"(Live Mint) Fine print of India’s start-up policy- The government’s ambitions of turning limited partner to venture capital funds has drawn sharp criticism from several quarters
• India’s venture capitalists have a new benefactor—the government.
• Central government would create a fund of funds that would invest in private venture capital funds. Part of a bunch of measures that constitute the action plan for the government’s Start-up India initiative, the fund of funds’ proposed Rs.10,000 crore (about $1.5 billion) corpus will be deployed in tranches of Rs.2,500 crore over a period of four years.
• The government’s ambitions of turning limited partner to venture capital funds has drawn sharp criticism from several quarters. The primary gripe is whether it is prudent, even proper, on the part of the government to invest taxpayers’ money in venture capital funds, which will in turn invest in enterprises that carry a high risk of failure.
• The fund of funds will invest in venture capital funds registered with markets regulator Securities and Exchange Board of India (Sebi). This is designed to stimulate the growth of the domestic venture capital industry, which is practically non-existent at present. The country’s venture capital industry, which consists of foreign firms such as Sequoia Capital, Accel Partners and Matrix Partners, and home-grown firms such as Kalaari Capital, Nexus Venture Partners and Helion Venture Partners Llc, currently raise more than 90% of their capital from foreign institutional investors, commonly known as limited partners.
• There’s no doubt that it is important to encourage the growth of a domestic venture capital industry that is not overwhelmingly dependent on foreign capital. There are two key reasons. One, firms backed by foreign capital tend to gravitate towards start-ups that replicate business models that have been successful in the US, or in other developing markets. Their limited partners are understandably more comfortable with that strategy. This is why the consumer Internet sector, for instance, gobbled up more than half the venture capital invested here over the past few years. The fund of funds aims to fix that imbalance by specifically investing in funds that will, in turn, invest in sectors such as health, education, manufacturing and agriculture.
• Two, the dependence on foreign capital makes firms here vulnerable to the ups and downs of those markets. While the Indian venture capital market is not currently strapped for capital and India remains an attractive investment destination for global limited partners, even a tremor in the US economy or venture capital market could trigger a major upset here.
• However, just the creation of a Rs.10,000 crore or $1.5 billion fund of funds will not spur the growth of a local venture capital industry. To begin with, the size of the corpus itself is minuscule in the context of the demand. Remember, the fund of funds will deploy Rs.2,500 crore, or under $400 million, every year. Last year alone, venture capital investments in India stood at about $1.8 billion, according to data compiled by Chennai-based Venture Intelligence.
• The only sources of domestic capital currently available to venture capital funds are HNIs (high net-worth individuals) and family offices. Neither is incentivised enough, through tax concessions, to put meaningful money into play in venture capital funds. Domestic venture capital funds, therefore, have no option but to raise capital from overseas investors. Even that is not easy because of a complex regulatory framework. As a result, most domestic venture capital funds have to adopt a dual fund structure (in which capital raised from foreign investors is parked in a separate offshore fund).
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