The Startup India Seed Fund Scheme

What is it?
The Startup India Seed Fund Scheme (SISFS) is a sector agnostic INR 945 Crore startup fund, set up by the Government of India, with the objective of providing financial assistance to start-ups for proof of concept, prototype development, product trials, market entry and commercialization.

What does it aim to achieve?

The SISFS aims to provide capital to start-ups in the seed and ‘Proof of Concept’ development stage, which would otherwise find it challenging to secure funding from angel/ venture capital funds or traditional banks at such an early stage. By helping to bridge this gap in the start-up funding cycle, the SISFS aims at assisting early-stage start-ups in having a better chance at market entry, commercialization and product trial in the future.

How will the SISFS be governed?

An Expert advisory Committee (EAC) (which will comprise primarily of representatives of various departments of the Central Government, representatives of policy centres and other eminent individuals in the start-up ecosystem) will be responsible for the overall implementation and monitoring of the SISFS. The EAC will be primarily responsible for evaluating and identifying incubators for allotment of funds, monitoring progress and ensuring recourses are efficiently utilized.

Who is eligible to receive funds under the SISFS?

The SISFS intends to disburse funds through eligible incubators, rather than to startups directly. Eligible incubators may apply under the scheme to avail the benefits.

Below are some of the key criteria for incubators:

• Registration and operations: Incubators must be registered as a legal entity
  and be operational for at least 2 years as on the date of application under the
  scheme.
• Size: Incubators must have the facilities to seat at least 25 individuals, and
  also have at least 5 start-ups incubated physically on the date of application.
• Management: Incubators must have a full-time experienced CEO.
• Third-party funding: Applying incubators must be not be disbursing funding
  to incubates using any private third-party entities.
• Affiliation with state/ central governments: Incubators applying under the
  scheme must have been assisted by the Central or State Government(s). In
  case incubators do not qualify under the foregoing, they must meet certain
  other specified criteria.

In addition to the above, incubators would also be evaluated on the basis of a
number of factors including quality of the incubator team, availability of
infrastructure, performance of start-ups incubated in the past, among others.

How will the funds be disbursed to incubators?

Qualifying incubators will be provided a grant of up to INR 5 Crore in instalments,
subject to certain milestones being met. In addition to the grant amount, an
additional management fee of 5% of the grant amount will also be provided to the
incubators for administrative expenditure, costs incurred in selection and
conducting due diligence on start-ups, and monitoring the progress of beneficiary
start-ups. Further, the grant amounts should be utilized by the incubator within 3
years of the first round of funds being disbursed; provided further that if the
incubator has not used at least 50% of the total commitment within the first 2 years,
then, such incubator will not be eligible for any future drawdowns.

What kind of start-ups are eligible under the SISFS?

Start-ups that qualify under the below criteria may apply under the SISFS with up to 3 incubator(s) of their choice in order of their preference.

• Start-ups must be recognized by the DPIIT and not incorporated more than 2 prior to the date of application;
• Start-ups must have a business idea to develop a product/ service with market fit, viable commercialization and scope of scaling.
• Start-ups should not have received more than INR 10 Lakhs of monetary support under any Central/ State Government scheme (excluding any prize money, subsidized workspace, founder allowance, access to labs/ facilities)
• Shareholding in the start-up should comprise of at least 51% held by Indian promoters (as per the Companies Act, 2013 and the SEBI (ICDR) Regulations, 2018 at the time of application.
• Start-ups engaged in areas 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 would be given a preference in selection.

What is the criteria for selection of start-ups by incubators?

Every incubator registered with the SISFS must constitute a committee – the Incubator Seed Management Committee (ISMC) – which will evaluate and identify start-ups for funding. Applying start-ups may also be requested to submit details of team profile, problem statement, product/service overview, business model, customer profile, market size, quantum of funds needed, projected utilization plan for funds, among others. Other criteria for selection would be based on parameters including but not limited to the following:

• Need for the idea – including analysis of market size, market gap etc.
• Feasibility – including reasonability of the technical claims, methodology used etc;
• Potential Impact – customer demographics & the impact of the product/service, including national importance would be analyzed;
• Novelty – the Unique Selling Proposition (USP) of the offering would be analyzed along with the intellectual property being used;
• Team – technical and business expertise of the team would be factored.

How much funding will start-ups receive?

Start-ups would be eligible to receive funding in the following manner:

• Up to INR 20 Lakhs as grant for validation of Proof of Concept, prototype development or product trials –which will be disbursed on a milestone basis.
• Up to INR 50 Lakhs for market entry, commercialization and scaling up.

Notwithstanding the above, an individual start-up may not receive more than 20% of the total grant given to an incubator.

Our Analysis and Conclusion

Providing seed funding to enable start-ups to prove their ‘Proof of Concept’ is a positive step in enabling a vibrant and end-to-end start-up ecosystem, and is likely
to have a multiplier effect in validation and implementation of business ideas. Support from the Government in the initial stages of start-ups will reduce the chances of innovative business ideas failing merely due to lack of adequate capital early on. However, as is the case with several successful companies, it is very likely that start-ups will have to tweak and pivot from their initial ideas and business models several times before they achieve the right product-market fit. For this, start-ups may need more than one round of funding from such initiatives (the SISFS only provides for 1 round of funding for an individual start-up). Therefore, continued support from the Government for promising start-ups and the people behind them will go a long way in fostering the community. While the SISFS is a step in the right direction, which is likely to support around 3,600 start-ups to begin with, being able to provide continued support and guidance, not only financially, but in terms of mentorship and guidance is crucial in enabling start-ups to take-off.