How Karnataka is pulling out all stops to achieve its lofty startup goals

For a venture capital fund with two dozen startups in its portfolio, six buyouts by names like Cisco and EDS Corporation, a couple of public listings, and a slew of promoter buybacks and secondary sales sounds like a reasonably good record.

That portfolio is of Karnataka Information Technology Venture Capital Fund (KITVEN), set up way back in 1999-2000, making it perhaps the earliest VC experiment by a state government agency. And after its first Rs 15 crore fund and second Rs 26 crore fund in 2008-09, the Karnataka government’s venture funding activity has seen a revival of sorts over the past one year.

Flurry of funds

It is currently running various funds with a total corpus of Rs 400 crore for equity investments, besides several grants, prizes, partnership and mentoring offers. In the past one year, a Rs 100 crore venture fund for semiconductor and electronics manufacturing, a Rs 50 crore fund for biotech startups, a fund-of-funds of Rs 200 crore to back other VC funds, a Rs 20 crore fund for animation and gaming startups, and a grant-in-aid fund of Rs 50 lakh for idea-to-proof of concept have been set in motion.

Over the past four months alone, as many as 61 startups have got anywhere between Rs 5 lakh and Rs 50 lakh from various funds run by the state IT department.

These are good tidings for the state, which has long been India's foremost breeding ground for startup innovation and entrepreneurship.

Some of this recent momentum can be attributed to Priyank Kharge taking on the mantle of Karnataka's minister of information technology and biotechnology. Priyank, son of veteran Congress leader Mallikarjun Kharge, has been a grassroots-level politician for many years. He started off with a grand target of 20,000 startups in the state by 2020.

Stiff target?

Is the target a bit audacious? Kharge agrees it is difficult to meet such ambitious policy targets, but insists on having a strong intent. “The failure rate among startups is quite high. How do I ensure fewer startups fail? We open up the system, ensure access to quality mentors, incubators, investors and capital. We tie up with accelerators. We help with legal process and idea validation. These things combined will help us propel to 20,000 startups,” he says.

He maintains that there was a huge number of startups in the state looking for mentorship and capital. “It is just increasing. What was 3,700 a year-and-a-half back in Bangalore is now 7,200. In the last one year aloe, 3,700 startups have registered with the government of Karnataka,” he explains.

Like other politicians, including Prime Minister Narendra Modi who launched ‘Startup India, Stand up India’, Kharge knows only too well the importance of engaging with the youth and addressing the rising entrepreneurial aspirations of millions. And it looks like he is rubbing off on neighbouring states. Kharge’s counterpart in Telangana, KT Rama Rao, has also launched a large incubation centre, T-Hub, and undertaken various other initiatives to promote startups in his state.

Incubation programme

Kharge and his team recently launched an incubation programme for 100 startups across the state, through a two-month selection programme called Elevate 100. As many as 111 ventures have been selected out of 1,800 from various parts of the state. These startups will be provided mentoring, apart from legal, banking and tech infrastructure help through partnerships with companies like Google, Amazon, Zoho, PwC, Yes Bank and Kotak Bank. They will also have access to Rs 400 crore state funding.

Kharge said this would be an annual programme. This means, over 500 startups will be groomed over the next five years, and they stand to raise a total of Rs 2,000 crore over the period. However, the availability of funds will not be limited to the 100 selected startups, Kharge clarified.

The minister claimed that the state government’s initiatives had spurred startup creation in Tier 2 towns and rural areas as well. “There are people from Yadgir (a small town in Karnataka's Yadgir district) who pitched for Elevate 100. There are people from Chitradurga, Hospet... students of final year engineering have pitched,” he said.

“The startups need to have a legal status, that of a company, to pitch for the programme. That means these people are serious about what they are doing. The ecosystem is growing outside Bangalore,” Kharge said.

Bangalore’s startup community and VC network find the minister’s startup policies and programmes heartening. “It is a welcome measure by the government to engage with startups and facilitate the growth of the ecosystem. We should not look at the results now. It is still a nascent industry and too early to gauge outcomes,” said Naganand Doraswamy, founder of VC fund Ideaspring Capital and former president of TiE’s Bangalore chapter. Doraswamy is one of the mentors the Karnataka Startup Cell taps.

Doraswamy also agreed that 20,000 startups seemed like a rather stiff target. “But we should shoot for a high number always. My only concern is we should be mindful of the quality of startups, not just quantity,” he added.

Govt gets its hands dirty

However, Doraswamy believes the government's role should be limited to backing VC funds, and it shouldn't invest in startups directly. “Ideally, they should run just fund-of-funds but that is my personal opinion... Having said that, KITVEN did reasonably well,” he admits.

Kharge, however, is determined to go to the grassroots here as well, playing a startup investor. “Somebody has to take the leap of faith. When we started KITVEN, nobody was there. Where are startups struggling the most? It is mentorship and access to capital. Why do you think 3,000 people registered with me? Half the ecosystem is looking at the government. There is some gap.”

When asked about the return on investment, he said, “If we get back Rs 100 or Rs 110 for every Rs 100 we put, we are okay. There was a small aerospace firm we invested Rs 1.2 crore where we got back Rs 2 crore. It went on to get higher funding we did not wait for that.”

Clearly, the state is going all out to ensure that more startups emerge, and most of them get funded. Even if it misses its lofty goal of 20,000 startups by 2020, it won't be for lack of trying.