Budget 2022: Capital assurance plan for startups would boost confidence of Indian entrepreneurs

National Startup Day was observed on 16 January 2022 in India as a validation of the role that startups have played in strengthening India’s position on a global stage. India has already achieved the distinction of emerging as the third-largest ecosystem globally. The pandemic notwithstanding, the year 2021 is now being called The Year of Unicorns with 43 Indian startups achieving a valuation of over $1 billion.

A report by LetsVenture, an early-stage platform for startup investing, notes that the pandemic proved to be a silver lining for many startups as the accelerated pace of digitisation and remote work became the order of the day. This gave many non-metro cities the opportunity to catch up with their metro counterparts as they had equal access to talent and resources.

Building a robust startup ecosystem

With a great wave of entrepreneurship in India, the Government is committed to strengthening the startup ecosystem in India. Addressing more than 150 startups on 15 January, Prime Minister Narendra Modi acknowledged startups as the ‘backbone’ of the country propelling India into a ‘techade’ of entrepreneurship and innovation.

It is evident that the government is keen to support the entrepreneurial wave in India. The StartUp India programme launched seven years back was a turning point. Since then, many important steps such as the creation of a fund of funds with an approved corpus of Rs 10,000 crore for contribution to startups through Alternative Investment Funds have been extremely beneficial.

Startups require support in initial years

Ahead of the Union Budget, we expect the government to delve into a deeper understanding of the problems startups face in the initial years of their existence. It is in this phase that they need to invest heavily from the capital they raise to achieve a level playing field with their peers.

Empirical evidence suggests that most startups need 2-3 years to validate their market viability. This means that during this period the lack of capital can prove to be fatal, even before the startup has had a chance to test the waters.

Capital assurance through equity stake

To support startups in the first few crucial years of existence and ensure that they have a fair chance of establishing themselves, the government can consider a capital assurance plan--by way of an equity stake in startups in years 2 and 3 once the business model is proven and income earnings have started trickling in. This can then be redeemed through a buyback in the form of an IPO or rights issue.

The support on capital assurance can be made equal to the existing capital of the startup up to Rs 2 crores at par, and the government becoming a venture capitalist in ensuring the startup is able to flower and bloom in the road ahead and create jobs. The government in effect becomes an equity earner by selling its stake in future unicorns that can be used to recycle capital to keep the startup ecosystem well-capitalised.

In recent times, the government has acquired a majority stake by way of a huge relief package to a large company to ensure that it remains afloat. The same amount of capital if directed towards startups may not only give rise to more Unicorns but give a further fillip to startup culture in India. Such policies may further encourage startups, especially in tier II and tier III cities, and play a significant role in enhancing GDP.

With the government receptive to the ideas as proposed by startups in the recent meet with the prime minister and other top bureaucrats ahead of the Budget, a capital assurance plan for startups would boost the confidence of Indian entrepreneurs and “let a thousand flowers bloom”.

The writer is a PhD; CEO and Co-Founder, Agrim Housing Finance Pvt Ltd.

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