Pune: As grants for startup support programs become increasingly limited, incubation fund management is emerging as a critical capability for incubators seeking long-term sustainability.
The Incubation Practice School at Venture Center organized a talk focused on Incubation Fund Management, exploring how incubators can design, govern, and deploy funds to create meaningful startup impact beyond grant cycles.
The session was delivered by Poyni Bhatt, former CEO of SINE, IIT Bombay and a qualified Company Secretary with nearly three decades of experience across industry, academia, and the startup ecosystem.
Bhatt has mentored more than 220 startups and over 1,000 innovators, with mentees collectively raising approximately USD 800 million. The session highlighted how Incubation Fund Management must evolve from grant utilization to investment-oriented fund strategy.
Participants were introduced to the role of funds within incubators and gained perspectives relevant to incubators, ecosystem enablers, investors, and startup leaders navigating Incubation Fund Management in a changing funding landscape.
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Grants Are Becoming Scarce: A Shift Toward Investment Discipline
Bhatt began by explaining that incubators have long invested in startups using seed grants, often supported by government funding. However, Incubation Fund Management has historically lacked long-term strategic planning.
“Incubators receive grants – but when asked what their plan is after the five-year grant period ends, many do not have an answer,” she said.
She noted that while grants continue to flow into the ecosystem, expectations have changed. Funding agencies increasingly expect grants to perform like investments. This shift is driving the need for structured Incubation Fund Management, including performance measurement, exit planning, and professional investment processes.
According to Bhatt, incubation funds must be managed like investment funds despite legal differences such as the absence of GP-LP structures or defined fund lifecycles.
The Three Pillars of Incubation Fund Management
Bhatt explained that Incubation Fund Management revolves around three core areas:
- Fund formation
- Pre-investment activities
- Post-investment activities
She emphasized that incubators must adopt an investor mindset, where investment performance, exits, and profit from exits matter.
“You need a team that acts like an investment team. Creating deal flow and establishing proper processes are extremely important,” she said.
Fund Formation Beyond Government Grants
A key theme in Incubation Fund Management is diversifying funding sources. Bhatt encouraged incubators to move beyond reliance on government schemes and pursue:
- CSR Funding
- Philanthropic Capital
- Alumni Contributions
- Local Business Community Participation
She shared an example from Mangalore, where local business leaders were exploring collaboration with incubators to support startups.
Once capital is raised, incubators must define a clear investment mandate and thesis — an area where many incubators struggle in Incubation Fund Management.
Building an Investment Thesis
Bhatt outlined several elements incubators must consider when designing an investment thesis for Incubation Fund Management:
- Stage of Investment
Incubators typically write the first check, which often takes longer to exit. A balanced approach combining early investments and co-investments in more mature incubated startups can improve exit timelines.
- Deal Size
With a limited corpus, incubators must decide whether to support many startups with smaller investments or fewer startups with larger funding.
- Sectoral Focus
Incubators should leverage sector expertise as “smart money.” Investing outside core strengths requires careful evaluation of support capability.
- Startup Team
Single-founder teams may be supported through incubation, but investment decisions require assessing team completeness and risk exposure.
- Co-Investment Strategy
Co-investment reduces risk but may raise questions from grant agencies about startup portfolio expansion.
- Exit Potential
Every investment must demonstrate exit potential through future funding rounds, acquisitions, or IPOs — a fundamental principle of Incubation Fund Management.
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Investment Management vs Grant Management
Bhatt stressed that Incubation Fund Management requires capabilities beyond grant administration, including:
- Valuation understanding
- Term sheet negotiation
- Shareholder agreements
- Investment instruments
- Exit mechanisms
- Continuous monitoring
- Stakeholder alignment
“This requires a commercially mature team—not just grant administrators,” she said.
Pre-Investment Execution in Incubation Fund Management
Effective Incubation Fund Management requires proactive deal sourcing rather than relying solely on inbound applications.
Investors must:
- Attend ecosystem events
- Connect with entrepreneurs
- Partner with other incubators
- Build strong startup pipelines
Bhatt explained that to fund five startups, incubators may need to evaluate 100–150 companies.
Screening criteria include:
- Investment Thesis Alignment
- Technology Readiness
- Team Strength
- Customer Traction
- Market Potential
- Business Model Viability
- Competitive Positioning
- Due Diligence and Red Flags
Bhatt emphasized that rigorous due diligence is central to Incubation Fund Management.
Key checks include:
- Financial Liabilities
- Legal Compliance
- IP Ownership Clarity
- Founders’ Agreements
- Contractual Obligations
- Regulatory Filings
“We have walked away from very good companies because of red flags,” she said.
Examples of red flags include:
- Unclear IP Ownership
- Undisclosed Liabilities
- Litigation Risks
- Founder Conflicts
- Frequent Team Changes
- Unsupported Claims
External legal and financial professionals should be involved in due diligence processes.
Investment Structuring and Agreements
In Incubation Fund Management, term sheets define valuation, instruments, rights, and obligations.
Common valuation approaches include:
- Fixed Valuation
- Deferred Valuation Through Convertible Instruments
- Co-Investment Valuation
Common instruments include:
- SAFE
- Equity
- CCPS and CCDs
Bhatt cautioned against lending instruments due to regulatory ambiguity and limited upside potential.
Investment agreements typically include:
- Equity Ownership Terms
- Disbursement Schedules
- Usage Conditions
- Governance Rights
- Liquidation Preferences
- Exit Provisions
Funding is often released in milestone-based tranches.
Monitoring, Value Addition, and Exit Planning
Bhatt explained that continuous engagement with portfolio companies is essential to Incubation Fund Management.
Incubators should:
- Maintain Real-Time Engagement
- Support Founders Operationally
- Help Startups Raise Follow-On Funding
- Monitor Progress Closely
Exit planning must begin early
“Exits do not happen in one or two years; they typically take four, five, six, or even seven years,” she said.
Possible exit approaches include:
- Staggered Exits Across Funding Rounds
- Time-Bound Exits
- Valuation-Based Exits
- Buyback Mechanisms
Circular reinvestment of returns can help incubators achieve self-sustenance.
Sustainability of Incubators Through Investment Returns
Poyni Bhatt noted that Incubation Fund Management contributes indirectly to incubator sustainability.
Even when grants cannot be used for operations, incubation equity and exits can support long-term viability.
“Incubation equity and exits can definitely contribute,” she said.
She also highlighted fundraising through CSR and alumni networks as complementary funding sources.
Ultimately, Incubation Fund Management requires proactive pipeline creation, strong investment processes, continuous value addition, and disciplined performance tracking.
“Grants are becoming increasingly scarce. Unless you demonstrate good performance and exits from your incubation fund, it is unlikely that you will receive further funding,” Bhatt concluded.
