Fund of Funds 2.0: Why Govt's Rs 10,000 Cr bet will transform India's manufacturing landscape

It was in early 2016 that the Government of India unveiled the Fund of Funds for Startups (FFS), armed with a Budget of Rs 10,000 crore. The idea was not to funnel this directly into startups but channel them through Sebi-registered alternative investment funds, which would then invest at least twice that amount into new, exciting ventures. This way, the pressure of picking potential winners by itself was out of the way.

Nine years later, the government seems to have nailed it as a super investor.

Recent data shows that the alternative investment funds (AIFs) supported by FFS have already invested more than Rs 20,000 crore in over 1,100 startups. And these funds are reportedly mobilising a corpus of over Rs 90,000 crore from other investors. A year back, it was reported that 18 of the startups that got funding under the FFS plan have become unicorns.

It’s a good time to take stock of the FFS programme, not merely because nine years have passed. The recently-concluded Budget saw Finance Minister Nirmala Sitharaman announcing a new FFS with a fresh capital of Rs 10,000 crore. This is in addition to a promise of a separate deeptech fund of funds.

The world of business in 2025 is completely unlike the 2016 one. As if a global pandemic and a few ongoing wars weren’t enough to add to the complexity of the world order, the advent of generative artificial intelligence has given fresh reasons for anxiety (and, at the same time, I should concede, some hope too). 

Given the uncertainties, it makes immense sense for the government to continue backing ventures on the path of innovation by putting money into them. The investor avatar of the government could help somewhat neutralise the effect of ‘funding winters’ that parts of the startup world are experiencing.

A recent report by KPMG Private Enterprise’s Venture Pulse highlights how the Asia-Pacific region saw VC investment falling to a nine-year low in 2024, though the global figure for VC investments improved marginally. India itself saw a nearly 30% drop last year.

The world over, the concept of government venture capital is seen in a positive light, especially when it is deliberately used to complement private venture capital in funding firms that might escape the radar of traditional VC firms. Last year, a study in OECD countries, titled, ‘What is the role of Government Venture Capital for innovation-driven entrepreneurship?’, conveyed as much.

The riskier it is for the private sector to touch, the better it is for the government to step in. Such ventures are typically in areas of technology that take long to bear fruits or operate in environments that require deep transitions or transformations.

FFS programmes are, therefore, a strong signal that the government is taking the lead in nurturing innovation. It's easy to blame the VCs for their lack on interest in deep tech ventures, for examples. But ground-breaking innovation that takes a long time to fructify should be the domain of the government.

It is the US Government's idea to send humans to the moon that is said to have given birth to the Silicon Valley, as Nasa had to look for the fastest computers and state-of-the-art navigational systems, among other technologies. It is for the same reason that a government agency such as Nasa, and not a commercial entity like Space X, is behind the launch of the James Webb Space Telescope.

So, how would the second avatar of FFS be different from the first? A few things have already been revealed by the Secretary in the Department for Promotion of Industry and Internal Trade (DPIIT) Amardeep Singh Bhatia. For one, the first FFS didn’t differentiate between different types of startups. The second one will, and it will focus on manufacturing and high-technology sectors.

Companies that qualify under this programme may also require more funding upfront as well as for a longer term.

Take manufacturing. It’s a sector that is yet to realise its full potential in the country, despite getting a lot of attention. Taking fundamental bets on transformational ventures in an emerging era of smart factories, 3D printing, among others, makes a lot of sense in a country whose manufacturing landscape is littered with MSMEs. Who else but the government can give this strategic direction and impetus.

This is also a phase where there is a global battle for dominance in technologies around mobility, gene therapy, materials, space, AI, to name a few. Countries that control these technologies will set the standards. So while it is good that the government is playing a guiding role, we need to have an industrial policy strategy like Japan and Korea had in the late 20th century.

The FFS idea is also perhaps a signal to the large conglomerates to follow suit, considering the role they have played in developed countries in spurring innovation. If Reliance or Tatas, say, can match these investments with something from their own pockets, that would help bridge the R&D gap we have over other countries.

Also, the government should use the momentum to offer tax rebates to high networth individuals (HNIs) to invest in these FFS programmes.

India has evolved to become the third largest startup ecosystem in the world. And with a vast skilled and aspirational population, and the government tasting success in funding new ventures through other funds, it won’t be surprising to see more sharply focussed fund of funds programmes emerging in the coming years. That would be the right way to go.