What Happened
- The Union Cabinet approved the Startup India Fund of Funds 2.0 with a corpus of Rs 10,000 crore to mobilise long-term domestic capital and strengthen the venture capital ecosystem.
- The fund will adopt a targeted, segmented approach focusing on deep tech startups, early-growth stage startups, and tech-driven innovative manufacturing ventures.
- Priority will be given to ventures requiring patient, long-term capital that traditional venture funds often avoid.
- The scheme aims to expand investment beyond major metropolitan centres to smaller cities and emerging startup clusters.
- Under the first phase (Fund of Funds 1.0), the entire Rs 10,000 crore corpus was committed to 145 Alternative Investment Funds (AIFs), which together invested over Rs 25,500 crore in more than 1,370 startups.
Static Topic Bridges
Startup India Initiative and Fund of Funds Mechanism
The Startup India Initiative was launched on January 16, 2016, to build a robust startup ecosystem. Key components include simplified regulations, tax exemptions (Section 80-IAC of the Income Tax Act provides a 3-year tax holiday for eligible startups), self-certification for labour and environmental compliance, and the Fund of Funds. The Fund of Funds does not invest directly in startups -- it invests in SEBI-registered Alternative Investment Funds (AIFs), which in turn invest in startups. This catalytic structure leverages private capital alongside government commitment. The Fund is managed by the Small Industries Development Bank of India (SIDBI).
- Startup India launched: January 16, 2016; Action Plan with 19 action items
- DPIIT recognition: startups must be recognised by the Department for Promotion of Industry and Internal Trade
- Tax benefits: 3-year tax holiday (Section 80-IAC); angel tax exemption (Section 56(2)(viib) removed in 2024 Budget)
- Fund of Funds 1.0: Rs 10,000 crore; 145 AIFs committed; Rs 25,500 crore invested in 1,370+ startups
- SIDBI as fund manager: invests in Category I and Category II AIFs
- AIF categories (SEBI): Category I (social venture, infra, angel), Category II (PE, debt, FoF), Category III (hedge funds)
Connection to this news: Fund of Funds 2.0 doubles the total government commitment to Rs 20,000 crore, with the new tranche specifically targeting deep tech and early-stage funding gaps that the first phase did not fully address.
Deep Tech Startups and the Innovation Ecosystem
Deep tech refers to startups built on substantial scientific or engineering innovations -- as opposed to business model innovation. Deep tech sectors include artificial intelligence/machine learning, quantum computing, robotics, advanced materials, biotechnology, space technology, clean energy, and semiconductors. These ventures typically require longer gestation periods (5-10 years vs 2-3 years for consumer tech), higher R&D investment, and specialised talent, making them less attractive to traditional venture capital that seeks quicker returns.
- India's startup ecosystem: 3rd largest globally with over 1.30 lakh DPIIT-recognised startups (as of 2025)
- Unicorns (valuation $1 billion+): over 110 Indian unicorns (2025); but very few in deep tech
- Deep tech funding gap: deep tech startups received only approximately 8-10% of total Indian VC funding
- Government deep tech support: iDEX (Innovations for Defence Excellence), ISRO's IN-SPACe, BioE3 Policy
- Key deep tech sectors in India: AI, semiconductor design, space tech, agritech, healthtech, clean energy
- National Quantum Mission (2023): Rs 6,003 crore over 8 years for quantum computing, communication, sensing
Connection to this news: The Fund of Funds 2.0's explicit focus on deep tech addresses a structural gap -- deep tech startups need 5-10 years of patient capital, which most Indian VC funds (with 7-10 year fund lives) struggle to provide. Government-backed anchor investment de-risks private participation.
Alternative Investment Funds (AIFs) -- SEBI Regulatory Framework
AIFs are privately pooled investment vehicles that collect funds from investors for investing in accordance with a defined investment policy. SEBI's AIF Regulations (2012) categorise AIFs into three categories. Category I AIFs include venture capital funds, social venture funds, SME funds, and infrastructure funds, and receive government incentives. Category II covers private equity, debt funds, and fund of funds. Category III includes hedge funds using complex strategies. The FoF invests exclusively in Category I and II AIFs.
- SEBI AIF Regulations: 2012 (amended multiple times, most recently 2024)
- Minimum investment: Rs 1 crore for investors; Rs 25 crore minimum corpus for AIFs
- Category I AIFs: receive specific incentives/concessions from SEBI, government, or regulators
- Total AIF commitments in India: over Rs 12 lakh crore (as of March 2025)
- Fund of Funds structure: Government (SIDBI) invests in AIFs, which invest in startups -- multiplier effect
- Tax treatment: Category I and II AIFs get pass-through status (income taxed at investor level)
Connection to this news: The FoF 2.0's Rs 10,000 crore will be channelled through AIFs, amplifying the investment through the multiplier effect seen in FoF 1.0, where Rs 10,000 crore government commitment catalysed Rs 25,500 crore in actual startup investments.
Key Facts & Data
- Fund of Funds 2.0 corpus: Rs 10,000 crore (total FoF commitment now Rs 20,000 crore)
- FoF 1.0 results: Rs 10,000 crore committed to 145 AIFs; Rs 25,500 crore invested in 1,370+ startups
- Sectors covered: AI, robotics, clean technology, fintech, healthcare, manufacturing, biotech, space tech
- India's startup count: over 1.30 lakh DPIIT-recognised startups
- Indian unicorns: over 110 (as of 2025)
- Fund manager: SIDBI (Small Industries Development Bank of India)
- Focus areas: deep tech, early-growth stage, tech-driven manufacturing, regional expansion