Startup India Fund of Funds 2.0, Objectives, Key Features

The Central Government has approved the establishment of ‘Startup India Fund of Funds 2.0’ with a total corpus of Rs. 10,000 crore for the purpose of mobilizing venture capital for the startup ecosystem of the country. The Scheme shall be known as the ‘Startup India Fund of Funds 2.0 (Startup India FoF 2.0)’.

Startup India Fund of Funds 2.0 Background

The Startup India Fund of Funds 2.0 scheme builds upon the earlier Fund of Funds for Startups (FFS 1.0). 

• Fund of Funds for Startups (FFS 1.0) was launched in 2016 under the Startup India Action Plan to address funding gaps and catalyse the domestic capital for startups. 
• Fund of Funds for Startups (FFS 1.0) played an important role in catalysing venture capital investments in India. It helped improve funding availability for startups, especially during their early stages.
• However, gaps persisted in sectors such as deep technology and innovative manufacturing, where investment risks are higher and returns take longer to materialise. Startup India Fund of Funds 2.0 has been designed to address these specific shortcomings.

Startup India Fund of Funds 2.0 Objectives

The Startup India Fund of Funds 2.0 scheme aims to strengthen both the availability and quality of funding in the startup ecosystem.

• It seeks to enable access to venture capital for startups across different stages and sectors.
• It provides a focused push to innovation-driven manufacturing and long-gestation technologies.
• It aims to support the development of smaller venture capital funds that invest in early-growth-stage startups.
• It promotes innovation by nurturing startups working on complex and high-risk ideas.

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Startup India Fund of Funds 2.0 Key Features

Corpus and Time Frame: The scheme has a total corpus of ₹10,000 crore. Investments will be spread across 16th and 17th Finance Commission cycles.

Priority Sectors: Special emphasis is placed on deep technology and advanced manufacturing. These sectors are critical for technological self-reliance and long-term competitiveness.

Co-Investment Framework: Acts as a common platform where the government, different ministries, and institutional investors can invest together in startups, allowing pooling of resources for priority sectors, reducing individual risk, and ensuring that larger and more strategic investments can be made in areas where funding needs are high.

Operational Framework: Startup India Fund of Funds 2.0 follows an indirect investment model, ensuring professional fund management and efficient allocation of resources.

• The government does not invest directly in startups. Instead, it contributes to SEBI-registered Alternative Investment Funds (AIFs). These AIFs, in turn, invest in startups through equity and equity-linked instruments.
• A Venture Capital Investment Committee (VCIC), comprising industry experts and stakeholders, will evaluate and recommend AIFs for funding. Preference will be given to AIFs managed by experienced professionals with a proven track record.

Segmented Investment Approach: Startup India Fund of Funds 2.0 adopts a four-segment structure, making it more targeted:

• The first segment focuses on AIFs supporting deep-tech startups, which require higher investment and longer development cycles.
• The second segment supports smaller AIFs investing in early-stage startups that are still in the process of developing products or services.
• The third segment targets technology-driven and innovative manufacturing startups, aligning with broader industrial policy goals.
• The fourth segment remains flexible, supporting AIFs investing across sectors and stages.

Implementation Mechanism: The Small Industries Development Bank of India (SIDBI) has been designated as the primary implementation agency. In addition, another domestic agency may be selected to assist in implementation.

Governance and Monitoring: An Empowered Committee, chaired by the Secretary of the Department for Promotion of Industry and Internal Trade (DPIIT), will monitor implementation and performance.

• The EC will include representatives from various ministries, the National Startup Advisory Council, and experts from the startup ecosystem.
• It will also have the authority to modify guidelines within the approved framework to ensure effective implementation.

Ecosystem Development: Up to 5% of returns can be utilised for activities such as capacity building, mentorship, workshops, and regulatory support.