Skin in the game: SIDBI chief urges universities, incubators to move from grants to equity funding

Sivasubramanian Ramann, Chairman & Managing Director, Small Industries Development Bank of India (SIDBI)

Sivasubramanian Ramann, the chairman of the Small Industries Development Bank of India (SIDBI) is urging incubators and educational institutions to abandon the “free money” mentality through grant-based support and embrace equity investments.

Under a proposed strategy, SIDBI intends to collaborate more closely with incubators, both private and public, providing financial support in the form of equity rather than outright grants given by the latter.

“The process (of this setup) is in flow. We have tied up with 16 universities so far. We told them (incubators) that we would like a share of the equity when they put seed money in a particular startup. This movement from grant to equity based-investment is much needed,” the chairman told Moneycontrol on the sidelines of TiEcon Delhi 2024 conference over the weekend.

He emphasized that this approach would not only provide financial backing but also enhance the credibility of startups by having SIDBI's name associated with them.

Highlighting the shortcomings of grant-based funding, the chairman remarked, "Grant money runs out fast because it is free money for everybody, leaving startups strapped for funds again. I am not against the grants but there is only that much a grant can do. The culture of putting an equity into startups is a better discipline for them. They will understand what it is to get capital and will be faster on the learning curve.”

SIDBI currently runs the Fund of Funds scheme (FFS) for Startups which was launched in 2016 under the Startup India program. The fund does not directly invest in startups but through SEBI-registered Alternative Investment Funds (AIFs).

Over the years, it has become one of the largest and popular limited partners (LPs) of the Indian startup ecosystem. Also known as silent partners, LPs are entities or individuals who contribute capital to VC funds without taking an active role in daily management or limited voting rights in a startup's business.

As per Traxcn data, there are 718 incubators and accelerators in India, both privately funded and government-supported. Besides IITs and IIMs, SIDBI has tied up with CIIE.CO, The CODISSIA Defence Innovation and Atal Incubation Centre, Biotechnology Industry Research Assistance Council (BIRAC) among others.

The government provides grants to universities and institutes to support innovation, research minimum viable products (MVPs), and mentor startups. As the startup ecosystem evolves, the government seeks to streamline grant processes and reduce risks, advocating for incubators to transition towards financial independence and make better use of government funds.

The shift, however, poses challenges for many. Some educational entities prioritized grant acquisition over establishing robust incubation support frameworks, including funding sustainable business models.

Initially met with skepticism, SIDBI's insistence on equity investments had raised eyebrows, but the tide is turning, the chairman said. Institutions, once hesitant, are now eagerly partnering with SIDBI and adopting the strategy.

“We are talking to other pockets within the government who have been largely giving grants over the years,” Ramann said.

The chairman also clarified that while equity investment would be the primary mode of support, there might be instances where a portion of the funding could be provided as a grant, depending on the specific needs of the startup.

By taking an equity stake in promising startups, SIDBI aims to create a perpetual fund that can be reinvested in future ventures.

As of December 2023, FFS has committed Rs 10,229 crore to 129 alternative investment funds (AIFs), which resulted in the funding of 18 unicorns in the country. Overall, the scheme has helped mobilise more than Rs 75,000 crore of domestic capital, according to SIDBI.

Moving forward, SIDBI plans to float a Rs 10,000-crore rights issue in the next fiscal to expand its equity capital as it expects to grow assets to Rs 5 lakh crore by end of March 2024 from about Rs 4 lakh crore in March 2023.

"We recently had moved the department of financial services seeking to raise capital. Following this they moved the standing committee of Parliament which has suggested a capital support of Rs 10,000 crore to us next fiscal so to provide us with more lending support to SMEs," the chairman had said.