How start-ups can access central and state funding pools

Access to patient capital remains one of the biggest bottlenecks for Indian start-ups. Recognising this, the Government of India and many state governments have created funding instruments and Fund-of-Funds (FoF) vehicles to catalyse private investment, de-risk early stage finance, and support innovation across sectors. This article explains how these government-backed FoFs work, what schemes start-ups can plug into, and — step-by-step — how founders can practically access central and state funding pools. I also include pro-tips, common pitfalls and a short checklist you can use when preparing applications.

1. Quick primer: What is a Fund-of-Funds (FoF) and why it matters

A Fund-of-Funds (FoF) does not invest directly into start-ups. Instead, it invests capital into professionally managed funds (typically SEBI-registered Alternative Investment Funds — AIFs) which then deploy equity into start-ups. Government-backed FoFs are designed to:

• Catalyse private capital by co-investing alongside private VC/PE funds (thereby increasing the total capital available),
• Reduce investor risk and crowd in established fund managers to sectors or geographies that need more attention, and
• Provide strategic focus (e.g., seed to early stage, deep tech, women-led startups or regionally targeted investment).

India’s flagship FoF is the Fund of Funds for Start-ups (FFS) — a government initiative managed by SIDBI with a corpus of ₹10,000 crore intended to invest into AIFs, which are required to deploy at least twice the SIDBI contribution into Indian start-ups. This is a cornerstone of the StartUp India Action Plan.

2. Central level funding vehicles start-ups should know

a) Fund of Funds for Start-ups (FFS) — SIDBI (GoI)

• Structure: GoI committed a corpus of ₹10,000 crore to be managed by SIDBI. SIDBI contributes to selected SEBI-registered AIFs; those AIFs invest in start-ups (often with a 1:2 leverage requirement). SIDBI does not invest directly in start-ups; selection flows through AIFs that meet the FoF criteria.
• How it helps founders: FFS increases the number of institutional investors and the total investible pool; the AIFs that receive FoF support typically have mandates to invest across stages (seed, early, growth) and will make direct investments into start-ups.

b) Startup India Seed Fund Scheme (SISFS)

• Purpose: SISFS provides direct seed grants/seed funding (via eligible incubators) to very early-stage start-ups for proof-of-concept, prototyping, pilot testing and market entry. Start-ups usually apply through incubators admitted to the SISFS ecosystem.
• How it helps founders: Unlike FFS, SISFS provides direct small grants (or seed support) to founders (subject to incubator recommendation), which is ideal for the earliest product-validation stage.

c) Other central supports

• Direct central ministry grants, challenge funds, research-collaboration grants (e.g., MeitY TIDE, DST PRIME/GRAVITAS, Atal Innovation Mission) and procurement pilots are often available; many of these are not FoF structures but provide non-dilutive funding or pilot contracts that validate startups for later equity funding. (See central ministry portals and Startup India funding page.) (Startup India)

3. State funds and seed pools — the local advantage

Many states run state FoFs, seed funds, and targeted grant pools to boost local entrepreneurship. These can include:

• State seed funds/seed grants administered by state nodal agencies (e.g., Maharashtra State Innovation Society seed fund; many states have launched seed grants, incubation funding and targeted “Maha-Fund” style pools). These generally offer smaller sums than central FoFs but with easier access for local startups and stronger handholding.
• State FoFs that co-invest into VC/AIFs focused on the state’s startups (recent examples include several states announcing regional FoFs or large seed pools to be deployed via incubators and funds). State policies increasingly include mandates for in-state hiring, pilot procurement, and preferential use of local incubators.

Why state funds matter: They are often faster, sometimes non-dilutive or concessional, and can be designed to target sectors (agritech, healthtech) or demographic groups (women founders, SC/ST entrepreneurs).

4. How start-ups can actually access these pools — step-by-step

Step 1 — Know which bucket you belong to

• Pre-product / prototype stage: target SISFS (via incubators), state seed funds, challenge grants.
• Seed to Series A: target VC funds that have received FoF support (FFS-backed AIFs), angel networks and state co-investment schemes.
• Growth/scale: target larger VC/PE and corporate funds; central FoFs mainly serve to catalyse these fund flows.

Step 2 — DPIIT recognition & basic compliance

Many central schemes and incubators require DPIIT recognition (Startup India) or at least company incorporation, audited or certified financials, and an innovation statement. Apply for DPIIT recognition early — it makes multiple doors open (SISFS eligibility, many grants and procurement pipelines).

Step 3 — Map and approach eligible intermediaries

• For FFS: You do not apply to SIDBI. Instead, identify AIFs / VC funds that have received (or are likely to receive) FoF allocations and pitch them. Check SIDBI/Fund websites for lists of AIFs that have been sanctioned. If an AIF’s mandate matches your sector/stage, approach them with a crisp data room.
• For SISFS: Apply through eligible incubators listed on the SISFS portal. Incubators shortlist startups and forward applications to SISFS for grant consideration. Prepare a strong proof-of-concept, prototype evidence, and incubator pitch.
• For state funds: Approach the state nodal agency (e.g., Maharashtra State Innovation Society, state startup missions). These agencies often have online application portals and defined windows/calls for seed funding. Prepare the specific documents they require (business plan, use of funds, pitch deck, team bios).

Step 4 — Documentation & due diligence checklist

Common items funds and incubators will request:

• Company incorporation documents, PAN, bank account proof.
• DPIIT recognition (if required) and GST/other registrations.
• Founder CVs, cap table, term sheet (if any).
• Pitch deck, product demo, user metrics, pilot letters/LOIs.
• Financial projections, burn rate, previous funding details.
• For state grants: project budget, use of funds, impact metrics (jobs created, local procurement).

Pro tip: Prepare an investor-grade data room on Google Drive/DocuSign with versioned documents to speed up diligence.

Step 5 — Negotiate terms & understand covenants

When you talk to AIFs/VCs (including FoF-backed funds) know that FoF backed funds might have government reporting conditions, co-investment terms and performance metrics. For state seed grants, check clawback, reporting, and procurement conditions. Read term sheets carefully: grants may require IP assignment conditions, and equity deals will determine dilution.

Step 6 — Post-disbursement compliance

Government-affiliated funds often require periodic reporting, audit compliance, or milestone evidence (product launch, revenue targets, job creation). Maintain clean books and meet reporting timelines.

5. Pros, cons and common pitfalls

Pros

• Catalytic capital: FoFs crowd in private institutional capital, expanding the pool of active VCs.
• State funds = accessibility: State seed funds are more accessible for regional founders and provide handholding.
• Non-dilutive early support: SISFS and state seed grants reduce the need for premature equity dilution.

Cons / Pitfalls

• Indirectness of FoFs: You cannot apply to FFS directly; you must be attractive to AIFs that receive FoF allocations. That raises the bar for traction/evidence.
• Time & paperwork: Government-affiliated processes may require extra reporting and sometimes slower disbursement cycles.
• Strings attached: Some state funds tie you to local hiring or pilot procurement quotas; read covenants carefully.
• Small cheque sizes at seed stage: SISFS and state seed grants are relatively small — good for validation but insufficient to scale without follow-on capital.

6. Practical tips to improve your odds

1. Pre-validate before pitching: have a pilot customer, LOI, or demonstrable users — this makes you attractive to FoF-backed AIFs and incubators alike.
2. Target the right fund: research AIF mandates and past investments; approach funds with a history of investing in your sector/stage. SIDBI and some portals publish lists of sanctioned AIFs.
3. Use incubators strategically: for SISFS and state grants, incubators act as curators — pick incubators with strong track records and sectoral expertise.
4. Leverage state policy incentives: if a state offers co-investment or procurement pilot routes, use that to demonstrate revenue traction to private investors.
5. Be transparent about use of funds: government and AIF investors want clear milestones and measurable outcomes (jobs, pilots, revenue).

7. Short checklist before applying

• Are you clear which pool you’re targeting (FFS-backed AIF vs SISFS vs state seed)?
• Do you have DPIIT recognition or company incorporation docs ready? (Startup India)
• Is your pitch deck / prototype / LOI in place?
• Have you shortlisted 3-5 funds/incubators most likely to invest/endorse you?
• Have you checked reporting and covenant obligations of the funding source?

8. Conclusion

Government-backed FoFs (like the ₹10,000 crore FFS managed by SIDBI), SISFS seed grants and a growing number of state seed pools form a multi-layered financing ecosystem that founders can and should tap into. The central FoF expands institutional capital by funding AIFs, while SISFS and state seed funds provide early stage validation capital and local support. Smart founders will map their stage to the right instrument, prepare a crisp data room, work with reputable incubators, and target FoF-backed funds that match their sector and stage. With the right preparation, government funding channels can be a powerful lever — not a substitute — for private capital and growth.

Key sources & further reading

• SIDBI — Fund of Funds for Startups (FFS) overview. (sidbivcf.in)
• Startup India — Funding guide and Startup India Seed Fund Scheme (SISFS) guidelines. (Startup India)
• SIDBI annual report / FFS progress notes. (SIDBI)
• Maharashtra State Innovation Society / Maharashtra Startup Policy 2025 (example of state seed fund and ‘Maha-Fund’ announcements). (Maharashtra State Innovation Society)