How do Startups benefit from Alternative Investment Funds?

How do Startups benefit from Alternative Investment Funds?

                                                                                                                                                                                                                    What are Alternative Investment Funds (AIF’s)?

As the name suggests, AIF's are those investment vehicles that do not fall under the purview of traditional investments such as equity, debt, or bonds.

What are the types of Alternative Investment Funds.

Category 1: Startup Fund/Early Stage Funds, Infrastructure Funds.

These are the AIFs that positively contribute to the Indian Economy and enhance growth. Such funds generally invest in startups or early-stage ventures, social ventures, SME's, infrastructure or other sectors that are considered socially or economically important for the country.

The Category 1 Funds further constitute:

Startup Funds/ Early Stage Funds

These include funds that manage money from investors seeking private equity stakes in startups and small businesses that show high growth potential. These investments are categorized as a high return and high-risk opportunities.

Infrastructure Funds

Infrastructure Funds channelize money into companies undertaking the development of infrastructures like roads and power.

Category 2: Private Equity Funds

Private Equity Funds provide diversified investment portfolios managed by experienced fund managers. They provide the advantage of diversification as well as hedge mechanism by providing an alternative asset class.

Category 3: Hedge Funds

These AIFs are funds that use leverage to a great extent. These funds are created to make short term returns. Hedge Funds use many forms of ways like leveraged, long, short and derivative positions in both domestic and international markets.

How do Startups benefit from Alternative Investment Funds?

                                                                                                        How do Alternative Investment Funds back startups in India?

The Government of India has been taking concrete steps to bolster the Indian startup Industry. The Government of India has established a 10,000 Crore Fund of Funds for Startups (FFS), to meet the funding needs of startups. Department for Promotion of business and Internal Trade (DPIIT), Government of India, is the monitoring agency and the Small Industries Development Bank of India (SIDBI) is the operating agency for FFS.

What exactly are Funds of Funds?

Merely stating, Funds of Funds involves holding a portfolio in other investment funds rather than equity, bonds, etc.
As per the operative tips issued by DPIIT, FFS contributes to the corpus of SEBI registered Alternative Investment Funds (AIFs). These AIFs, in turn, need to invest a minimum of double the contribution beneath FFS in startups, as outlined by the govt. of Bharat.

Each AIF sets up its own Investment Committee, which takes investment decisions. These decisions are primarily the result of countless factors like uniqueness, innovativeness, intellectual property, and business potential.

A formal mechanism has been put in place in the form of the Monitoring Committee to review the progress of the Startup India programme on a regular basis. The Monitoring Committee comprises representative from DPIIT, NITI Aayog, Department of Revenue (Ministry of Finance), Ministry of Micro, Small and Medium Enterprises, Department of Science and Technology (Ministry of Science and Technology), Department of Bio-Technology (Ministry of Science and Technology), Ministry of Electronics and Information Technology, Department of Higher Education (Ministry of Human Resources Development) and Small Industries Development Bank of India (SIDBI). The Monitoring Committee continuously reviews the progress & implementation of various measures for the growth of the startup ecosystem.

Government’s Funds of Funds- A performance review.

The government's Funds of Funds scheme has been a huge success. As per the statistics, the 251 startups registered under the FFS created 11,698 jobs, averaging to around 45 jobs per startup. The startups funded under the FFS Scheme focus on a variety of sectors ranging from IT to food and beverages. With burgeoning unemployment rates, India needs to expand massively in the startup arena. The creation of Alternative Investment Funds is thus a welcome move. It creates a win-win situation for investors who like risk and want to go beyond traditional investing.-BAZARTAK


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