India Inc and start-ups have had a cosy relationship, especially visible in a lot of events. Indian industry has found a growing passion for supporting start-ups through many different ways, and it does give returns beyond the apparent PR value. Start-ups can be test beds for new products/services, innovations that could be too expensive to explore in-house.
One of the ways that I have witnessed Indian Industries participate in start-ups is through introducing challenges/competitions, aka corporate innovation programs. E.g. a healthcare business sponsors a challenge to find a unique healthcare business idea sometimes even having a social impact. As a business it makes sense to explore start-ups to discover innovations and find new markets and for doing that Corporate Social Responsibility (CSR) Funds of the company can come in handy.
On 29th August, 2013, the Indian Government introduced the new Companies Act 2013. In this new Act, one of the most significant amendments had been the compulsory law of Corporate Social Responsibility (CSR). Section 135 (1) of the Act illustrated the following:
“Every company having a net worth of rupees five hundred crores or more, or turnover of rupees one thousand crores or more or a net profit of rupees five crores or more during any financial year shall … spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy”
Schedule VII of the Act listed down all the possible areas eligible for CSR spending. For seven years of implementation, the CSR laws of the Companies Act, 2013 have undergone frequent amendments. One such amendment on 11th October 2019 rejuvenated hope for start-ups since it qualified contribution to incubators funded by Central Government or State Government or any agency or Public Sector Undertaking of Central Government or State Government, etc as eligible items under CSR.
Now, over the last few years, we have seen a thriving new industry of incubators in the country. This notification essentially helps qualify a large number of such incubators to access CSR funding. With such funding in place, incubators to support more number of start- ups or improve the quality of their service delivery among start-ups. Would that mean start- ups can now consider CSR funding as part of their routine or focussed funding avenues? The answer is, unfortunately, NO. Let us see a few reasons why:
- Firstly CSR funding is supposed to be spent to benefit the people in distress directly. A large number of thoughtful CSR initiatives take care of ensuring every rupee spent to reach the end beneficiary hence minimising the administration cost to the program. CSR funds typically bring in a strategy to mitigate potential risks, improve brand image and do employee engagement activities primarily through community welfare projects in and around their industry/office setups. All these privileges are not very easy to be found when routed to a start-up via an incubator. 2. CSR funding is a finite amount that corporates will invest every year based on their profits. In these times of pandemic mostly we have already seen a majority of CSR funds being spent either on direct relief works or given to PM Cares or various State Disaster Management Relief Funds. All this has left significantly less scope for funding any initiatives outside these immediate needs.
- In this limited market alone, an increasing number of CSR projects directly execute activities through the foundations’ set up by the corporates themselves or through a trusted non-profit partner whom they are maybe working already over last few years.
- The non-profits in India are very competitive themselves in terms of accessing CSR funds and generally associate over a long term project, including multiple year’s worth of CSR interventions.
- There’s one more misconception that I often come across of start-ups planning to access CSR funds directly. One primary reason that it’s a pipe dream is that by law, CSR money goes into a registered non-profit having specific certifications and experience over a few years. A very few social enterprise start-ups are having a registered non-profit qualify when it comes to the regulations.
- Without having worked with any significant number of beneficiaries from a distressed
community, a start-up cannot promise an effective utilisation of CSR funds. An essential component of raising money while you are still a start-up is towards your administration, market validation and go to market opportunities these are not the focus areas of an experienced CSR team.
While start-ups should consider themselves lucky if they’ve accessed CSR funds via an incubator so far but going ahead there are more reasons to assume that it will be a difficult funding source.
I want to sum up by saying that, even if creating an affordable business for the bottom of the pyramid is your focus area as a start-up, focus on being sustainable through your revenues and raising money from formal investment ecosystem rather than competing with the funding channel designed for non-profits and the underserved.