Is state VC funding becoming the name of the game?

The Indian government this week launched a much awaited venture capital (VC) fund. Dubbed the India Aspiration Fund, the 20 billion rupee fund (US$306-million) will operate as a fund-of-funds administered by the Small Industries Development Bank of India (Sidbi).

Life Insurance, India’s biggest insurance company, will be a co-investor in the fund, which will then invest in private sector VC funds. Sidbi will put in one rupee for every two rupees that each respective VC fund plan to invest.

Israeli model

Like this, India hopes to imitate the success of Israel’s Yozma programme, in which the state invested in VC funds before exiting to private investors. Today Israel has a thriving VC ecosystem.

Ironically the launch comes ahead of an announcement that India’s President Pranab Mukherjee is expected to visit the Middle-Eastern country in October. He will become the first Indian head of state to do so.

The mood was captured this week when Israeli Prime Minister Benjamin Netanyahucommented that the two countries shared a renowned entrepreneurial spirit, saying he’d noticed that in Silicon Valley it was common to hear Indian dialects and Hebrew.

VC hotting up

Governments around the world have started to become more involved in venture-capital investing (see this earlier post).

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With the VC sector hotting up in India (having more than doubled from US$600-million to US$1.4-billion in investments between 2006 and 2012, according to a recent report, India’s government is keen to get in on the action too.

It also wants to promote a local VC industry, with Minister of State for Finance Jayant Sinha saying at the launch of the fund that currently 95% of VC and private-equity funding comes from outside of India.

The government has already been involved in VC funding since at least 1999, through Sidbi ventures, a subsidiary of India’s small business funding agency Sidbi. It will now invest in funds which will then chose which entrepreneurs to then invest in.

Already 4 billion rupees have been allocated to various VC funds from the fund-of-funds reports Economic Times, and over 50 funds have signed up to co-invest with Sidbi.

South Africa, left in the dust

South Africa’s government too should set up a fund-of-funds, joining the likes of Brazil, Malaysia, Israel, Chile and others.

In May the country’s main opposition party, the Democratic Alliance, revealed that a parliamentary committee had agreed to would consider the possibility of setting up VC fund in the National Empowerment Fund which funds black entrepreneurs.

The committee should strongly consider the fund-of-funds model, particularly as the private sector is better suited to choosing fundable projects, but could do with some assistance from the state to have more appetite to back more risky ventures.

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When the country’s development finance institution, the Industrial Development Corporation began making VC investments in the early 2000s it opted to take stakes of between 40% and 50% in nine funds together with foreign funders, pension funds and corporates which then made investments in various companies.

But in 2007 the organisation opted to instead make investments directly in companies, mainly it argued, to ensure that it had more control over who it invested in.

In 2013 the country’s Technology Innovation Agency (TIA) which invests in innovative businesses, put a planned R100-million fund-of-funds on hold after a government review.

Barlow Manilal, the agency’s fifth head since it was launched in 2010 (he took office in April) last month told Small Business Insight that the agency is still considering the idea.

But with an allocation from the fiscus that was trimmed by 25% and with a number of top staff having left the agency (a voluntary retrenchment process came to an end in July) it is unlikely that resuscitating the fund-of-funds idea is at the top of Manilal’s mind.

India forging ahead

Meanwhile last week in his Independence Day address Prime Minister Narendra Modi announced a campaign to promote bank financing for start-ups and to offer incentives to boost entrepreneurship. An announcement this week by Google that it will launch a Youtube production facility in Mumbai is confirmation that things are hotting up in India.

Though much work still lies ahead for India in slashing some of world’s most crippling red tape and labour laws and improving infrastructure, the country it seems is doing everything it can to become a start-up capital.

South Africa — and a few other emerging economies — are being left behind in the dust.

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