed capital tends to be just enough to help a startup achieve its initial goals. If the company is successful in the initial phase, it may catch the interest of venture capitalists. These investors are likely to invest heavily in the company before it moves further. Mezzanine financing is sometimes necessary to support a company into its introductory phase. This is usually available only to businesses with a track record-even then at a high rate of interest. The final stage is when early investors get their payday. When a young company goes public with its IPO, it raises sufficient capital to keep growing and expanding.

Advantages of seed funding

The following are the advantages of seed funding-

• reduction of  the risk to founder in a new venture;
• covering funds insufficiency;
• source  of working capital;
• expansion of a business relationship by bringing strategic partners;
• scale up and accelerates the growth.

Types of seed funding

The following are the types of seed funding-

• crowd funding ;
• corporate seed funding;
• angel investors;
• incubators;
• accelerators
• venture capital.

Startup India Seed Fund Scheme

The Startup India Seed Fund Scheme (‘SISFS’ for short) aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market.  Department for Promotion of Industry and Internal Trade (‘DPIIT’ for short) has created SISFS with an outlay of Rs. 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 Seed Fund will be disbursed to eligible startups through eligible incubators across India.

Seed fund shall strictly not be used by startups for creation of any facilities and shall be utilized for the purpose it has been granted for. A grant can be used for validation of Proof of Concept, or prototype development, or product trials. A debt/ convertible debenture can be used for Market entry, Commercialization, or Scaling up.

Many innovative business ideas fail to take off due to the absence of this critical capital required at an early stage. If seed funding is offered to such promising cases, then they can have a multiplier effect in validation of business ideas of many startups, leading to employment generation in the country.

In India the SISFS was launched by Hon’ble  Shri Piyush Goyal on 19.04.2021.

Eligibility

Individual entrepreneurs are not eligible to apply for support under the scheme. Only DPIIT Recognized startups can apply for the SISFS.  There is no minimum education qualification required for founders to apply for SISFS.  There are no exemptions to any of the eligibility criteria. All the criteria must be met on the date of application submission.

A startup, recognized by DPIIT, incorporated not more than 2 years ago at the time of application.  It must have a business idea to develop a product or a service with a market fit, viable commercialization, and scope of scaling.  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.

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, defence, space, railways, oil and gas, textiles, etc.  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.

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

SISFS is a sector agnostic scheme, which means that startups from any sector can apply for the scheme. However, 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. This list of sectors is indicative and not exhaustive.

DPIIT recognized start up

An entity shall be considered a ‘Startup’-

• If it’s incorporated as either Private Limited Company or Registered Partnership Firm or Limited Liability Partnership. A sole proprietorship or a public limited company is not eligible as startup.
• If it is up to 10 years from the date of its incorporation/ registration.
• If its turnover for any of the financial years has not exceeded Rs.100 crore.
• If it is 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.
• Should not have been formed by splitting up or reconstruction of a business already in existence.

Application

The application shall be filed completely on line and not physical submission is required.  There is no application fee for the scheme. Even after the selection of a startup by an incubator for assistance under this scheme, the startup shall not be charged any fees. The incubator or any of its staff members shall not charge any fee in cash or in kind from applicants or beneficiaries under the scheme for any process of selection, disbursement, incubation, or monitoring.

One can give startups an option to apply to 3 different incubators according to their preference. Applicants can choose incubators basis their sector, stage, business needs, and strategic goals.  After the receipt of the application, each Incubator shall evaluate applicants based on their submissions and presentations and select startups for Seed Fund within 45 days.

Each of the incubators applying for the Startup India Seed Fund Scheme will constitute a committee called the Incubator Seed Management Committee (ISMC), consisting of experts who can evaluate and select startups for seed support.  The startups shall be selected through an open, transparent and fair process.   Applicants who are rejected will also be notified through email.  An applicant, if rejected once, may apply afresh.

Experts Advisory Committee

An Experts Advisory Committee (EAC) has been constituted by DPIIT, which will be responsible for the overall execution and monitoring of the Startup India Seed Fund Scheme.   The EAC will evaluate and select incubators for allotment of Seed Funds, monitor progress, and take all necessary measures for efficient utilization of funds towards fulfillment of objectives of Startup India Seed Fund Scheme. 

Incubators

The incubators shall fulfill the following eligibility criteria-

• The incubator must be a legal entity.
• The incubator should be operational for at least two years on the date of application to the scheme.
• The incubator must have facilities to seat at least 25 individuals.
• The incubator must have at least 5 startups undergoing incubation physically on the date of application.
• The incubator must have a full-time Chief Executive Officer, experienced in business development and entrepreneurship, supported by a capable team responsible for mentoring startups in testing and validating ideas, as well as in finance, legal, and human resources functions.

Disbursement of seed fund

The Seed Fund will be disbursed to eligible startups through eligible incubators across India in the following steps-

• DPIIT;
• Experts Advisory Committee;
• Incubators;
• Startups.

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

• Up to Rs. 20 Lakhs as 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 development of prototype, product testing, building a product ready for market launch, etc.
• Up to Rs. 50 Lakhs of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments
• A startup applicant can avail seed support in the form of grant and debt/convertible debentures each once as per the guidelines of the scheme.

The incubator shall execute a legal agreement with the selected startups before the release of the first installment. The incubators shall ensure that the necessary terms and conditions, including milestones, related to the Seed Fund are clearly detailed in the agreement.  Subsequent disbursement would be linked to the achievement of previously specified milestones as per agreement between the startup and incubator.  Startups will receive the funds in their company bank accounts.

Startup shall submit final report and audited utilization certificate at the end of the project duration.  For failed ventures, the entrepreneur shall share his/her learnings and the reasons for failure in the report and submit this along with the utilization certificate for the fund amount.

As of 30 July, 2022, 102 incubators received approval for Rs.375.25 crore (US$ 47.38 million) under the SISFS, out of a total corpus of Rs. 945 crore (US$ 119.26 million). Additionally, 378 DPIIT-recognized startups have received approval from designated incubators under the scheme for a total of Rs. 81.45 crore (US$ 10.29 million).

The government has allocated Rs. 283.5 crore for the Startup India Seed Fund Scheme in the Budget 2022-23, which is higher than the Revised Estimate of about Rs 100 crore.

Is seed money income?

The balance sheet will reflect the seed money as equity (ownership) in the company. It isn't income. Income is money that comes into the business as a result of sales or interest on invested money. The seed money is investment capital.

Conclusion

The Seed Fund Scheme for new age firms will ensure adequate availability of funds, especially for startups with good ideas across various fields. 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. It would like to especially encourage innovators from rural areas to come forward and benefit from this scheme. 

Reference:

1. www.startupindia.gov.in.
2. https://seedfund.startupindia.gov.in/about.
3. www.google.com.
4. https://byjus.com/free-ias-prep/sisfs-startup-india-seed-fund-scheme/
5. https://www.business-standard.com/