As part of their innovation promotion mandates, some Ministries of the Government of India (GoI) provide grants to startups, and now state governments are considering doing the same. However, innovation grant-making to startups by the GoI could benefit from certain fundamental reforms.
The story of the flagship Atal Innovation Centres (AICs), described here (even if parts of it are debatable), is an illustrative example of the challenges with government startup grant-making. The AICs, administered by the NITI Aayog, were launched in 2016 to support early-stage startups in health, mobility, manufacturing, and agritech sectors, with support of Rs 10 Cr over 5 years. Like any incubator that takes the startup to the prototype stage and connects with investors and markets, the startups would get mentoring, small grants, and common infrastructure. The 72 centres have so far incubated over 3500 startups.
However, the report linked above claims that fewer than 5% of the startups have raised any external capital, no startup of note has emerged from them, and most centres are only notionally functional. Notwithstanding this balance sheet, the Government of India and state governments appear to be doubling down on grant-making to startups to promote innovation. An allocation of Rs 2,750 crore ($308 million) has been made to continue the Atal Innovation Mission. Not just the centre, states like Karnataka have announced Rs 1,000 crore in new deep-tech and AI funds and fresh incubators.
Arguably, the biggest problem with grant-making by government entities is the absence of any meaningful portfolio management (beyond tranche releases). Grant makers are supposed to prize their better-performing portfolio grants, support them with mentoring and business development, forge ecosystem connections, enable access to markets and platforms, promote them in public procurements, assist in business permissions and patents, facilitate follow-on funding, and generally showcase them positively everywhere.
The incentives of grant-making are partly to blame. Everyone wants to take credit for making a grant, and very few want to do the painstaking work of supporting the grantee with the aforesaid measures. The latter is also discouraged by the nature of portfolio support activities, for at least some of the reasons below.
One, by their very nature, portfolio management activities are informal and not amenable to impersonal bureaucratic processes. They require deep personal relationships and engagements with not only the grantees but also the ecosystem stakeholders, and leveraging them to benefit the grantee. It requires an entrepreneurial mindset as opposed to a bureaucratic one.
Two, they involve actively promoting private firms, a socially stigmatised activity in India’s public discourse, even more so in public bureaucracies. Bureaucrats cheerleading particular grantees from a portfolio, even with all the justification, generally tend to be viewed with suspicion. It can also attract post-facto audits and vigilance inquiries, especially if those grantees turn out to be unsuccessful, a strong likelihood in the startup world. It does not help that there will invariably be instances of such support being abused through corrupt practices.
Three, they also require bespoke in-kind support, which, in turn, requires financing. While such financing can be small, accessing it through the regular bureaucratic processes can be daunting, if not impossible. The financial scrutiny associated with such approvals can be excruciating and long-drawn.
Four, such activities involve painstaking and long-drawn engagement, with often limited immediate or salient benefits. This lengthy and personalised nature also means that the grant maker must remain in the same position for a long time. In systems where reassignments, transfers and promotions are the norm, such personal commitment and long-term perspectives are difficult.
For all the aforementioned reasons and more, portfolio management activities will struggle to be conducted effectively within public systems, such as in India. Direct startup grant-making by governments should therefore be strictly avoided. Instead, it is preferable to do startup grants through arms-length institutional arrangements that are insulated from traditional oversight mechanisms and not constrained by the rigidities of public bureaucracies. This is easier said than done, though there are some examples of limited successes. It is also appropriate that these grants be restricted to design and proof of concept (TRL 1-3), and prototype development and pilot (TRL 4-6) stages.
Instead of grants, startups at commercialisation pathways (TRL 7-9) should be supported with concessional, patient, and risk-tolerant debt and equity investments. Given the challenges of administering them through public entities, and also given the presence of a pool of public and private financial institutions and entities with relevant expertise, these funds are best channelled through the latter. Public funds could be channelled into these entities or to Funds of Funds (as Limited Partners).
A substantially improved/reformed Fund of Funds for Startups (FFS) scheme, operated through the Small Industries Development Bank of India (SIDBI), can be a good example in this regard. I blogged here also about the Maharashtra Defence and Aviation Fund (MDAF), which has had some successes.
I had blogged here with some suggestions on industrial policy to fund startup innovation.
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