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NEW DELHI: At a time when the global economic downturn has squeezed overseas funding for local startups substantially, Amitabh Kant, India’s G20 Sherpa has made a case for domestic insurance companies and pension funds to take the lead in investing into startups.
“The challenge is that Indian insurance companies and pension funds are still not investing in startups. There’s a vast amount of investable sums. They must be asked to put more and more resources into Indian startups,” Kant said at a summit in New Delhi on Tuesday.
Much of the growth to late stage startups are heavily dependent on external funding to support and grow their businesses. Investors like Japan’s SoftBank, US-based Tiger Global are among the biggest backers of Indian startups. “Money (into startups) comes from Silicon Valley or many other funds from across the world. Indian startups must start attracting Indian money,” said Kant, while adding that pension funds and insurance firms could perhaps look at the possibility of setting up a funding corpus like the ‘fund of funds’ to support startups working in new, emerging areas like deep tech.
A slowdown in investor funding has pushed many startups to re-evaluate their business projections, halt new experimentations, triggering layoffs across the sector. Analysts at Bain & Company estimate that as many as 20,000 employees may have lost jobs last year. Investments into startups declined to $25.7 billion in 2022 from a record $38.5 billion in 2021 as rising cost of capital on the back of steep increase in interest rates by global central banks pushed investors to remain on the sidelines.
Investors, who are otherwise sitting on enough dry powder, have tightened scrutiny of firms and are steering clear of backing startups with poor unit economics. “There should not be easy money. Money should get into startups that are well governed,” said Kant, who emphasised that startups with sound business models will face no dearth of investments.
Currently, regulations do not specifically permit insurance companies and pension funds to invest directly in startups. There have been certain amendments in 2020-21 where insurance companies were permitted to invest in ‘fund of funds’, which could invest in startups, but not directly into startups.
The challenge for the government is that startups do not provide a price on daily basis, which is available with listed securities, including mutual funds. So price determination for investments will remain a challenge to be resolved. Pension funds and insurance companies were allowed to invest in IPOs of certain startups, subject to thresholds. “The only way this can change is if regulations of IRDA and PFRDA are amended to specifically allow these bodies to directly invest in startups,” said Jayesh Kothari, associate partner at DSK Legal.
Kant added that startups, which are particularly building green initiatives and operating in segments like deep tech, cloud, robotics will gain traction. “The focus should be to go green. Valuation and capital will flow into these startups.”