The Government of India has come up with the Start-Up India Seed Fund Scheme for enabling, promoting, and encouraging entrepreneurship in the country. This funding scheme is aimed at early-stage start-ups to provide them financial assistance for Proof of Concept, Prototype Development, Product trials, market-entry, and commercialization. The total outlay for the entire scheme is INR 945 Crore and it is expected to support 3600 entrepreneurs. The Scheme was notified on the 21st of January, 2021, and shall have a duration of 4 years at the initial phase. Funds will be disbursed through eligible incubators to eligible start-ups. An Expert committee shall be formed under DPIIT which shall undertake the overall execution of the scheme. The scheme shall provide support in the form of grants and debt/convertible debentures. Once a Start-Up has been granted funding under this scheme, it will become ineligible for any subsequent funding under this scheme.
OBJECTIVES OF THE SCHEME
This scheme target those Start-Ups that are finding it difficult to get their business forward from the ‘idea’ stage by providing them funding for the critical capital requirement at early stages. Since most funding agencies as well as Venture funds take a cautious stance on putting their money in a business idea that is at a very early stage of development, this scheme will be immensely beneficial. The more ideas that will be successfully implemented through this scheme, the more employment opportunities shall be created by such successful Start-Ups. Since the scheme is aimed at helping over 3000 Start-Ups during its subsistence, that will also result in the validation of multiple business ideas and will increase the Start Ups’ chances at success.
ELIGIBILITY UNDER THE SCHEME
Since the scheme is structured in such a way that funds shall be disbursed among the eligible Start-Ups only through incubators, the eligibility conditions have also been set apart for being eligible under the scheme for Start-Ups and Incubators.
For a Start-Up to be eligible for receiving funding under this scheme, it needs to be recognized by the DPIIT. To be recognized by DPIIT as a Start-Up, an entity shall meet the following conditions, namely:
- If 2 years have not passed since the year of its incorporation as a Private Limited Co., a registered Partnership Firm or a Limited Liability Partnership (LLP)
- If the turnover of the said entity has never exceeded the INR 100 Cr. limit during any of the years since its incorporation/registration
- If such entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation
- Such an entity that has been incorporated by splitting an existing company is not entitled to be called as a Start Up
In addition to the conditions laid down by DPIIT, the business idea of the Start-Up must also be capable of commercialization and scaling up. Moreover, it must be using technology to solve the targeted problem, with areas such as social impact, waste management, food processing, biotechnology, healthcare, energy, mobility, defence, space, railways, oil and gas, textiles as being the key focus areas. The Start-Up must not have received more than 10 lakhs in funding under any other government scheme and its 51% shareholding must be held by Indian promoters.
For an Incubator to be eligible for receiving funding under this scheme, it must be a legal entity of the following type, namely:
- Registered under Societies Registration Act, 1860
- Registered under Indian Trusts Act, 1882
- Registered as a Private Limited Company under Companies Act 1956/2013
- Established under the Legislature or Act
Moreover, the Incubator must be functioning for at least the last 2 years. It also needs to have the infrastructure to sit 25 individuals in its workspace. The Incubator needs to have at least 5 Start-Ups under its incubation physically and it needs to have full-time employees for Managerial, Legal, Finance, and Human Resources positions. The Incubator must not be funded by private 3rd party investors and must have government support. For Incubators who are not supported by the government, the following additional eligibility also needs to be met for it to be eligible under the present scheme. The additional eligibility is as follows:
- Must be operational for 3 years or more
- Must have at least 10 startups under its incubation physically
- Must submit audited annual reports for the last 2 years
SELECTION PROCEDURE FOR START UP
A Start-Up, that is interested in availing the benefits under this scheme shall make an application on the Start Up India Portal. The following details need to be submitted while finishing up the Application:
- Team profile
- Problem statement
- Product/service overview
- Business model
- Customer profiles
- Market Size
- Quantum of funds needed
- Projected utilization plan for funds
Once the application has been finalized, a Start-Up can select up to 3 incubators as per their preference for funds distribution. Applications received on the portal will be shared with the respective Incubators for evaluation. The Incubators shall shortlist the Start-Up based on the evaluation criteria reached by them. The Shortlisted Start-Ups will then present their ideas to the Incubator Seed Management Committee. (or ISMC) Once the ISMC selects the Start-Up based on Presentation within 45 days, the selected Start-Ups shall start receiving the seed funds from their selected Incubators. Unsuccessful applicants shall be notified by E-mail regarding their rejection in the Application. The Incubators shall not charge any fee in cash or in-kind from the applicants or the beneficiaries under the scheme. The Incubators shall use the following criteria for selecting or rejecting the Application of a Start-Up:
- Need for the idea
- Feasibility
- Potential Impact
- Novelty
- Team
- Fund Utilization Plan
- Presentation
- Any other relevant parameters as per the incubators
Weightage shall be assigned to each of these parameters as per the own criteria of the Incubators and can be set differently for different Incubators.
DISTRIBUTION OF FUNDS UNDER THE SCHEME
The Incubators shall disburse the funds to the Start-Ups in the following manner:
- INR 20 Lakhs as grant for the validation of Proof of Concept, or prototype development, or product trials. The disbursement is done on milestone-based installments. Only 20% of the total grant to an incubator shall be given as grants.
- Up to 50 INR Lakhs of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments. The term of duration for the loan amount shall not exceed 5 years (60 months). The start-ups can opt for a moratorium of up to 12 months (1 year) for the repayment of the loan amount. The rate of interest cannot be more than the prevailing repo rate.
- The funds shall be utilized only for the purposes it was released.
- A legally binding agreement shall be entered between the Incubator and the selected Start Up clearly mentioning the milestones and other details pertaining to Seed Fund
- Funds can be disbursed only in the company bank account.
- An audited report on the utilization of funds shall be submitted at the end of the project. Failed ventures shall share their learning and reason for failures
- The following details are required to be submitted by the beneficiary start-ups in their progress reports:
- Progress of proof of concept
- Progress of prototype development
- Progress of product development
- Progress of field trials
- Progress of market launch
- Quantum of loan, angel or VC funding raised
- Jobs created by start-up
- Turnover of start-up
- Any other appropriate parameter
Successful implementation of the scheme will lead to the creation of a robust entrepreneurial ecosystem in the country. This will not only benefit the well-established and funded Tier – I cities but shall also enable the Tier – 2 and Tier – 3 cities to spread their entrepreneurship wings. This will further contribute to the exponential growth and development of the country.
