The Future of Indian Venture Capital with Mohammad Mustafa and Sanjay Mehta
Prospects of Venture Capitalist Landscape in India during COVID-19
Venture Capitalists are the mainstays of any start-up ecosystem and play a dynamic role in business operations. COVID-19 has created an urge for every business to go digital. India's start-up ecosystem is initiating just to escalate the process of job creations and enable and accelerate the digitization of the business world.
The primary threat with the VCs right now is the cash crunch prevailing worldwide. Innumerable global investors have decided to snap off some large deals. Prior to the onset of the pandemic, Indian venture capital deal activities were going very healthy. Furthermore, extensive corporate venture capital participation in the Indian start-ups was in place with numerous venture capital fundraising being recorded.
This video discussion was held with Mohammad Mustafa, an IAS officer, along with the present Chairman and MD of Small Industries Development Bank of India (SIDBI). The discussion revolved around the impact of COVID-19 pandemic on the prospects of the Indian Venture Capital landscape and what measures SIDBI has decided to safeguard the dynamics of India’s VC environment.
Current Scenario of the Start-up Ecosystem
After commencement of the debate, Mohammad Mustafa narrated that the present situation of pandemic seems quite challenging and tough time is running for the governments all around the world for controlling the crisis. Both central and state governments are playing their roles very well to stem the tides of COVID-19 and have taken several measures in the fields of medical and economy. As far as SIDBI is concerned, Mustafa told that the institution was equally worried about testing the current situation and identifying the priorities.
These are the two priorities outlined by him:
Equipment related to fighting the COVID-19 pandemic
Role of SIDBI in the Indian Start-up Industry
SIDBI plays a vital role in the start-up industry for supporting entrepreneurs throughout their journey from inception to growth. Various schemes by SIDBI include Fund of Funds for Start-ups, Aspire Fund, India Aspiration Fund, SIDBI Startup Mitra, Incubation Centre, and TIFAC-SRIJAN Scheme.
Mustafa spoke about the COVID-19 Start-up Assistance Scheme (CSAS), an initiative from SIDBI to provide immediate assistance to the innovative start-ups which have shown the courage to adapt according to economic impacts of COVID-19 and at the same time ensure employees’ safety and financial stability.
The major highlights of the scheme are:
Under this scheme, interim support of up to ₹2 crores at 10.5% per annum shall be provided to start-ups whose cash flow and liquidity have been adversely affected by the COVID-19 pandemic.
The assistance can be utilized for various working capital requirements like salaries/wages, rent, administrative expenses, payment to vendors, etc.
The tenure of the loan shall be up to 36 months, including the maximum moratorium period of 12 months. The loan has to be repaid in a maximum of 24 installments.
He further recited that SIDBI has already received 300 queries and 80 applications through CSAS scheme. Out of which, 10 applications have already disbursed, and many more are in the pipeline.
Apart from this, Mustafa also disclosed that SIDBI has already assisted around 80 companies for supplying medical equipment, and has committed approximately ₹4,800 crores for 48 VCs under the Fund of Fund scheme for various purposes. VCs need to raise funds at first and can ask SIDBI for further assistance.
Expectations from VCs During the Current COVID-19 Challenge
As per Mustafa, SIDBI has few expectations during the COVID-19 crisis:
VCs should not stop investing in start-ups but instead, support the funding process.
VCs should also show dedication as a part of their portfolio for bringing innovation in the core healthcare system.
Way Forward for the Indian VC Industry
SIDBI has always pushed small companies and MSMEs on the country’s economic forefront. It has always been instrumental in analyzing actual steps that should be taken for easing the business in India. The Indian venture capital ecosystem is growing day by day and has reached a respectable position. The industry has ripened over time and has a record of approximately INR 10 billion in terms of investment recently.
As far as forthcoming business threats are concerned, Mustafa said that innovation is the key to the current business model for VCs and start-ups. He added that the industry needs to focus on IP-based businesses and their growth as well.
A firm’s key competence is to accelerate its ability to create, own, market, and sell Intellectual Property (IP). As far as investments are concerned, he stressed upon foreign investors who drive a significant part of the industry; but, we should also promote long-term domestic institutional investors at the same time. Of course, this will depend on the improvement of the benchmark performances of such institutes.
How can Start-ups Survive Among the Threats of COVID-19?
In this pessimistic scenario, there are a few Indian start-up ventures growing ideally. Such ventures are on a rapid growth spree and have set an excellent benchmark for other companies struggling for survival in the current crisis. According to a report by KPMG on the start-up ecosystem in India, the number of start-ups has grown from 7,000 in 2008 to 50,000 in 2020.
Speaking on the part of growth, Mustafa narrated that start-ups should work on, he pointed out that Indian start-ups should especially focus on the healthcare ecosystem. Innovations are welcomed as much as possible because there exists a massive demand for the medical equipment in the current scenario, and it will continue to rise in the future as well. He also pointed out the importance of angel investors. There is a requirement for angel investors based on their knowledge, expertise, and who have the risk-taking appetite for the new ventures.
Mustafa also shared the idea of “neighborhood offices”, which he is personally willing to explore in the start-up space. This concept is about organizing employees into groups based on who is willing to work together each day. It will inspire employees to connect more and get a feel of the community.
Key Success Pointers for the Indian Economy
Mustafa shared a few of his key pointers that can play an important part in the Indian economic growth.
A couple of these factors are:
Huge consumer demand – Each valuable idea will work in the Indian market because of its high population that subsequently results in huge demand and consumption rate.
Focus on IP-based businesses – Start-ups in India should start focusing on IP-based businesses. According to him, IP is going to prove as an indispensable asset for the upcoming start-ups on their road to success. Currently, Indian start-ups are lacking revolutionary innovation born by latest technologies or exclusive business models. Most Indian start-ups are implementing ideas that are already taken up or implemented in India or abroad. It is mandatory for the start-ups in India to develop innovative business models, new ideas and a lot of awareness of IP laws for flourishing in India or abroad.
1.The SIDBI Startup scheme for post-COVID-19 states very rigid revenue and profitability requirements that seem impractical for the upcoming start-ups. What steps were taken to relax such requirements and to ease the access of upcoming start-ups for this scheme?
A.Replying to this query, Mustafa said that the scheme was started just to support the companies, which were operating on a low scale and were directly affected by the COVID-19 pandemic. There are a few conditions laid out for the start-ups to apply for the scheme like revenue requirements, a number of employees working in the company (should be at least 50), etc. However, he also dictated that these are just the normal standards issued by SIDBI for the start-ups to apply. The institution is not rigid, and some of the conditions can be forfeited depending upon the case. If the start-up gives a sound logic, few of the conditions can be relaxed.
2.Can a non-DIPP registered start-up apply for the SIDBI loan? If not, what do we need to do to apply for DIPP now and simultaneously apply for a loan as well?
A.To this query, Mustafa replied that at this point of time, it is not possible to provide loans to non-DIPP registered start-ups as it is a mandatory criterion to avail the SIDBI loan scheme.
3.Is there a likelihood of COVID-19 Start-up Assistance Scheme (CSAS) being extended to non-VC funded start-ups as well?
A.No. As of now, the scheme is extended to VC funded start-ups only.
4.Can the badly hit sectors like travel, hospitality and leisure expect some help from SIDBI?
A.About this query, Mustafa said that there are no ready schemes for the sectors as SIDBI is currently monitoring the data and statistics of the current situation. He said that the government and various industry bodies are taking steps to draft schemes for the adversely affected sectors.
5.What is the thought process for CSAS funds only directed towards VC funded start-ups and not the other smaller entities?
A.Mustafa responded to this question by saying that SIDBI is currently getting more and more queries around this thought of funding non-VC funded entities. The institution is looking into the implementation of this thought process.
6.Is SIDBI increasing the speed for the VC applications pending for the approval under various Fund of Fund schemes?
A.SIDBI has outlined a few steps towards clearing the pending applications:
•There will be a meeting of SIDBI’s Venture Capital Investment Committee or VCIC every fortnight to discuss the applications.
•Digital application processes are already in place where VCs can rate themselves and know if they are eligible.
7.Is there any help desk for the start-ups to approach SIDBI regarding details about the schemes?
A.Mustafa informed that there would be two dedicated branches that SIDBI will cater to the start-ups only. These branches will provide services related to start-up applications, details of the schemes laid out for them, and other services. One branch will be in New Delhi, and the other will be in Bengaluru.
8.Any special schemes for women entrepreneurs or women-led funds?
A.SIDBI gives priority to women applications, whether in VCFs or any schemes run by them. 9.How can Fintech entities/NBFCs have access to working capital/loans from SIDBI?
A.SIDBI has already launched a pilot scheme to extend the financial assistance of up to ₹10 crores to new-age Fintech Non-Banking Finance Companies (NBFCs) engaged in financing small businesses and other income-generating activities. For funding assistance eligibility, the Reserve Bank of India registered new-age Fintech NBFCs to meet the prescribed parameters.
10.Any plans from SIDBI to support Agriculture Marketing Solutions start-ups?
A.Yes, SIDBI is supporting agricultural start-ups through various schemes. These start-ups can apply through those avenues for support.