India to co-invest with VCs in chip design startups

Key Takeaways

• Government will match private VC investments in chip design startups dollar-for-dollar, taking equivalent equity
• No fixed exit timeline: startups can buy back government shares once they generate revenue
• Large conglomerates will also receive incentives based on royalties earned from their chip designs

India will co-invest alongside venture capital funds in chip design startups, matching private investments rupee-for-rupee in exchange for equity. The scheme, part of the ₹1.27 trillion Semicon 2.0 programme unveiled on Wednesday, aims to close the funding gap that has kept Indian semiconductor design companies far smaller than their global peers.

The mechanics are straightforward. If a chip design startup needs $10 million in early-stage capital, the government will fund $5 million. The startup raises the remaining $5 million from a private investor. Both parties receive the same equity stake. The burden of raising capital for the long, expensive journey from concept to production drops by half.

Amitesh Sinha, additional secretary at Meity and CEO of the India Semiconductor Mission, told Mint the plan addresses a specific problem: India lacks deep-tech funds willing to sit through semiconductor design timelines. Chips can take three to five years before generating revenue. Most VCs want faster returns.

How does the equity co-investment work?

The government first offers grants for startups to build chip design prototypes. These prototypes become the pitch deck for private investors. Once a startup secures VC or PE funding, the Centre matches the private capital raised in that round for an equivalent equity stake.

One detail stands out: no exit clock. "The government will not go into this with an expiry date or a plan to exit the startup within a stipulated number of years," Sinha said. When a semiconductor startup becomes profitable, it can buy back the government's shares. The option stays with the company.

Sinha did not disclose how much of the ₹1.27 trillion Semicon 2.0 budget is earmarked for equity co-investments.

Why chip design, not fabs?

Building a semiconductor fabrication plant costs $10 billion or more. Chip design requires far less capital but captures a larger share of value. Design companies own the intellectual property. They control the technology. India already employs roughly 20% of the world's semiconductor design engineers, about 200,000 people, working at Qualcomm, Intel, AMD, and others.

IT Minister Ashwini Vaishnaw made the priority explicit at a roundtable on Wednesday: chip design companies will be central to Semicon 2.0. India wants to generate its own semiconductor IPs, not just provide engineering services to foreign firms.

What went wrong with the first scheme?

The original design-linked incentive scheme under the 2021 India Semiconductor Mission offered ₹15 crore per startup. That sounds like a lot until you price a tapeout, the stage where a chip design is sent to a foundry for manufacturing. Tapeouts for advanced nodes can cost $50 million or more. The funding fell short by an order of magnitude.

A second problem: no market pull. Many startups designed chips without confirmed orders. Commercial production stalled.

India still has not produced a chip design unicorn. Tessolve Semiconductor, the most valuable domestic player, raised $150 million from TPG at a $450 million valuation. That is respectable but a fraction of global design leaders.

Large companies get incentives too

Semicon 2.0 also extends support to established conglomerates. These firms already have capital. The government's incentive is different: payments linked to royalties earned from their chip designs. The logic is to push large companies into R&D they might otherwise defer.

"The incentives from the Centre, based on the royalty that they earn from their chips, is in order to give private companies the confidence of investing in R&D, and subsequently take their products to market," Sinha said.

The VC co-investment model is familiar

The structure mirrors the government's ₹1 trillion research, development and innovation fund, where VCs participate as co-investors. The bet is that private investors will perform due diligence, filtering out weak ideas. The government shares risk, not just subsidy.

Whether this model attracts international VCs comfortable with semiconductor timelines remains to be seen. India's deep-tech fund ecosystem is thin. Most domestic VCs focus on software, fintech, and consumer businesses with faster paths to liquidity.

Frequently Asked Questions

How much funding can a chip design startup receive from the government?

The government will match private investment dollar-for-dollar. If a startup raises $5 million from VCs, the Centre contributes another $5 million for the same equity stake. The total allocation for this equity scheme has not been disclosed.

Does the government plan to exit these investments?

No fixed exit timeline exists. Once a startup generates revenue, it can buy back government shares if it chooses.

Are large companies eligible for Semicon 2.0 incentives?

Yes. Large conglomerates receive incentives tied to royalties earned from their chip designs, rather than equity co-investment.

Why did the first chip design scheme underperform?

The original scheme offered only ₹15 crore per startup, far below the capital required for prototype production and tapeout. Many startups also lacked market orders for commercial production.

What is India's current position in global chip design?

India employs about 20% of the world's semiconductor design engineers, roughly 200,000 people, but has not yet produced a chip design unicorn.

Source: mint / Jatin Grover,Shouvik Das