There are multiple reasons for tepid corporate interest in incubators; among them is lack of awareness
There is a list, officially called Schedule VII, which tells companies what they can do under corporate social responsibility (CSR) as prescribed by the Companies Act, 2013.
Of the 10 possibilities, from eradicating hunger to promoting education, the penultimate item in that list is funding technology incubators attached to academic institutions. In the first year of implementation, few companies put CSR money into these incubators.
Incubators help start-ups survive in their very early stages when most of them rely on funding from family and friends. Incubators are valuable to start-ups because besides grants, they give them an office to work out of and act as a platform for networking. The grants to fledging start-ups are anywhere between Rs.25 lakh and Rs.50 lakh.
There are about 100 incubators associated with academic institutions and many of them are funded by the department of science and technology (DST), the ministry of micro, small and medium enterprises and the Small Industries Development Bank of India (Sidbi). About 10-12 start-ups are incubated at each of these centres, and they could be involved in developing clean technology, healthcare solutions and creating information technology (IT) innovations.
Among the eight incubators Mint spoke to, five have received CSR funding of under Rs.2 crore in total.
So far, prominent incubators like the one attached to the Indian Institute of Management (IIM) Ahmedabad got a total of Rs.75 lakh from Mahindra and Mahindra Financial Services Ltd, Take Solutions Ltd and Bajaj Electricals Ltd; the ones at Indian Institute of Science (IISc) and Indian Institute of Technology (IIT) Delhi got Rs.50 lakh each from two multinationals under a non-disclosure agreement; IIM Calcutta and BITS Hyderabad received about Rs.5 lakh each from a software company and Sidbi Venture Capital Ltd, a venture fund run by Sidbi, from its own CSR funds.
Other well-known incubators associated with institutions like IIT Madras, IIM Bangalore and IIM Calcutta have so far not got any CSR funding. They said they are in talks with a few companies, and expect to sign a few memoranda of understanding.
But all incubators admit the interest from companies has been tepid and the reasons for this are multifold.
The first is lack of awareness. “Traditionally this is not CSR. The idea of CSR is associated with doing social good, so this concept of funding incubators as CSR is alien,” says J. Salim Vali, vice-president, Centre for Innovation, Incubation and Entrepreneurship (CIIE), at IIM-A.
Vali said they were expecting to raise Rs.3 crore in CSR funding but were able to get commitments worth only Rs.75 lakh last year.
Second, many companies fund start-ups and get returns on that investment. But when they give CSR grants to an incubator, which in turn diverts some of that money into start-ups, they get no returns.
For instance, Cisco Systems Inc. has an investment arm called Cisco Investments, which will invest $40 million (around Rs.241 crore) in early-stage firms under its India Innovation investment programme, and the investment arm typically takes a stake in these start-ups. For Cisco, these start-ups are a way to foster ideas, which will benefit its business too.
“CSR funding in incubators is an interesting option but may not be sustainable for building a start-up ecosystem for the longer term. That is better done by capital that will look for returns also, as that will ensure more competitive start-ups take root,” said Alok Bardiya, director, corporate development, Cisco.
Third, CSR funding is limited to approved academic incubators but companies are not aware which academic incubators are approved, said C.S. Murali, chairman, entrepreneurship cell, society for innovation and development, IISc.
This, even though DST lists 90 approved incubators on its website.
To tackle this problem, Divya Rajput, head, Centre for Business Innovation at the Indian Institute of Corporate Affairs, Delhi, the think-tank that drafted the CSR rules, said it is preparing a list of eligible incubators that companies can give their CSR funds to.
Originally, incubators were included in the CSR list as they promote innovation. While the law does not specify if incubators should channel funding to start-ups, most have done so.
On their part, founders of start-ups are divided on whether CSR funding makes sense. Some like Nitin Gupta, founder of Sickle Innovations, a farming solutions company, believes CSR funding is valuable, especially for start-ups that are still getting their feet wet. The start-up, incubated by CIIE at IIM-A, makes farm implements that can be used by small farmers.
Gupta said even impact funds (funds that invest in social start-ups) don’t invest in the prototype stage. “You need to get to a certain level to get their attention.” So, CSR money is a much-needed source of seed funding. “With this money, it will be easier to scale and build credibility and with that we can chase after impact investors,” he said.
Sickle Innovations got Rs.18.5 lakh in CSR funding from the Rs.25 lakh grant Mahindra and Mahindra Financial Services made to CIIE. The company made another grant worth Rs.23 lakh towards Sustain Earth, a start-up incubated by Villgro, a DST-approved incubator.
Piyush Jaju, founder of ONergy, which sells solar equipment to rural households, said it is difficult for incubators to get CSR funding. “Companies do not like to mix what they do for profit and what they do with a social motive. For CSR, companies are focused on charity. Changing that mindset is very difficult,” said Jaju. “ We cant rely on this as a source of funding,” he added.
ONergy got Rs.20 lakh from CIIE as part of a Rs.25 lakh grant from Bajaj Electricals.
Executives from Mahindra and Mahindra Financial Services and Bajaj Electricals said they are funding incubators as an experiment and if it yields results they will look to increase CSR funding to them.
Businesses can benefit from this, insisted Sanjay Kallapur, director of the fellow programme in management at the Indian School of Business, Hyderabad. He said using CSR to give to social enterprises can spark innovation that can stoke research and development (R&D) in their own companies. He called this a Responsible Business Framework.
“Companies anyway have to do CSR. If they encourage social enterprises in their line of business, through incubators, it could be a win-win situation,” he said.
But to attract CSR funding, incubators will also need to show that they are accountable and producing results with their graduates, said Will Poole, managing partner, Unitus Seed Fund.
“I do not believe CSR grants will be large enough to both support an incubator and flow-through incubators in any material way to the organizations they train and support”, Poole said.
CSR consultants wonder why this criteria was included in Schedule VII in the first place. “No company has expressed interest in this. CSR funding in incubators sticks out like a sore thumb from the rest of the areas listed.”
Also, the wording is very vague, it was said. “As the law discourages CSR funding to any form of for-profit enterprise, funding incubators means encouraging for-profit enterprises.”
He said the criteria needs rewording and clarification from the ministry on its exact meaning.
Till then, few companies are considering this route.
This article was taken from here.