Why India’s Rs 10,000 cr fund of funds for startups is a great idea

On Wednesday, the Indian government approved a Rs 10,000 cr fund which will support startups. The idea is to float a fund of funds, which means that it will not directly pick up stake in companies, but it will become a limited partner in venture funds that are registered on the Securities and Exchange Board of India (SEBI), the country’s stock market regulator.
This is a big, practical departure from the way government grants and funds have been disbursed in India so far. Technically a fund of funds won’t meddle too much with investing in individual companies. Which means, minimum governance or less bureaucracy and corruption.
According to the Startup India action plan, the fund of funds will be managed by a board with “private professionals drawn from industry bodies, academia, and successful startups.” It will create smaller funds, of which half will be raised by the registered investor and the rest will be put in by the government.

Moreover, it has been proven to be the right strategy for governments to catalyse startup funding as the Israeli model has shown. In the early 90s, when venture capital was practically non-existent in Israel, the country’s government set up a $100 mn fund called the Yozma.
The idea behind a Yozma fund was to entice foreign venture capital firms by matching the funds they bring in with the government fund. According to Start-up Nation, a book published by the Israeli foreign relations office in 2009, between 1992 and 1997 the government aid under Yozma helped raise nearly $200 mn in venture capital.
“Today they manage nearly $3 bn billion of capital and support hundreds of new Israeli companies,” authors Dan Senor and Saul Singer, wrote in the book. If India plays its cards right, alongside the big bang reforms announced earlier this month, it could become a bigger startup nation after all.