Startup Funding in India
India has been home to numerous start-ups which have gathered huge amounts of investment, thanks to the country’s booming economy and a market with enormous potential. However, the scenario seems to have changed nowadays with a funding crunch that is severely impacting Indian start-ups. According to reports, start-ups raised just $2 billion in the first quarter of 2023, a 75% decline compared to the same period in 2022. Although the reasons for the fall are not entirely clear, it is expected to worsen in the coming years, thus leading to severe job losses and delayed IPOs. As per experts, it would be naive to expect yet another record fund raise year like 2021 at least for a decade. In light of this, let’s explore what’s causing the slowdown and what can be done to combat it.
1. Introduction to Startup Funding in India
Startup funding in India has been a topic of interest for entrepreneurs and investors alike. Funding for startups refers to the monetary investment in a business for various purposes such as product development, manufacturing, expansion, sales, marketing, office spaces, and inventory. In India, startup funding has gained significant momentum in recent years due to private investments including seed, angel, venture, and private equity funds. Technical support from incubators, accelerators, and the government has also played a crucial role in the expansion of the Indian startup ecosystem.
While many startups choose not to raise funding from third parties and are funded by their founders only, most startups opt for external funding as they grow larger and scale their operations. Equity financing, debt financing, and grants are common sources of funding for startups. Founders should have a detailed financial and business plan before they approach investors to ensure that they are clear about why they are raising funds.
In India, the government’s Startup India initiative, launched in 2016, strives to build a thriving ecosystem that supports the establishment of new enterprises, promotes long-term economic growth, and encourages innovation and design. With over 4200 startups and counting, India has moved up to the third position in the world in terms of startup numbers.
As the Hon’ble Prime Minister stated, “India needs to be a job creator rather than a job seeker.” Startup funding in India is an essential aspect of promoting entrepreneurship, solving societal problems, and generating employment opportunities that aid in India’s growth and development.
2. Eligibility for DPIIT Recognition
Under the Startup India initiative, companies can apply for recognition as a Startup by DPIIT and gain access to a range of tax benefits, easier compliance, IPR fast-tracking, and more. But what are the eligibility criteria for DPIIT recognition? Well, your company must meet certain requirements, including a period of existence and operations not exceeding 10 years from the date of incorporation. The startup should be incorporated as a Private Limited Company, a Registered Partnership Firm, or a Limited Liability Partnership, and have an annual turnover not exceeding INR 100 crore for any of the financial years since its incorporation. Moreover, the entity should work towards developing or improving a product, process, or service and have a scalable business model with high potential for the creation of wealth and employment. It should not have been formed by splitting up or reconstructing an already existing business.
Getting DPIIT recognition enables startups to access a host of benefits under the Startup India initiative. This includes reducing the regulatory burden on startups, allowing them to focus on their core business and keeping compliance costs low. Startups may self-certify compliance for six Labour Laws and three Environmental Laws through a simple online procedure. DPIIT-recognised startups are required to pay only 80% of the fees on copyrights and design and can have a patent application fast-tracked. Furthermore, these startups get an opportunity to list their products on the Government e-Marketplace and can apply for tax exemption under Section 80 IAC of the Income Tax Act. Finally, startups within 10 years of incorporation can apply for DPIIT recognition by visiting the Shram Suvidha Portal of the Ministry of Labour and Employment at Shram Suvidha Portal and then logging in. As DPIIT recognition opens the door to an array of benefits, it is a wise step for startups to ensure they meet the eligibility criteria and apply for recognition.
3. Benefits of DPIIT Recognition
Registering as a startup with DPIIT offers several benefits, including exemption under Section 56(2)(vii)(b) of the Income Tax Act for excess consideration received from shares. In addition to tax exemptions, registered startups can avail of a three-year exemption from paying income tax consecutively during the first decade of incorporation, and long-term capital gains tax on the sale of residential property can be waived if such proceeds are reinvested in a registered startup. However, administrative hurdles, such as delays in obtaining Section 80IAC exemption, remain an obstacle. Although DPIIT recognition offers many benefits, qualifying for it requires meeting specific criteria, including annual turnover not exceeding Rs. 100 crore, being incorporated as a Private Limited Company, Registered Partnership Firm or a Limited Liability Partnership, and not formed by splitting or reconstructing an existing business. Additionally, recognized startups can self-certify compliance for six labor laws and three environmental laws, such as The Employees’ Provident Funds and Miscellaneous Provisions Act and The Water (Prevention & Control of Pollution) Act with no inspection within five years, if no complaint filed against them. DPIIT recognition also enables startups access to a panel of facilitators for general advisory on different intellectual property, helping them value their innovations.
4. Startup India Seed Fund Scheme
The Startup India Seed Fund Scheme launched in April 2021 aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry, and commercialization. The fund was divided into four years for providing seed funding to eligible startups through incubators across India. According to DPIIT joint secretary Manmeet Nanda, “the scheme has benefitted the startup community.” A third-party impact assessment of the scheme is currently underway by the National Institute of Financial Management (NIFM) to see its real impact. Around 1000 startups have already benefitted from the scheme across various sectors. The scheme has allocated Rs 611 crore to 165 incubators, and Rs 61 crore have been released to startups under the seed fund scheme so far. The goal of the scheme is to benefit innovative startups during their early stages and help them conduct proof of concept trials. The scheme has provided funding to startups in different sectors such as healthcare, agriculture, education, IT services, and auto. Additionally, over 100 women-led startups have been approved under the scheme’s healthcare sector alone. The scheme’s multiplier effect indicates its positive impact in nurturing innovation and growth in the startup ecosystem. If required, the department would seek more funds to completely utilize the Rs 945 crore fund allocated under the scheme.
5. Shanghai Cooperation Organisation (SCO) Special Working Group
The Shanghai Cooperation Organisation (SCO) has been making waves in the global political and economic space, especially when it comes to promoting intergovernmental cooperation, trade, and innovation among its member states. In recent times, the SCO has formed a Special Working Group, which focuses on nurturing the local startup ecosystems of its member states and enabling access to investor engagement activities. This is a significant step as it promotes collaboration among startups from all SCO members and provides a valuable opportunity for entrepreneurs to scale up their ideas and network with established corporates and investors.
The Special Working Group, comprising representatives from all the member states, is also tasked with organizing the SCO Startup Forum- an annual event that brings together stakeholders from the startup ecosystem for collaboration and knowledge exchange. The forum facilitates the sharing of best practices, the exploration of scaling opportunities, and the creation of open procurement channels for innovative solutions from startups. This event is an excellent opportunity for local entrepreneurs to showcase their innovative solutions and gain exposure to potential investors and clients.
According to the India SCO report on startups and innovation, the forum’s objective is to create multilateral cooperation and engagement among the member states, enabling the local startup ecosystems to thrive. This engagement opens opportunities for startups to explore international markets and facilitates cross-border incubation and acceleration programs that provide the startups with mentorship and investment opportunities.
In conclusion, the SCO’s Special Working Group and Startup Forum represent a significant step in promoting innovation, entrepreneurship, and intergovernmental cooperation among member states. The initiatives provide an excellent opportunity for local entrepreneurs to showcase their innovative solutions, gain exposure and mentorship, and access much-needed funding and resources to scale up their ideas. As the SCO continues to prioritize regional development, these efforts will undoubtedly propel the growth of the local startup ecosystems and drive economic growth within the region.
6. Startup India Investor Connect
Startup India Investor Connect is an excellent platform that connects startups in India with investors to facilitate investment opportunities. This platform was created by the Department for Promotion of Industry and Internal Trade to help bridge the gap between investors and startups. Through AI based matchmaking, this platform aims to create a virtual marketplace of investors for innovative startups and to enable connections between investors and startups in emerging cities. This way, entrepreneurs will be able to directly reach out to multiple investors using a single application and pitch their startup idea.
One of the significant benefits of the Investor Connect platform is the instant visibility that entrepreneurs will receive from the right investors. This platform has already gained massive popularity in India, with over thousands of users visiting the website since inception. It is essential to note that the portal does not participate in any online or offline buying or selling of securities or settlement of trades of securities. It is not a trading platform and should not be viewed as a Stock Exchange set up under the Securities Contract Regulation Act 1956.
Through this portal, Indian startups can benefit from accessing investors’ capital, which is essential for product development, manufacturing, expansion, and sales and marketing. However, it is necessary to have a detailed financial and business plan before approaching investors. Entrepreneurs should be clear about why they are raising funds and which funding source matches their startup’s stage of operations. Funding opportunities through Startup India Investor Connect can be an excellent way to take your business to the next level.
7. Policies and Schemes for the Indian Startup Ecosystem
The government has been making strides in building a strong startup ecosystem in the country through various policy measures and schemes. One such initiative is the Startup India Action Plan, which aims to offer extensive support to recognized startups. This plan provides capital gains exemption to investors in government-recognized funds, tax exemptions on investments over fair market value, and fast-tracked patent applications, among other benefits. Additionally, facilitators are available to assist with filing applications, and the government bears the facilitation costs. A 80% rebate on patent filing fees, self-certification and compliance of 9 environment and labor laws through the Startup India web portal, and relaxed norms for public procurement further strengthen the startup ecosystem.
The government has also launched various schemes to provide financial assistance and mentorship to startups. The Aatmanirbhar Bharat App Innovation Challenge, launched under the Digital India mission, encourages the development of world-class mobile applications. The SAMRIDH scheme, meaning Startup Accelerators of MeitY for Product Innovation Development and Growth, seeks to support startups by providing access to various resources such as incubation facilities and seed funding.
Overall, these schemes and policies aim to provide a nurturing environment for startups to thrive in India. As Ashwini Vaishnaw, Minister of Electronics Information and Technology (MeitY) notes, “The goal of our initiatives is to build a robust ecosystem of startups that have the potential to create sustainable solutions from ground zero.” These initiatives have already made significant progress with over 4,000 recognized startups and 1,900 eligible for tax exemption, providing a strong foundation for the Indian startup ecosystem.
8. Funding Landscape for Startups
The startup funding landscape has undergone a market correction in the past year with a decline in growth and late-stage funding. However, seed and bridge funding have increased significantly by 27% and 11% respectively. Despite a decrease in capital inflow in the top three startup hubs, funding in emerging hubs rose 41%. Investment funds continued to flow with 1,519 deals in 2022, compared to 1,584 in 2021. Angel investors are a key player in providing startups with seed capital, while venture financiers provide development capital and follow-on money. A diverse funding landscape helps reduce dependency on a few funding sources and mitigates the risk of funding shortages. Several factors have fuelled the country’s startup development, including the availability of venture money, angel investors, and government efforts, resulting in a surge in the number of unicorns.
According to Artha’s Managing Partner and Director Anirudh Damani, 2022 was a much-needed year to bring back sanity in the startup ecosystem. The funding winter was needed to separate the businesses thriving on customer capital and those surviving on investor capital. Despite the challenges faced by startups in securing funding, the financing situation for startups in India appears promising, with ongoing growth and room for expansion. However, startups continue to encounter obstacles such as legislative impediments, a dearth of access to funding, and a limited supply of qualified personnel. The Indian government and private sector stakeholders are taking steps to resolve these issues and create a startup-friendly environment, with the development of several projects such as Startup India, Digital India, and Make in India.
9. Startup India Showcase and Mentorship Advisory Assistance
Startup India Showcase and Mentorship Advisory Assistance are two key initiatives under the Startup India program aimed at fostering the growth and success of startups in India. The Showcase provides an online discovery platform for the most promising startups in the country, selected through various DPIIT and Startup India programs, and exhibited in the form of virtual profiles. This offers a unique opportunity for startups to showcase their innovative products or solutions and connect with potential investors, customers, and partners.
On the other hand, the Mentorship Advisory Assistance program aims to facilitate intelligent matchmaking between mentors and startups across different sectors at scale. This would provide startups with access to the guidance and knowledge of experienced professionals who can help them navigate common challenges and achieve their goals. This program focuses on developing relationships that can help startups grow and fulfill their full potential.
Both of these programs are instrumental in creating a supportive environment for startups to grow their businesses. As per Startup India, there are over 600,000 registered members in the startup community, and showcasing their products or services on this platform could lead to exciting new opportunities. Additionally, getting personalized guidance through mentorship can help address key challenges and accelerate progress.
In the words of the Startup India website, “The vision of Startup India is to transform India into a country of job creators instead of job seekers.” The Showcase and Mentorship Advisory Assistance programs are two initiatives that help turn this vision into a reality by supporting and nurturing the entrepreneurial spirit that exists in India.
10. Latest Funding Resources: Startup Funds Worth $3 Bn+ Announced
In of the difficulties that Indian startups faced in 2023, investors have remained committed to supporting new businesses in the country. VC, CVCs and PE investors have announced 32 funds worth more than $3 Bn to support Indian startups at various stages. About 66% of the funds investment corpus and plans announced in the first four months of 2023 focused on early-stage startups. Additionally, the financial year 2023 saw a tough period for Indian start-ups as it proved challenging to secure funding in the first quarter of the year 2023.
However, investors continued to back Indian start-ups by investing $3 Bn+ via 32 funds launched this year. The majority of the funds, which focus on early and early-growth stage startups were aimed specifically at supporting Indian businesses. For example, AdvantEdge unveiled its third fund to invest in electric vehicle (EV) startup ecosystems. Moreover, India’s finance minister Nirmala Sitharaman announced a fund targeting agritech in rural areas of the nation during the union budget speech 2023-24 in February.
To help entrepreneurs access up-to-date information on funding resources, Inc42 compiled a list of the launched funds comprising details on their fund size, sectors in focus and more. All funds have been placed in alphabetical order. Startup funds worth $3 Bn+ announced for startups prove that investors continue to view the Indian start-up scene with optimism, and there are signs of growth and a sustainable economy for the future.