Across the world early stage start-ups are founded by individuals between the ages of 25 and 35 years. In 2011, McKinsey & Company published a report on entrepreneurship conduciveness in G20 countries, that said “319 million people (were) engaged in early-stage entrepreneurship across the G20 nations, with a majority in the BRICS countries.” The report goes on to further list “new ventures from inception to critical size” as an important pillar of entrepreneurial foundations in countries.

A 2013 report by Ernst & Young ranks India at #11 among the G20 countries in terms of access to finance to start-ups. On its part, the Indian government recognizes this and has given shape to various public policies so that strong businesses are born, and can create more jobs and growth. In addition to the Start Up India scheme launched in January 2016, our government launched the Stand Up India programme in April 2016 to facilitate greater access to finance for start-ups by underserved segments of society such as Scheduled Castes, Schedule Tribes and women.

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The economic maturity of an emerging country like India has allowed the government to make certain iterations and improvements in these programmes to offer greater ease of business. But some underlying assumptions render access to finance elusive for several small-scale enterprises. Various stakeholders can contribute to improving this lever of change in the entrepreneurship ecosystem and help give entrepreneurs that initial impetus to succeed.

Public-Private Partnerships

The public and private sectors can play collaborative as well as individual roles to offer more inclusive policies, enabling deeper and diverse funding options to support every stage of a start-up’s growth path. Precedents from other emerging G20 nations can serve as good examples to learn from and apply to local conditions.

The Brazilian government unveiled the INOVAR program in the year 2000 to encourage innovative companies, and facilitate access to capital. Through its key components – INOVAR Fund Incubator, Brazil Innovation Forum, Brazil Venture Capital Investment website, INOVAR Business Prospecting and Development Framework, and its capacity-building & training programs, INOVAR has fostered the venture capital ecosystem in Brazil.

In 2012, the government in United Kingdom introduced Start Up Loans, a programme personally overseen by the Prime Minister, that offers affordable finance to new and early stage entrepreneurs along with mentoring, and business advisory.

The Indian government also focuses on innovation and sustainable business through its Start Up India and Stand Up India programmes. Relaxations in respect of the age of the start-up and cashflow documentations have also been made recently to include more new ventures within its gamut.

But the specifics of funding need further awareness and more flexibility. For example, the basic funding conditions seem to imply that all early-stage entrepreneurs can ‘manage’ the deficit between the government funding on offer and the actual cost of the project. Also, what about the assumption that every start-up will need a large amount of capital, and will base her or his business model from a certain scale?

Starting Small

 Several ventures start as what may be termed as ‘solopreneurships’ (single individual doing everything) or other ‘unorganized’ models of small businesses, eventually expanding to offer employment to the larger community. In fact, 45% of India’s employment outside the periphery of agriculture is derived from the unorganized sector. But merely because they need even less than the minimum amount that the government promises to offer in programs such as Stand Up India, they disqualify.

Many of these small-scale entrepreneurs resort to ploughing their own savings into the business, or borrowing from family or friends, or even local money lenders at the seed stage. But do we know how much this amount is, typically? And at what interest cost it is borrowed?

The Russian government created Russian Venture Company (RVC) in 2006 to provide low-cost financing to early-stage innovative start-ups. Termed as a ‘fund of funds’, RVC invests in select venture capital funds for innovative companies, dedicated to early-stage financing.

The Small Business Association, USA facilitates loans, funding access, mentoring, consulting, student clubs, and support for each stage of funding supported by the Small Business Saturday program.

The Start Up India programme has a similar focus too, with a fund of funds of 10,000 Cr INR. Details of recognition of start-ups and venture capitalists, and approvals of tax benefits have been made public periodically. In addition, INR 623.5 Cr from the fund of funds have been invested in 65 start ups so far (as on 16 June 2017). But do all or majority of first-time entrepreneurs even know about Venture Capital and Angel Investors as options to seek funding? How do VCs and Angels perceive new businesses? Can the Government intervene further to encourage corporates and VCs to offer seed/ pre-seed capital to small scale businesses?

Micro-credit for Macro Development

In India, start-ups and SMEs are treated separate from each other, in that, about three-fourths of

SME funding comes from bank lending and the rest is divided between IPOs and venture capital.

Credit guarantee is a key feature of both, the Start Up India as well as Stand Up India programmes. But how many of our small-scale entrepreneurs understand the concept of credit rating. Also, what about the non-banking finance options? Do small scale entrepreneurs apply for, or even know about the possibility of loans from non-banking financial institutions? How many have been rejected/accepted and why?

The main objective for emerging economies such as India to foster the growth of start-ups, is to create livelihood and alleviate poverty. Access to Finance as a lever of change in the Indian entrepreneurship ecosystem has a long way to go before it addresses every need, especially in the seed and pre-seed stages. How can the government and the private sector collaborate as well as independently overcome limitations and ease this initial financial need of start-ups, and accelerate the growth of small scale enterprises?