A majority of successful startups have been funded by foreign venture funds and many of them are locating outside the country to receive such funding.
The government on Wednesday approved Rs 10,000 crore (Rs 100 billion) 'Fund of Funds for Startups' to support them with an aim to generate employment for 18 lakh persons.
"The fund is expected to generate employment for 18 lakh persons on full deployment...A corpus of Rs 10,000 crore could potentially be the nucleus for catalysing Rs 60,000 crore (Rs 600 billion) of equity investment and twice as much debt investment," an official statement said.
The decision was taken in the Union Cabinet meeting chaired by Prime Minister Narendra Modi.
"The Cabinet has approved the establishment of 'Fund of Funds for Startups' (FFS) at Small Industries Development Bank of India (SIDBI) for contribution to various Alternative Investment Funds (AIF), registered with SEBI which would extend funding support to startups," it said.
This is in line with the 'Startup India Action Plan' unveiled by the government in January.
The corpus shall be built up over the 14th and 15th Finance Commission cycles, subject to progress of the scheme and availability of funds, it said.
"This would provide a stable and predictable source of funding for startup enterprises and thereby facilitate large scale job creation," it added.
An amount of Rs 500 crore (Rs 5 billion) has already been provided to the corpus of FFS in 2015-16 and Rs 600 crore (Rs 6 billion) earmarked in the 2016-17.
Further provisions will be made as grant assistance through gross budgetary Support by Department of Industrial Policy and Promotion (DIPP) which will monitor and review performance in line with the 'Start up India Action Plan', it said.
Further, the statement said the expertise of SIDBI would be utilised to manage the day-to-day operations of the fund.
The monitoring and review of performance would be linked to the implementation of the action plan to enable execution as per timelines and milestones.
The move assumes significance as startups face several challenges such as limited availability of domestic risk capital, constraints of conventional bank finance, information asymmetry and lack of hand holding support from credible agencies.
A majority of successful startups have been funded by foreign venture funds and many of them are locating outside the country to receive such funding, it said.
"A dedicated fund for carrying out 'Fund of Funds' operations would address these issues and enable flow of assistance to innovative startups through their journey to becoming full fledged business entities," it added.
This would encompass support at seed stage, early stage and growth stage, it said.
The statement said that the government's contribution to the target corpus of the individual fund as an investor would encourage greater participation of private capital and thus help leverage mobilisation of larger resources.
It said accelerating innovation driven entrepreneurship and business creation through startups is crucial for large-scale employment generation.
An expert committee on venture capital has opined that "India has the potential to build about 2,500 highly scalable businesses in the next 10 years, and given the probability of entrepreneurial success that means 10,000 startups will need to be spawned to get 2,500 large scale businesses," it added.
