Unit 3: Government Funding and Startup schemes

1. What are Startups?

Definition

A startup is a young company founded by one or more entrepreneurs to develop a unique product or service and bring it to market. By its nature, the typical startup tends to be a shoestring operation, with initial funding from the founders or their friends and families.

Criteria for "Startup" Recognition (DPIIT - India Context)

According to the Department for Promotion of Industry and Internal Trade (DPIIT), an entity is considered a startup if:

• Age: It has been in existence for up to 10 years from the date of its incorporation/registration.
• Type: It is incorporated as a Private Limited Company, a Registered Partnership Firm, or a Limited Liability Partnership (LLP).
• Turnover: Its annual turnover has not exceeded INR 100 Crores for any of the financial years since incorporation.
• Innovation: It is working towards innovation, development, or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

2. Startup India: Initiative and Benefits

Startup India is a flagship initiative of the Government of India, intended to build a strong ecosystem for nurturing innovation and startups in the country. It was launched on January 16, 2016.

Key Pillars

1. Simplification and Handholding: Easing compliance and exit processes.
2. Funding Support and Incentives: Providing exemptions and funding through funds of funds.
3. Industry-Academia Partnership and Incubation: Creating incubator networks and research parks.

Detailed Benefits under Startup India

A. Regulatory Benefits

• Self-Certification: Startups can self-certify compliance for 6 Labor Laws and 3 Environmental Laws, reducing the regulatory burden.
• Easy Winding Up: Under the Insolvency and Bankruptcy Code, startups can wind up operations within 90 days, allowing entrepreneurs to reallocate capital and resources faster.

B. Intellectual Property Rights (IPR) Benefits

• Fast-tracking Patent Examination: Applications are expedited.
• Rebate on Filing Fees: Startups receive an 80% rebate on patent filing fees and a 50% rebate on trademark filing fees.
• Panel of Facilitators: The government bears the facilitation cost; the startup only pays statutory fees.

C. Tax Exemptions

• Income Tax Exemption (Section 80IAC): Recognized startups can apply for tax exemption for 3 consecutive financial years out of their first 10 years since incorporation.
• Exemption from Angel Tax: Investments above fair market value are traditionally taxed. Recognized startups are exempt from this tax (Section 56(2)(viib) of the Income Tax Act).

D. Public Procurement

• Exemption on Prior Turnover/Experience: Government tenders often require prior experience or turnover. These requirements are relaxed for startups to allow them equal opportunity to bid for government contracts.
• EMD Exemption: Exemption from submitting Earnest Money Deposits.

3. Resources for Startups

To survive and scale, startups require various non-monetary resources:

• Incubators: Organizations that offer shared office space, mentorship, and administrative support during the early stages (0–2 years).
• Accelerators: Fixed-term, cohort-based programs that include mentorship and educational components, culminating in a public pitch event or demo day.
• Mentorship Networks: Access to industry veterans who guide founders on strategy, hiring, and market fit (e.g., TiE, NEN).
• Co-working Spaces: Shared workspaces that reduce overhead costs and foster community (e.g., WeWork, Innov8).
• Startup India Hub: An online portal by the government acting as a single point of contact for the entire startup ecosystem to exchange knowledge and funding.

4. Bank Loans for Startup Business

Debt financing allows startups to retain equity while securing capital.

Pradhan Mantri MUDRA Yojana (PMMY)

Designed for non-corporate, non-farm small/micro-enterprises.

• Shishu: Loans up to ₹50,000.
• Kishore: Loans from ₹50,000 to ₹5 Lakhs.
• Tarun: Loans from ₹5 Lakhs to ₹10 Lakhs.

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

• Objective: To provide collateral-free loans to Micro and Small Enterprises (MSEs).
• Mechanism: The government provides a guarantee cover to the bank. If the startup defaults, the trust pays the bank.
• Limit: Collateral-free loans up to ₹2 Crores (depending on the bank/institution).

Stand-Up India Scheme

• Target: SC/ST and Women entrepreneurs.
• Loan Size: ₹10 Lakh to ₹1 Crore.
• Purpose: Setting up a greenfield enterprise in manufacturing, services, or trading.

5. 10,000 Startups – A NASSCOM Initiative

NASSCOM (National Association of Software and Services Companies) launched the "10,000 Startups" program in 2013.

Objectives

• To incubate, fund, and support 10,000 technology startups in India.
• To foster an ecosystem that facilitates partnership between startups and large enterprises.

Key Features

1. Pitch & Connect: Startups get opportunities to pitch to angel investors and VCs.
2. Enterprise Connect: Helps B2B startups connect with CIOs of large corporations for pilot projects.
3. Industry Partnerships: Collaboration with Google, Microsoft, Intel, and Kotak to provide cloud credits, toolkits, and banking support.
4. Warehouse Program: NASSCOM operates "Startup Warehouses" (co-working spaces) in major cities (Bangalore, Kolkata, Navi Mumbai, etc.) providing affordable infrastructure.

6. Export Promotion Schemes

To encourage foreign exchange earnings, the government offers specific zones and schemes.

A. Software Technology Parks (STPs)

The Software Technology Parks of India (STPI) is an autonomous society under the Ministry of Electronics and Information Technology (MeitY).

• Purpose: Geared exclusively toward the development and export of computer software and IT-enabled services.
• Benefits:
  • Duty-Free Imports: Hardware and software can be imported completely duty-free.
  • 100% Foreign Equity: Allows 100% foreign capital investment.
  • Tax Holidays: (Historically significant, though some sunset clauses apply now).
  • DTA Access: Can sell a portion of the software in the Domestic Tariff Area (DTA) up to 50% of export value.

B. Special Economic Zones (SEZ) Scheme

An SEZ is a specifically delineated duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs.

• Purpose: To boost exports, generate employment, and attract FDI.
• Fiscal Incentives:
  • 100% Income Tax exemption on export income for SEZ units for the first 5 years, 50% for the next 5 years.
  • GST Exemption: Exemption from Central Sales Tax and Service Tax (now integrated into GST exemptions/refunds for exports).
  • Single Window Clearance: Simplified approval mechanism for setting up units.
• Obligation: The unit must be a "Net Foreign Exchange Earner" over a cumulative period of 5 years.

7. Laws for Startups

Founders must navigate a complex legal landscape.

1. Incorporation/Company Laws

• Companies Act, 2013: Governs the registration of Private Limited companies.
• LLP Act, 2008: Governs Limited Liability Partnerships.
• Compliance: Annual returns, board meetings, and auditing requirements.

2. Labor and Employment Laws

• Code on Wages: Minimum wage compliance.
• Employee Provident Fund (EPF): Mandatory for firms with 20+ employees.
• Prevention of Sexual Harassment (PoSH) Act: Mandatory constitution of an Internal Complaints Committee (ICC) if the company has 10+ employees.

3. Intellectual Property Laws

• Patents Act, 1970: Protection of inventions.
• Trade Marks Act, 1999: Protection of brand names and logos.
• Copyright Act, 1957: Protection of software code and creative content.

4. Taxation Laws

• GST (Goods and Services Tax): Registration is mandatory if turnover exceeds ₹20 Lakhs (services) or ₹40 Lakhs (goods).
• Income Tax Act: Corporate tax filing and TDS (Tax Deducted at Source) compliance.

5. Contract Law (Indian Contract Act, 1872)

• Governs Co-founder agreements, Non-Disclosure Agreements (NDAs), and Service Level Agreements (SLAs).

8. US/International Funding Grants (SBIR, STTR, NSF)

While the previous sections focused on India, the syllabus includes these major United States federal funding mechanisms, often studied as global benchmarks for R&D funding.

A. SBIR (Small Business Innovation Research)

Often called "America's Seed Fund."

• Nature: A highly competitive program that encourages domestic small businesses to engage in Federal Research/Research and Development (R/R&D) with the potential for commercialization.
• Phases:
  • Phase I (Feasibility): 250k. To establish the technical merit, feasibility, and commercial potential. (6 months).
  • Phase II (R&D): $750k. Continued R&D based on Phase I results. (2 years).
  • Phase III (Commercialization): No SBIR funding. The business pursues commercialization based on Phase I/II achievements using non-SBIR funds.

B. STTR (Small Business Technology Transfer)

Similar to SBIR but focuses on public/private partnership.

• Key Difference from SBIR: STTR requires the small business to formally collaborate with a Research Institution (e.g., a university or a federally funded R&D center).
• Allocation: The small business must perform at least 40% of the work, and the research institution must perform at least 30%.
• Goal: To bridge the gap between basic science (academic) and commercial innovation.

C. NSF Grants (National Science Foundation)

The NSF acts as a specific agency administering SBIR/STTR programs (along with DoD, NASA, etc.).

• Focus: NSF grants specifically target "deep tech" or high-impact technologies (AI, Robotics, Biotech, Advanced Materials).
• Non-Dilutive: Unlike Venture Capital, NSF grants do not take equity in the company. The money is a grant, not a loan.
• Impact: Receiving an NSF grant acts as a "seal of approval," making it easier for startups to raise subsequent private capital.