Top investors want $1B govt-sponsored fund of fund to anchor domestic early-stage VC funds

A committee comprising the bigwigs from alternative investment fund community has estimated that the Indian entrepreneurial ecosystem would require $55 billion over the next decade and half of the amount should come as debt to support entrepreneurial activities in the country. The committee has also called for a cap of Rs 5 crore to define angel investment by an individual, besides asking for a government-sponsored fund of fund worth Rs 5,000 crore and measures to allow pension and insurance funds to invest 1-2 per cent of their corpus in early-stage VC funds among various other measures.

The committee consisted of key individuals across investment stages (angel, venture capital and private equity) including Saurabh Srivastava (Indian Angel Network), Anand Ladsariya (Mumbai Angels), Alok Mittal (Canaan Partners), Jayant Sinha (Omidyar Network), Ashish Dhawan (founder of ChrysCapital) and Sumir Chadha (Westbridge Capital), among others.

In its report presented two months ago, the committee has pointed out that India has the potential to build 2,500 successful startups, which would require at least 10,000 startups in the ecosystem (assuming one out of four startups would be able to develop a scalable venture). It has, however, added that the current system is far below the potential as just around Rs 100 crore worth of angel investments were recorded in 2011 in the country, which would need to grow to Rs 3,500 crore annually over the course of next 10 years.

Even early-stage VC investments (sub-$10 million deals) were much below the potential, having clocked Rs 1,200 crore in 2011, as against Rs 29,000 crore in comparable investments in the US and Rs 3,000 crore in China. The report states that such investments might grow to Rs 14,000 crore annually in India in the next decade.

Here are the key measures proposed by the committee:

• Creation of innovation labs in PPP mode with the government providing infrastructure and the private sector bringing in management and operational support.
• Defining early-stage ecosystem: It should include angel investment of up to Rs 5 crore by an individual and up to Rs 10 crore by a group; seed stage investment for companies with turnover of less than Rs 25 crore and VC stage investment in companies with revenue of less than Rs 50 crore (provided they are not part of a group with cumulative turnover of more than Rs 300 crore).
• Target to raise number of incubators in the country from the current 120 to around 1,000 in tier I and tier II towns; raising the seed funding limit of these incubators from the current Rs 25 lakh to Rs 1 crore.
• Easier exit norms: Relaxing the lock-in period for angels and VC investors, easing overseas listing norms, preference to angel and VC investors in case of ventures shutting down (already applicable but not enforceable).
• Allowing angel groups to form LLP with complete pass-through status; tax benefit write-off for investments up to Rs 1 crore per year.
• Allowing PF funds and insurance funds to invest up to 1-2 per cent of their corpus in early-stage VC firms.
• Allowing NRI investment in domestic VC funds through an automatic route.
• Forming a fund of fund sponsored by the government with corpus of Rs 5,000 crore (committee has suggested $1 billion but exchange rate movements has made it a shade below $900 million) with a cap of Rs 50 crore or 50 per cent of total corpus of any single VC fund.
• Fostering venture debt financing.
• Banks' exposure to VC funds up to Rs 500 crore should be brought under priority sector lending rather than capital market exposure and, therefore, should be out of provisioning norms.