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India sets up $1.6B fund for startups, backs a new era of software product innovation

india budget

The new Modi government’s first budget presented in the Indian parliament on Thursday was music to the ears of the tech startup community on two counts.

Firstly, finance minister Arun Jaitley announced the setting up of an INR 100 billion (US$1.6 billion) fund for startups. The financial support will come in the form of equity as well as soft loans. How exactly the funds will be administered and disbursed is not yet clear.

This is the first time that such a fund has been set up by the government in India though the earlier government had launched a INR 5 billion (US$83 million) India Inclusive Innovation fund, which wasn’t specifically for startups.

Just a couple of weeks earlier, the Indian Software Product Industry Round Table (iSPIRT), an industry think tank, had in a series of meetings with Ravi Shankar Prasad, India’s minister for information technology, telecom, and law, suggested the setting up of an INR 50 billion (US$830 million) fund for tech startups, along the lines of the Yozma fund in Israel.

The Yozma fund began as an Israel government initiative in the nineties and seeded the venture capital ecosystem in what has become popularly known as Startup Nation. Today, the Israeli tech startup scene is way ahead of that in India, even though India is a world leader in software services.

See: Here’s an indicator of just how immature the Indian startup ecosystem is compared to Israel

iSPIRT had told the minister that India had the tech talent to overtake Israel in four years, if a startup fund were to be set up just as Israel had done.

The new 100 billion rupee fund is therefore not only a superfast response by Indian government standards, but it even exceeds expectations.

While the announcement is welcome, the second point of cheer for the tech startup community is more fundamental. For the first time, the finance minister’s budget speech talks of “a special focus on software product startups.”

This has been a bone of contention within the tech community, with one section insisting that small product startups had very different needs from those of the big software services companies. In fact, the formation of iSPIRT last year was meant to give a voice to innovators who felt smothered by a well-entrenched services culture.

See: Why India must fix its obsession with software services and pivot to products

At iSPIRT’s meeting in Bangalore with the IT minister on July 1, Tech in Asia had specifically asked the minister if the time had come to have separate policy frameworks for the software services and products industries. Prasad replied diplomatically that he did not want to think in silos, but he would do everything in his power to create an environment for innovation. That he intends to walk the talk was evident just nine days later, because it found its way into the finance minister’s budget speech and gave a new direction to India’s tech industry.

Naveen Tewari, CEO of billion-dollar adtech company InMobi, one of India’s most successful startups, believes the move could further boost the startup scene’s standing:

“This morning’s special mention of the Software Product Industry by the Union Finance Minister is certainly noteworthy because it will be instrumental in branding Indian innovation and taking it to the next level by encouraging this nascent industry that largely comprises start-ups.”

Kailash Katkar, CEO of anti-virus software maker QuickHeal, notes:

“The Software Product Industry (SPI) needs privileged access to strategic technologies. Today’s announcement about the special focus on the SPI by the government clears the path for this happening in the near future.”

Sharad Sharma, CEO of BrandSigma and co-founder of iSPIRT, says the budget is a good first move:

The Finance Minister has done well in his maiden budget to recognize the Software Product Industry (SPI) as a distinct industry. At iSPIRT, we believe that this is the first step in giving the SPI ecosystem in India the much needed impetus juxtaposed with the recent assurances of the Minister of IT and Communications about making India a Product Nation.

(Top image: Flickr user 401(K) 2012)

Editing by Terence Lee

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