Startups on Thin Ice As Insufficient Funding Spurs Failures: Par Panel

Funding has long been a stumbling block for small businesses and startups in India. The formidable challenge of securing adequate financial support has been underscored by a recent report from a Parliamentary panel. This report sheds light on the crippling effect of insufficient funding on startups, particularly deep-tech ventures that heavily rely on engineering innovation and research expenditure.

Is Inadequate Funding Leading to Startup Failures?

The Parliamentary panel report emphasizes that inadequate funding is a prime contributor to the downfall of startups in India. This concern gains prominence as startups grapple with the intricacies of emerging as successful entities amidst a fiercely competitive landscape. A pronounced dearth of funds can significantly hamper their growth and innovation potential.

“Despite the availability of several support schemes for startups, the Committee has been informed by the stakeholders that insufficient funding continues to be a major contributing factor to the failure of startups in India,” the report says.

What Approach Should Startups Adopt for Success?

The panel proposes a multifaceted approach to address this issue. A crucial piece of advice to startups is to embrace best accounting practices, ensuring transparent financial management. Moreover, the committee has urged the startups to align with regulatory, legal, and tax frameworks to avert complications and manage risks more effectively.

Ecosystems for Startup: A Parliamentary Call

The Department related Standing Committee on Ecosystems for Startups to Benefit India underscores the imperative of startups embracing regulatory compliance and sound financial practices. It highlights that startups' integration into established regulatory frameworks can help streamline operations and ensure responsible conduct.

The Department of Industries and Internal Trade (DPIIT) has said that startups differ substantially from traditional enterprises in terms of financial parameters. Their business models, often untested and innovative, are characterized by limited profitability and operational cash flows, making traditional debt funding avenues like commercial banks and financial institutions less viable.

Venturing into Venture Debt

To mitigate these challenges, startups have typically relied on "Venture Debt" from Alternative Investment Funds (AIFs). These funds, recognizing startups' unique financial dynamics, provide a lifeline in the form of debt without the need for collateral security. This approach helps startups access much-needed funds to fuel their growth aspirations.

Government's Lifelines: Credit Guarantee Schemes

The Indian Government, cognizant of startups' financial constraints, has taken significant steps to support them. Initiatives such as the Credit Guarantee Scheme (CGS) for Micro and Small Enterprises and the Emergency Credit Line Guarantee Scheme (ECLGS) facilitate collateral-free lending to startups. These schemes offer guarantees to lending institutions, encouraging them to extend financial support to startups.

Why Are Deep-Tech Innovators Not Taking Off?

Despite these efforts, deep-tech startups, operating at the forefront of technological advancement, remain underserved by existing funding mechanisms. The Parliamentary panel report stresses that these startups require substantial capital due to their high engineering innovation and research costs. Current funding sources often fall short of meeting their operational expenses.

How Can Government Navigate the Funding Dilemma?

Acknowledging the challenges posed by insufficient funding, the report suggests that the Government should assess sectors that demand additional financial support. Enhancements to existing funds could ensure the viability of startups requiring substantial capital, particularly in technology-intensive domains.

Unlocking Funding Streams: How Can Government Monitor Funding Mechanisms?

The report further delves into the mechanisms for monitoring funding sources to ensure accountability and transparency. The Startup India Initiative, is equipped with robust monitoring mechanisms. These mechanisms oversee initiatives like the Startup India Seed Fund Scheme (SISFS), Fund of Funds for Startups (FFS), and Credit Guarantee Scheme for Startups (CGSS).

Under the SISFS, an Experts Advisory Committee (EAC) oversees the allocation of funds to selected incubators. These incubators, in turn, evaluate and select startups based on predefined parameters. The FFS Scheme provides capital to registered Alternative Investment Funds (AIFs), monitored by the Small Industries Development Bank of India (SIDBI). The utilization of funds under FFS is subject to detailed annual reporting and quarterly reviews.

While Government-backed funding initiatives play a pivotal role, private sources of funding, such as venture capitalists and angel investors, are equally important. Private investors are expected to adhere to due diligence processes and regulatory guidelines when investing in startups. The report acknowledges that the Government does not directly monitor these private funding sources.

The Reporting Landscape: Enhanced Financial Transparency

The report also addresses the quality of corporate financial reporting through the lens of the National Financial Reporting Authority (NFRA). While acknowledging the improvements brought about by NFRA in corporate financial reporting, the report highlights a lack of government-backed mechanisms to monitor funds from private investors received by startups.

A Call for Action

The Parliamentary panel report underscores the criticality of funding for startups and the unique challenges they face. While the Government has instituted various initiatives to support startups, the report urges startups to align with regulatory frameworks and adopt sound accounting practices. Additionally, it calls for strategic enhancements to existing funds, ensuring the sustainability of startups requiring substantial capital, particularly those in the deep-tech sector.

The future of India's startup ecosystem hinges on the convergence of strategic financial support, regulatory compliance, and transparent accounting practices. As the startup landscape evolves, continuous collaboration between the Government, financial institutions, and startups themselves will be essential to overcome the perennial challenge of insufficient funding.