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  • Sakshar Law Associates

Understanding seed funding in India

Updated: Sep 24, 2022


Sakshi Shairwal

Anushree N. Murthy

In the early stages of business, start-ups require a corpus fund to implement their idea. As banks often give secure loans, start-ups have no choice but to raise capital from investors or venture capitalists. This original amount utilized to start up the company is what may be defined as seed funding/capital.

The external funding obtained usually happens in stages as the business matures, such as pre-seed funding, followed by the official seed funding, which happens in stages such as Series A, B, C, and so on. The initial stage of financing a new enterprise is normally not included in the investment rounds. This is known as "pre-seed" investment or funding, the period in which founders of a company first start up their businesses. Founders themselves, close friends, supporters, and family are the most frequent "pre-seed" funders.

Following this, the first official step of equity investing is implemented, i.e., seed funding. It is often the first official amount that a company or enterprise raises. Some companies never reach Series a funding after the initial seed funding round due to the failure of the business. Seed financing is utilized to work on the initial goals by a founding team.

In Series A funding, investors seek excellent ideas and look for a sound strategy to develop this idea into a viable, profit-generating business. More traditional venture capital companies and angel or risk investors are usually involved in the Series A cycle.

The financing from Series B is used to help grow the company to meet these demand levels. Series B frequently features many of the same characteristics as the previous round, including a crucial key investor to attract other investors. The difference in series B is that other risk capital firms specializing in later-stage investment are added to the list of existing investors from Series A.

Enterprises that are quite financially successful are the ones that generally make it to Series C funding. These enterprises seek additional funds to help them develop new products and services, expand markets, or even acquire other small enterprises. Financing from Series C is designed to scale the company and grow as swiftly and profitably as possible.

In January 2021, the government started the Start-up India Seed Fund Scheme (SISFS) in order to overcome this capital insufficiency, which mainly aims to provide financial assistance to start-ups for concept proof, prototype development, product trials, market entry, and commercialization, and was effected on April 01, 2021.

The Fund has been approved for a period of the next four financial years from 2021-22 to 2025-26. The quantity allocated for this scheme is around Rs. 950 crores. A grant of ₹1 crore to 5 crores would be available, based on the assessment of an Expert Advisory Committee.

For the implementation of this program, the Ministry of Trade and Industry's Department for Promotion of Industry and Internal Trade (DPIIT) has established a set of guidelines. A start-up and incubator selection process based on comprehensive qualifying criteria is envisaged in the same. Through the government’s Start-up India portal, companies that match the eligibility criteria may apply for the scheme. It will benefit start-up enterprises that have been accepted by DPIIT, have been incorporated for less than two years and in which more than 51% are owned by the promoters.

Salient features of the scheme:

1. Establishment of an Experts Advisory Committee (“EAC”) In order to ensure the application and management of SISFS, the SISFS envisages the setting up of an Expert Advisory Committee (EAC). This committee will primarily be responsible for evaluating and selecting incubators and start-ups for granting seed funding (within the eligibility requirements laid down in the SISFS). The EAC shall then also oversee the process of distributing the seed funds to the selected incubators and start-ups. In the case of incubators, the EAC will distribute the seed grant, subject to fulfilling specified objectives relating to the use of funds. Furthermore, the EAC will also guarantee that incubators follow the appropriate path to achieve the EAC's key milestone targets.

2. Assistance to Incubators – In a number of milestone-based instalments, the EAC shall distribute the Rs. 5,00,000 to the selected incubators (as determined by the EAC). These instalments are only to be distributed in the presence of evidence of having achieved the prescribed milestones. Further, a management fee (5% of the total amount to the select incubator), which will be used for the operating expenses of the incubators in conducting due care and short-listing of start-ups, is also provided for the incubator in addition to the seed cash. Within three years of receiving the first payment by the incubator, the seed money is to be fully utilised.

3. Incubator Seed Management Committee (“ISMC”) – An ISMC must be set up by the designated incubators involved in the SISFS. The ISMC is an organ for evaluating and identifying appropriate seed assistance start-ups. The ISMC includes an incubator nominee who will be Chairman; a representative of the State government's Nodal Team; a venture capital fund or Angel network representative; an industry expert on domain issues; a domain professional from the university; two successful entrepreneurs and any other relevant stakeholder who the incubator considers to be appropriate.

4. Disbursement of Seed Funds to Start-ups – Once selected by the ISMC, incubators may disburse the seed capital to the companies in the following manner:

i.) A grant of up to INR 20,00,000 for conceptual proof, prototype development, or product trials, and these shall be milestone-based.

ii.) Investment up to INR 50,00,000 for market entry, marketing, or scaling up by convertible debentures or other debt instruments.

ii.) (i.)The start-ups also appear to be expressly prohibited from using the seed capital for any purpose not provided for. The total sum paid to the start-up by the incubator shall not exceed 20% of the incubator's total funding.

5. Indicators of Successful Implementation – Measurement parameters of incubator success include progress of the concept, progress in the development of the prototype, progression in product development, the progress of field trials, progress in the launch of markets, raise in loans, angels or risk capital funding amounts, job creation of the launch company, sales of the start-up company and any other parameter asset. The progress status for each of the above parameters will be communicated from the start-up to the incubator and then to the EAC. A return-on-investment report will also be prepared for each start-up and forwarded to the EAC by the incubator.

Apart from monetary assistance, the incubators also equip Startups to develop, research, and test prototype products with the required physical infrastructure and equipment and also provide them with networking opportunities by offering the Startups a marketing platform to show products developed for potential investors.


Eligibility for start-ups: Under the SISFS, the following start-ups will be eligible:

i.) Those recognized by the DPIIT & incorporated not more than 2 years ago at the time of application;

ii.) Those with a business idea for developing a market-fit product or service, feasible marketing, and scaling options;

iii.) Those who use technology in their primary product or service, business or distribution strategy, or methodology to resolve issues;

iv.) Those that focus primarily on problem-solving (in sectors such as waste management, social impact, water management, education, financial inclusion, agriculture, biotechnology, food processing, healthcare, mobility, energy, defense, railways, space, textiles, oil, and gas, etc.);

v.) Those with no monetary assistance exceeding INR 10 lakh under any other central or state government regime; and

vi.) Those with Indian promoters holding at least 51 percent of the company’s equity.

Eligibility for incubators: Under the SISFS, the following incubators will be eligible:

i.) Must be a legal entity– a firm, private society, private company or a government body;

ii.) Must be in operation on the date of application for at least two years.;

iii.) Must have seating facilities for a minimum of 25 persons;

iv.) Must physically be incubating at least 5 start-ups on the application date;

v.) A full-time CEO with the backing of a competent financial, legal, and HR team shall be required;

vi.) The seed fund should not be disbursed to incubates utilizing funds provided by a private third party business; and

vii.) Must have received central/state aid and, if not, at least three years of operations must take place and 10 different incubation start-ups must be physically under incubation in an incubator on the date of application and the audited annual reports shall be submitted for the last two years.


The SISFS is only one of a series of government policies to support the start-up industry. In light of the prevalent market situation where the majority of start-ups have difficulties raising money in front of the slowdown created by the pandemic, the implementation of these steps is extremely important.

This initiative also aims to develop a solid environment for start-ups to produce jobs, especially in smaller cities. The fund may also benefit start-ups in industries that receive less assistance from venture financing than e-commerce, food technology, travel, and training. The system will encourage virtual incubation by creating an online mechanism for entrepreneurs. This will allow the system to be more extensive and cope with the ongoing pandemic. At the same time, the application of the plan can be complicated by complex eligibility criteria and bureaucratic procedures.

SISFS will give the most necessary impetus to the project Make in India. It will also provide the start-ups the visibility they need to secure funding from investors, bankers, financial institutions, and venture capitalists. This scheme is designed to support and boost the financial needs of start-ups at the early stage. However, the success of the SISFS will depend fully on the administration and operation of the EAC, the incubator, and the start-ups.


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