An overview of Startup India Seed fund scheme

AN OVERVIEW OF STARTUP INDIA SEED FUND SCHEME

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 Scheme was announced by the Hon’ble Prime Minister, Shri Narendra Modi on 16th January 2021 in his Grand Plenary address of ‘Prarambh: StartupIndia International Summit.

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.

What is Startup India Seed Fund Scheme?

Easy availability of capital is essential for entrepreneurs at the early stages of 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 an innovative idea 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.

What are the objectives of SISFS:

The Indian startup ecosystem suffers from capital inadequacy in the seed and ‘Proof of Concept’ development stage. The capital required at this stage often presents a make or break situation for startups with good business ideas.
Many innovative business ideas fail to take off due to the absence of this critical capital required at an early stage for proof of concept, prototype development, product trials, market entry and commercialization.
Seed Fund offered to such promising cases can have a multiplier effect in validation of business ideas of many startups, leading to employment generation.

Eligibility Criteria for Startup Recognition:

a. The Startup should be incorporated as a private limited company or registered as a Partnership firm or a Limited Liability Partnership

b. Turnover should be less than INR 100 Crores in any of the previous financial years

c. An entity shall be considered as a startup up to 10 years from the date of its incorporation.

d. The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.

e. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”

The startup 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.

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 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.

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 seed support in the form of grant and debt/convertible debentures each once as per the guidelines of the scheme.

Analysis of Funding in Startups:

What is Funding?

Funding is an extremely important consideration for meeting the preliminary expenses for start-ups at initial stage. The first round of funding, popularly known as seed funding forms the basis of the start-up fundraising. The series funding helps in the evolvement of a start-up from a very basic stage to a full-fledged organization.

The funding done at the growing stage is called seed funding and the capital is known as a seed capital.

EQUITY FINANCING

Start-ups are usually equity financed/funded by way of a venture capital/ private equity investors and/or angel investors.

Venture Capitalist/Private Equity

Venture capital /Private Equity is often the first large investment a start-up can expect to receive.

Convertible instruments are given in preference option and most commonly used securities for VC/PE investment which includes compulsory convertible preference shares and compulsory convertible debentures.