Kshatrapati Shivaji, CMD of Small Industries Development Bank of india (SIDBI) which is managing the government’s Start-up fund talks about the progress happened so far in the sector with Nitin Sethi and Ishan Bakshi
Is the previous year’s Rs 500 crore part of some other fund and now has been moved to start-up fund?
Let me give you little background. We have been in the business of risk capital related interventions for entrepreneurs right from the mid 90 onwards. We believe in taking risk. We started risk capital including direct equity and now we are also encouraging venture debt.
Right from beginning we have also supported some regional venture capital funds even at state level. We have been active players in strengthening the start-up ecosystem. As of now we have a couple of fund of fund operations. The first is the India aspiration fund with a corpus of Rs 2,000 crore. That fund is mobilised from borrowing from the Reserve Bank of India (RBI). The second fund is the sector specific fund focused more on agriculture and rural oriented start-up interventions, called the aspire fund. Its corpus is Rs 60 crore which is being sourced from Ministry of MSME.
In January, the honourable Prime Minister announced the start-up action plan and the Rs 10,000 crore corpus which will come during the 14th and 15th finance commission period. Out of this Rs 500 crore came in March and the current year’s provision is Rs 600 crore.
In the India aspiration fund, 22 venture funds have been given commitment worth Rs 721 crore. We normally give around 15-20 per cent of the total corpus. The beauty of this architecture is that government resources will be used to leverage private capital and then the market will be taking a decision where the efficiency gain will be maximum. The Rs 721 crore which we have given commitment for will mobilise Rs 8,445 crore of risk capital. We are creating a framework where the private capital is contributing maximum for start-up investment
Right now, venture capital space is highly dominated by foreign capital. We are creating a framework so that domestic VC becomes more active. In addition to 22, five more applications which have been screened by the committee have been recommended for due diligence.
Can you please explain the operations of the Fund of funds?
By now 20 proposals, which have been screened by VC committee, have applied for Rs 867 crore. The Funds operation started only from 1st April. In March end we received Rs 500 crore for which the cabinet approval came a fortnight back.
KYCs are done, their processes are examined, and appraisal activities are undertaken. Then it will go to the executive committee of SIDBI and then the final letters will be given. These funds are expecting to mobilise 5,690 crore.
When does the actual disbursement happen?
This is a long term start-up funding operation. Right now the VCs/AIFs are trying to get financial commitment for their complete corpus. Sometimes they come to SIDBI first, sometimes they go to the other investors first. Then they go ahead for the 1st closure. Based on the 1st closure, within 18 months they have to necessarily complete the final closure. Once they start spotting start-up units, they finalise their investment plan.
Start-ups don’t need entire money in one go. Their capital requirement is based on their expansion plans. So in stages they demand money and then VCs demand money from investors. It’s a long term operation. So it takes 3 years plus 18 months so around 4.5 years.
Rs 500 crore were released in March and have the Rs 600 crore have also come to SIDBI?
They will come. Right now, budget provision for the current year is Rs 600 crore and Rs 500 crore for the last year has been released. The corpus is needed to give commitment to the venture capital fund. The applications that have been screened so far by the investment committee are around Rs 860 odd crore.
Out of the 20 proposals screened by the investment committee has the SIDBI board also cleared them?
It doesn’t go to the board. The SIDBI board prepares a framework and policy. It goes along with the due diligence to the executive committee.
So has the executive committee of SIDBI cleared any investments so far?
Some of the things have been done. The due diligence is going on. A couple of the proposals are on very final stage.
Is there a rate of return SIDBI looking for on the start-up fund?
Typically, the government’s and SIDBI’s overwhelming objective is not to behave like a typical commercial investor who only keep an eye on the returns. Our primary aim is to provide timely and adequate support at the right time to the start-up ecosystem to make it stronger. Our objective is to reach out and encourage the right people who need support, this would not happen if our primary objective is to maximise returns. There were discussions that funds should be invested in the riskier segments say such as agriculture, where private investors are averse to entering. We give extra weightage to VCs who focus on these segments. So the return is not the overriding priority but getting the funds to the start-ups, that need the support.
Is there a limit to how much government exposure can be made to a VC?
We normally go up to 25 per cent. We would like to provide a seed capital so that the entire eco-system becomes more and more vibrant. The moment I feel the domestic VCs will become active then the system will take off. Our job is to create vibrancy in the domestic VC environment. In a typical Indian tradition, failure is considered as a stigma as if he has done a crime. But that kind of mind-set has to change to encourage experimentation. The basic purpose of start-ups is to bring innovation and creativity mantra into existing business practices. It is a very risky game. Your principle can be wiped out because it is not a secured exposure in a plain vanilla term loan with security and collateral.
The VCs you invest in can invest in any start-ups and not just the ones registered with DIPP…
I mentioned to you, the RBI has put the condition for our Fund of Funds. When you are giving 25 per cent fund in the VCs to invest in the MSMEs our purpose is that these MSMEs should tomorrow become larger units.
DIPP has the system of registering the start-ups. But the VCs that get investment from your fund need not necessarily invest in only these registered start-ups.
That is what I was explaining. The surrogate mechanism has a potential. When we are making them invest double the amount we give in MSMEs then many of them obviously will be getting registered with DIPPs for the tax purposes.
You already have the India Aspiration Fund and this Start-up too now. What is the difference between them?
They have more or less similar characteristics.
When SIDBI invests in VCs, the guidelines say, you need to appoint a person on the investment committee of the VC?
Many of the big and top performing VCs they resist anyone coming in their investment committee. Even internationally they say it is not regarded well. The VCs do the investment. Start-ups need not only funding, but, a lot of guidance, hand-holding and insight from time to time. We sometimes negotiate but it is not a very hard and fast rule because the area is very evolutionary. The creativity and innovations have no boundaries. In this particular start-up ecosystem these parameters are constantly evolving.
The proposals you are getting are from existing large VCs or are there fresh VCs coming to you?
Our main objective is how to fund the start-ups on the ground. If a good number of VCs have a very good reputation and track record with a good fund manager at helm, then the chances are there that they shall be able to do much better.
A few examples please…
We have funded a good number of leading and established venture funds with great track record. It is that kind of VCs who are coming forward. Our focus is to intervene at the seed stage of start-ups where need exists. Normally we don’t distinguish between old and new we go by their track record and credentials of the fund manager. Our committee members are very experienced persons and they check against these parameters.
Are projects of the people on the investment committee being considered? And how do you manage conflict of interest?
These people are very reputed public figures. The moment they find that there is a proposal that has their interest they recuse themselves from the meeting. They don’t participate.
Have such cases happened?
Yes.
