I was quite excited and happy to see the latest announcement from SEBI about providing tax-relief to Angel Investors. Although there are some debates around the 3 year lock-in clause (with IAN lobbying to modify the rule), yet overall it is a move in the positive direction. While there could be few companies where entrepreneurs will realize their returns in the first 15 months (and thus 3 year lock-in seems a burden), there are plenty other startups which will benefit as it gives them a cushion for having the angel money for 3 years.
Indian market is tough to realize returns faster, and cycle time is longer than other developed markets.
However, what I see missing in the eco-system is lack of incentives for Seed Investors. The SEBI announcement is directed towards angel funds and minimum money they need to invest is INR 50 lac.
But how many startups actually need INR 50 lac to get off the ground? Why don’t we have more Seed Capital Funds that cater to funding between INR 2-15 lac?
This is how investment needs look like:
The maximum number of companies need seed capital. Then as they progressively move up the pyramid, number of companies requiring funding reduces. And they move up the pyramid, the investment size increases.
I did a bit of research and saw that bulk of the companies die off in the seed financing stage itself.
Pic Courtesy – Canaan Partners
As seen from this diagram, only 27% of companies that are seed funded actually raise the required angel round. 16% of the companies shut down at the Seed stage.
The bulk of seed financing is done by Accelerators in India (which are quite few in number as opposed to the number of startups).
Which brings me to the next question? Why no seed investors? Why is the focus only around angel investing and not around those who will give startups their first cheque just to launch the idea?
F&F investing is a popular term in the West for seed investors. In India, do startups really get sufficient F&F to kick start? I am not talking about the returnee expats or founders with 10+ years of corporate experience that have enough savings to start a venture.
How many young passionate entrepreneurs have the money to take their idea forward? How can we encourage more entrepreneurs; by providing the first money to take the idea forward? What can be done to boost seed funding?
SEBI needs to introduce something like the Seed Enterprise Investment Scheme (SeedEIS) that exists in the UK. I am a big proponent of SeedEIS primarily because of the boost it gives to young entrepreneurs with very early stage startups.
What is SeedEIS?
According to HM Revenue & Custom, SeedEIS “offers great tax efficient benefits to individuals while also encouraging investing in small and early stage start-up businesses in the UK.”
Here are some points that make SeedEIS really great for boosting entrepreneurship:
- No minimum investment value
- Investors can get up to 50% tax relief, the year investment is made
- Investors can also avail Capital Gains Tax
- The company must be trading for less than 2 years.
Although no data is yet available on how SeedEIS has impacted entrepreneurship in the UK, we can take a look at the data on Enterprise Investment Scheme (EIS) which is a tax relief scheme akin to what SEBI has recently outlined (works mainly for angels). EIS since inception has benefitted 18,500 companies and over £8.6 billion have been raised, which goes to show the impact that SeedEIS will generate in the coming years (reference link).
So when IAN or one of the top bodies lobby with the government around changing SEBI rules for angel investing, maybe a strong case needs to be put with regards to Seed Capital Funds. Unless we create a strong pipeline at the bottom of the pyramid, we will see very few companies exit at the top.
Do you agree that India needs SeedEIS to boost entrepreneurship? Do leave your thoughts and opinions below.
ABOUT THE AUTHOR
Raunak Guha – Co- founder FounderMates
Raunak holds an MBA in Innovation and Entrepreneurship from Imperial College London. Prior to starting FounderMates.com, he was working as a Business Development Executive with a Financial Analytics SME in the UK. He has been very active in the startup eco-system in London and possesses a deep passion to foster entrepreneurship globally.
He can be contacted at +91 9008 639 690 and his email id is: firstname.lastname@example.org
Raunak’s past article(s): Find them here.