India is home to the third-largest startup ecosystem, with almost 50,000 functional startups in the country. It is predicted that startups in cities other than Bangalore, Delhi, and Mumbai are likely to increase by 40% in the next decade. This makes seed funding for startups very relevant. In this post, we analyse the background and advantages of the Startup India Seed Fund Scheme 2021.
What is the new Startup India Seed Fund Scheme?
- How long – In January 2021, the government, through its Department of Industrial Policy and Promotion approved the Startup India Seed Fund Scheme for a period of the next four years from 2021-22 to the financial year 2025-26.
- Who benefits and by how much – The scheme would provide financial assistance to startups. The corpus allocated for this scheme is around ₹ 950 crores. A grant of ₹1 crore to 5 crores would be available, based on the assessment of the Expert Committee.
- What’s the support like – It is expected that the Startup India Seed Fund Scheme would give support to around 4000 startups, and eligible incubators across India. The amount from this seed fund can be used for the following purposes –
- Proof of concept
- Prototype development and related expenses
- Trial of the product – including within India and abroad
- Market entry
This means that the scheme is not restricted only to mature startups that have verifiable, ready products. An entrepreneur with a good idea may just as well seek funding under the scheme. The company will have to demonstrate the financial viability, need and use of the funds before a committee.
Eligibility criteria under the Startup India Seed Fund Scheme, 2021
- The startup must have been incorporated not more than two years before the time of application
- A business idea to develop a product or a service with the market fit, viable commercialization, and scope of scaling
- Must use technology in its core product or service, or business model, or distribution model, or methodology to solve the problem for the target
- Preference to startups creating innovative solutions in sectors 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, etc.
- The startup should not have received more than Rs 10 lakh of monetary support under any other central or state government scheme. This does not include prize money from competitions and grand challenges, subsidized working space, founder monthly allowance, access to labs, or access to prototyping facility
- The shareholding by Indian promoters in the startup should be at least 51% at the time of application to the incubator for the scheme, as per the Companies Act, 2013 and SEBI (ICDR) Regulations, 2018
Why does an upcoming business need seed funding?
Seed funding, as the name suggests is the initial amount required. Further, to put the business on its path to growth. This money can be for arranging to fund, getting approvals, paying regulatory bodies for fees, accessing financing, arranging professionals that set up the company etc.
Using seed funding for Intellectual Property
Since startups under Indian law are as ‘entities working towards innovation, development. Or improvement of products or processes or services, it has become extremely desirable to hold intellectual property (IP). These could be patents over your innovative product or an improved process of making something already out there in the market or a trademark that gives you an exclusive right over selling under a specific name. Moreover, IP valuation often becomes the cornerstone of the valuation as investors speculate on the worth of your specific IP and its potential growth in the market.
Seed funding for setting up your business
An entrepreneur can use the seed funding to put in place a structure for the business. You can explore one of the following types.
- A sole-proprietorship type of business is fairly easy to constitute in terms of time and the legal processes it involves.
- You may also want to consider a One Person Company for the added tax advantage and its simplicity.
- However, if you plan on scaling it to a larger level; or your business type is such that you have multiple founders/partners. You should ideally aim at getting it as an LLP, which is a limited liability partnership. It is very much like a regular partnership sharing profits. With the added advantage that your liability reduces to a large extent, just like a company. You can also convert it into a private limited company later.
How has the startup scenario evolved in India over the last five years?
- The Indian startup ecosystem has seen government policies and the overall regulatory atmosphere that has undergone major overhauling in the last few years. We’ve had major schemes such as the Startup India Scheme, Make in India and Assemble in India.
- In 2019 – the government created the “Startup India Fund”. This is a fund that grants capital to venture capital firms that go on to invest directly in startups. More recently, there is prioritisation on “Made in India” and “Go Vocal for Local”, giving a fillip to Indian startups.
- With a focus on seed funding, export incentives and encouragement to local brands, the startup ecosystem is likely to flourish exponentially in the years to come.
Also read: What are the different types of funding for Indian startups?
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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.
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