India’s Startup Engine: A Policy Review of the Fund of Funds Initiative (2016)

India’s Startup Engine: A Policy Review of the Fund of Funds Initiative (2016)

Policy Update
Aditya Sharma

Background

The Fund of Funds for Start-ups (FFS), managed by the Small Industries Development Bank of India (SIDBI), was launched on January 16, 2016, under the Start-up India Action Plan to address critical gaps in India’s early-stage finance landscape. With an initial corpus of ₹10,000 crore, the scheme aims to foster innovation-driven enterprises by contributing to SEBI‑registered Category I and II Alternative Investment Funds (AIFs). Recipient AIFs are mandated to match SIDBI’s contribution at a minimum of 2:1 and deploy funds exclusively into DPIIT‑recognised start-ups.

As of March 2025, SIDBI has committed over ₹11,147 crore across 144 AIFs, supporting more than 1,100 start-ups and mobilising over ₹20,000 crore in downstream investments. Further revisions introduced in Budget 2025n branded “FFS 2.0”, have doubled the corpus to ₹20,000 crore, with strategic emphasis on deep‑tech, climate and defence start‑ups and on establishing a secondaries vehicle to ease exits.

Functioning

Under FFS, SIDBI acts as an anchor Liquidity provider, conducting due diligence on AIFs, sanctioning contributions, disbursing capital in instalments, and monitoring compliance. AIFs must raise at least twice the amount of SIDBI’s commitment and invest only in start‑ups defined under Gazette Notification G.S.R. 127(E) dated February 19, 2019. Evaluation of applications is carried out by the Venture Capital Investment Committee (VCIC), composed of sector experts. Despite structured screening, stakeholders have flagged concerns over time‑consuming approvals, rigid eligibility criteria (e.g. turnover and age limits for start‑ups), management fee caps, and onerous documentation requirements, especially for first‑time or smaller fund managers.

Performance

Between FY 2022 and FY 2024, SIDBI’s annual report indicates a growing equity finance portfolio under FFS, while total institutional finance operations expanded significantly. As of September 2024, FFS had sanctioned ₹11,147.70 crore, with AIFs deploying over ₹20,000 crore into start‑ups, suggesting an approximate 7 times the  capital mobilisation ratio. However, actual drawdowns are much lower; by early 2023, only about ₹3,931 crore had been disbursed against ₹9,121 crore committed approximately 43 per cent, raising concerns over disbursement efficiency. Reports indicate that in many cases, fund managers wait upwards of five years between approval and funding a misalignment with startup capital urgency.

Impact

FFS has made measurable strides in ecosystem building. Supported AIFs have catalysed more than ₹75,700 crore in private capital, with beneficiary companies generating approximately 2.04 lakh jobs and enabling early‑stage investments often ignored by mainstream VCs. It has also broadened access across geographies and encouraged investments in sectors such as agri‑tech, deep-tech, and climate innovation. The programme has backed first‑time fund managers, helping diversify strategy and leadership in India’s VC space, and reducing overt dependence on foreign LPs.

Emerging Issues

  • Disbursement lags: Only 40–50 per cent of committed capital reaches AIFs, creating funding delays for startups.
  • Restrictive eligibility norms: Conditions on start‑up age, turnover and DPIIT recognition limit flexibility and inclusion.
  • Fee constraints and operational friction: Management fee caps and compliance burdens have led some VCs to opt out.
  • Transparency deficit: SIDBI does not publish periodic NAV, IRR or DPI/TVPI metrics, limiting external performance assessment.
  • Geographic and sectoral concentration: Capital continues to cluster in Tier‑I cities and familiar sectors, undercutting impact objectives.
  • Exit constraints: Weak secondary markets and volatile IPO conditions prolong fund holding periods, slowing capital recycling.

Way Forward

For FFS 2.0 to realise its full potential, key reforms are vital. Disbursement pipelines should adopt a global best‑practice timeline, ideally, the first tranche released within 60 days of sanction. SIDBI must establish transparent reporting protocols, including regular NAV, DPI and IRR disclosures. It should also revisit eligibility norms and fee structures to enhance flexibility and attract diverse managers. Launching the proposed ₹10,000 crore secondary fund would alleviate exit gridlock and enable capital regeneration. Finally, policy alignment must ensure more focused allocation to underserved regions and high-impact sectors. With these reforms, SIDBI can hope to transform from a policy implementer into a world‑class domestic sovereign Liquidity provider, delivering on India’s ambition to be a self-reliant and inclusive innovation economy.

References

About The Contributor: Aditya Sharma is a Research Intern at the Impact and Policy Research Institute (IMPRI) and is in the first year of his Master’s degree in Environmental Economics  from Madras school of economics . His interest lies in analysing various programs and policies that are centered around sustainability and development.

Acknowledgement: The author sincerely thanks Aasthaba Jadeja and Bhaktiba Jadeja for assigning this work and providing consistent support throughout. 

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

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