Exploring the Fund of Funds for Startups: A Catalyst for Innovation

The Fund of Funds for Startups Scheme

The Fund of Funds for Startups (FFS) scheme represents a significant commitment to fostering innovation and entrepreneurship in India. With an allocation of approximately ₹8,000 crore, the initiative supports nearly 100 Alternative Investment Funds (AIFs). As part of this scheme, around ₹3,400 crore has been disbursed to over 70 AIFs, which in turn have invested around ₹14,000 crore in nearly 800 startups.

Background and Structure

Approved in 2016, the FFS scheme has a total fund size of ₹10,000 crore. Contributions are strategically spread across the 14th and 15th Finance Commission cycles to ensure ongoing support for startups. It's important to note that the FFS does not invest directly in startups; instead, it provides funding to SEBI-registered AIFs, which are also referred to as daughter funds. These AIFs then channel investments into startups via equity or equity-linked instruments.

Understanding Alternative Investment Funds

Alternative Investment Funds (AIFs) are private investment vehicles that pool funds from various investors based on a defined investment strategy. They are strictly regulated by the Securities and Exchange Board of India (SEBI) and encompass categories such as venture capital funds, private equity funds, and debt funds. The Small Industries Development Bank of India (SIDBI) plays a crucial role in operating the FFS by selecting appropriate AIFs and managing fund disbursement and compliance.

Leverage and Impact

AIFs that receive support through the FFS are mandated to invest at least double the amount committed by the government into startups. This requirement creates a substantial leveraging effect, amplifying the overall investment in the startup ecosystem. The FFS initiative is integral to the broader Startup India program, which aims to cultivate a robust and self-sustaining ecosystem for startups across the nation.

Significance of the FFS Scheme

• Boost to Domestic Capital Formation: The scheme promotes the channeling of domestic capital into innovative startups, thereby reducing dependency on foreign investments.
• Wealth and Employment Generation: Startups funded through the FFS have made significant contributions to job creation and regional economic development.
• Professional Fund Management: Investments are managed by professionals through AIFs, ensuring that funds are allocated based on sound assessments of growth prospects and risks.
• Support for Startups at Various Stages: The FFS, along with initiatives like the Startup India Seed Fund Scheme (SISFS) and the Credit Guarantee Scheme for Startups (CGSS), provides comprehensive support from idea to growth stages.
• Wider Sectoral Impact: Startups across various sectors such as fintech, agritech, healthtech, and clean energy have benefited from this initiative, fostering innovation-driven entrepreneurship.

Real-World Examples

• A healthtech startup acquired early-stage funding from an FFS-supported AIF, enabling it to expand its telemedicine services to underserved rural regions.
• An agritech startup, receiving investment through an AIF backed by FFS, adopted AI technologies for precision farming, later attracting private venture capital.
• A fintech startup offering digital payment solutions in tier-3 cities rapidly scaled its operations after obtaining growth capital through an FFS-linked AIF.

Through the Fund of Funds for Startups scheme, India is making strides toward building a dynamic and resilient startup ecosystem that nurtures innovation and economic growth.