Union Cabinet approves establishment of Fund of Funds for Startups under SIDBI

The Union Cabinet on 22 June 2016 approved the establishment of Fund of Funds for Startups (FFS). The establishment of the fund is in tune with the Start up India Action Plan that was unveiled in January 2016 to boost start up ecosystem in the country.
•    Beneficiaries: It will be utilised for contribution to various Alternative Investment Funds (AIF), registered with Securities and Exchange Board of India (SEBI) which would extend funding support to Startups.
•    Resource allocation: It has a corpus of 10000 crore rupees which shall be built up over the 14th (2015-20) and 15th Finance Commission (2020-25) cycles subject to progress of the scheme and availability of funds.
•    An amount of 500 crore rupees has already been provided to the corpus of FFS in 2015-16 and 600 crore earmarked in the 2016-17.
•    Further provisions will be made as grant assistance through Gross Budgetary Support by Department of Industrial Policy and Promotion (DIPP).
•    The 10000 crore rupees corpus could potentially be the nucleus for catalyzing 60000 crore rupees of equity investment and twice as much debt investment.
•    This would provide a stable and predictable source of funding for Startup enterprises and thereby facilitate large scale job creation.
•    Employment: On full deployment, the Fund is expected to generate employment for 18 lakh persons on full deployment.
•    Execution: The expertise of the Small Industries Development Bank of India (SIDBI) would be utilized to manage the day to day operations of the FFS.
•    Monitoring: The DIPP will monitor and review performance of the fund in line with the Start up India Action Plan.
•    The monitoring and review of performance would be linked to the implementation of the Start Up Action Plan to enable execution as per timelines and milestones.
•    For India, accelerating innovation driven entrepreneurship and business creation through Start-ups is crucial for large-scale employment generation.
•    The NITI Aayog-appointed Tarun Khanna Committee on Innovation and Entrepreneurship opined that India has the potential to build about 2500 highly scalable businesses in the next 10 years.
•    Given the probability of entrepreneurial success that means 10000 Start ups will need to be spawned to get 2500 large scale businesses.
•    However, start-ups face several challenges - limited availability of domestic risk capital, constraints of conventional bank finance, information asymmetry and lack of hand holding support from credible agencies.
•    A large majority of the successful Start-ups have been funded by foreign venture funds and many of them are locating outside the country to receive such funding.
•    A dedicated fund for carrying out Fund of Funds operations would address these issues and enable flow of assistance to innovative Start ups through their journey to become full fledged business entities.
•    This would encompass support at seed stage, early stage and growth stage.
•    Government contribution to the target corpus of the individual Fund as an investor would encourage greater participation of private capital and thus help leverage mobilization of larger resources.