Start-up
Also written Start-up (DPIIT definition) · Startup · Early stage business · Start-up company
A young business built on something new — a product, service, technology or business model — with high growth potential and a high failure rate; the DPIIT test is under 10 years old and turnover never above Rs 100 crore.
In plain language
A start-up is a company at the very beginning of its life. The workbook calls these infant companies and early stage businesses, whose business is yet to grow or evolve completely.
What makes one a start-up is not its size but its newness. Under the AIF Regulations these companies are concerned with new products, new services, technology or intellectual property based activities, or a new business model.
Two things follow, and they pull in opposite directions. A start-up can grow into a very large business very fast. A start-up can also simply die, and many do. The workbook calls this a high mortality rate.
That pairing is why start-ups belong in alternative investments rather than in a normal portfolio. The upside needs patient, risk-taking money that can wait years and can afford to lose some of its bets entirely.
The government has its own hard test for who counts, because tax breaks and scheme money hang on it. That test is about age and turnover.
How it works
The DPIIT definition (section 1.2.1). The Government of India, through the Department for Promotion of Industry and Internal Trade (DPIIT), defines a start-up as a business:
| Limb | Test |
|---|---|
| Age | Not more than 10 years old |
| Turnover | Has not recorded a turnover of more than Rs 100 crore in any financial year |
| Activity | Engaged in innovation, development or improvement of products, or a scalable business model with a high potential of employment or wealth generation |
All three have to hold. Note the wording on turnover: not current turnover, but turnover in any financial year, so a single year above Rs 100 crore ends it permanently.
Where start-ups sit in the AIF world.
- Venture capital invests directly in them. Under the AIF Regulations the companies venture capital is invested in are called venture capital undertakings.
- Category I AIF is defined as an AIF that invests in start-up or early-stage ventures or social ventures or SMEs or infrastructure or other areas the government considers socially or economically desirable.
- Angel funds are the sub-category built for the earliest stage of all. An angel fund's investment in any investee company is not less than Rs 10 lakh and not more than Rs 25 crore, and it may not invest in start-ups promoted or sponsored by or related to a corporate group whose group turnover exceeds Rs 300 crore. Angel funds may make follow-on investments in existing investee companies which are no longer start-ups.
- Government support. A fund of funds of Rs 10,000 crore for start-ups was established under DPIIT and is managed by SIDBI. It does not invest in start-ups directly — it invests in SEBI-registered AIFs, which then invest in start-ups, acting as an enabler to attract private equity, quasi-equity, soft loans and other risk capital.
What a start-up looks like to a valuer. Annexure 11.1 gives a second, practical description: companies with little tangible assets, driven by technology, internet-based models, digital services, AI and machine learning, IoT, SaaS and cloud, data analytics, or knowledge-intensive services such as healthcare, biotechnology and e-learning. It calls them digital economy companies. It then lists five reasons they are hard to value — no track record, small or no revenues, private-source equity, high mortality, and illiquidity — which is why surrogate multiples such as gross merchandise value came into use.
A worked example
Suryodaya Agritech Pvt Ltd is incorporated in March 2017. Illustrative figures. Test it as on 31 March 2026.
| Limb | Threshold | Suryodaya | Passes? |
|---|---|---|---|
| Age | Not more than 10 years | about 9 years | Yes |
| Turnover, any year | Never above Rs 100 crore | see below | No |
| Activity | Innovation or scalable model | Sensor-based irrigation | Yes |
FY 2022-23 turnover Rs 42 crore within the limit
FY 2023-24 turnover Rs 88 crore within the limit
FY 2024-25 turnover Rs 130 crore BREACH
Suryodaya stopped being a start-up on the DPIIT test in FY 2024-25, even though it is still comfortably inside the 10-year window. One year above Rs 100 crore is enough, and it cannot be undone by a weaker year afterwards.
What that changes for an angel fund. Saffron Angels held Rs 4 crore in Suryodaya from 2021, inside the Rs 10 lakh to Rs 25 crore band that applies to an angel fund's investment in any investee company.
Existing holding Rs 4 crore
Follow-on now proposed Rs 6 crore
Total in this company Rs 10 crore (ceiling Rs 25 crore - fine)
The follow-on is still permitted, because an angel fund may make additional investments in its existing investee companies which are no longer start-ups. A fresh angel-fund investment into Suryodaya today would not be, because it is no longer a start-up.
And one more gate. Had Suryodaya been promoted by a group whose turnover exceeded Rs 300 crore, Saffron Angels could not have invested at all — regardless of Suryodaya's own age or turnover.
Why NISM asks about it
Chapter 1 (Overview of Alternative Investments), section 1.2.1, introduces start-ups as the object of venture capital and then gives the DPIIT definition in full. Chapter 2 (Alternative Investment Funds in India) uses them in the Category I AIF definition at 2.3.12 and in the industry's growth story, including the Rs 10,000 crore fund of funds. Chapter 4 (Regulatory Framework — Indian Context) applies the investment restrictions for angel funds at 4.1.12. Annexure 11.1 of Chapter 11 (Valuation) describes them again from the valuer's side.
The DPIIT figures are the most reliably examined pair in Chapter 1: 10 years and Rs 100 crore. After that, the numbers around angel-fund investment in start-ups — Rs 10 lakh floor, Rs 25 crore ceiling per investee company, Rs 300 crore group turnover bar — and the Rs 10,000 crore SIDBI-managed fund of funds.
Common exam traps
- This page is the category; the government tests are named members of it. The published DPIIT start-up definition page carries the 10-year and Rs 100 crore test on its own, and Eligible start-up is the narrower Section 80-IAC income-tax test used for ESOP tax deferment. A tax question wants the 80-IAC test; a general AIF question wants the DPIIT one. Different rules, different purposes, one underlying idea.
- The turnover limb is historical, not current. Turnover above Rs 100 crore in any financial year ends it. A candidate reading it as this year's turnover will get the worked case wrong.
- Rs 10 lakh and Rs 25 crore are what an ANGEL FUND puts into a COMPANY. They are not a definition of a start-up. And in the other direction, no minimum value of investment applies to an angel investor putting money into an angel fund — the general AIF investor minimum is switched off there.
- Rs 300 crore is a group turnover bar on the start-up's promoters, not on the start-up.
- Start-up is not the same as venture capital undertaking. VCU is the AIF Regulations' term for the company a venture capital fund has invested in; start-up is a description of the company's stage.
- The fund of funds does not invest in start-ups. It invests in SEBI-registered AIFs, which then invest in start-ups.
- Not every start-up is a digital business. Annexure 11.1 leans on digital economy companies, but the same annexure opens by saying every business start-up, whether in the traditional sectors or in digital economy space, is hard to value.
Check yourself
1.Under the DPIIT definition, a start-up is a business that is:
- a)not more than 5 years old with turnover not exceeding INR 25 crore
- b)not more than 10 years old with turnover not exceeding INR 100 crore in any financial year
- c)not more than 15 years old with turnover not exceeding INR 250 crore
- d)of any age, provided it is loss-making
Show the answer
Answer: (b) not more than 10 years old with turnover not exceeding INR 100 crore in any financial year
The Government of India, through the Department for Promotion of Industry and Internal Trade, defines a start-up as a business that is not more than 10 years old and has not recorded a turnover of more than INR 100 crore in any financial year. Such companies must also be engaged in innovation, development or improvement of products, or a scalable business model with a high potential of employment or wealth generation — so age and turnover alone are not enough.
2.A fund that provides both equity and unsecured debt financing to early-stage companies would classify as:
- a)a venture capital fund
- b)an unsecured bond fund
- c)an NBFC fund
- d)an investment fund
Show the answer
Answer: (a) a venture capital fund
This is the workbook's own sample question. A VCF invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings, and the workbook explains that being early-stage investors, VCFs are allowed to invest primarily in unlisted securities — equity or debt or preference capital or other convertible structures — therefore, the definition uses the word "securities" to provide latitude to structure the investments appropriately. A private equity fund, by contrast, must invest primarily in equity or equity linked instruments or partnership interests.
3.Which statement about a private equity fund is correct?
- a)It primarily provides unsecured working capital financing to start-up companies
- b)It invests primarily in equity or equity linked instruments or partnership interests, mostly in later stage financing of businesses with an established model
- c)It may invest only in listed securities
- d)It is a Category I AIF
Show the answer
Answer: (b) It invests primarily in equity or equity linked instruments or partnership interests, mostly in later stage financing of businesses with an established model
The workbook's sample question asserts unsecured working capital financing to start-ups and marks it False. A PE Fund invests primarily in equity or equity linked instruments or partnership interests of investee companies, and unlike venture capital funds which are focussed on early stage investments, private equity funds are mostly involved in later stage financing in business entities that have established a business model and need to be scaled up for further growth. It is a Category II AIF, and it invests in unlisted companies.
Where this is taught
Free preparation for NISM Series XIX-ARelated terms
- Eligible start-upA company or LLP meeting Section 80-IAC's conditions — incorporated between April 2016 and April 2024, turnover under Rs 100 crore, certified by the Inter-Ministerial Board — the gate for ESOP tax deferment.
- Angel FundA sub-category of Category I AIF, registered with SEBI specifically as an angel fund, which raises money from angel investors and invests it in start-ups deal by deal rather than through schemes.
- Angel InvestorAn accredited investor, or key management personnel of an angel fund or its manager, who puts capital into start-ups and early-stage ventures through an angel fund.
- Gross Merchandise ValueThe total value of all goods sold through an e-commerce platform in a period, used as a non-financial multiple base to value loss-making e-commerce companies.
- Milestone ValuationAn investor protection under which a venture investor pegs the company's valuation to technical or commercial targets in the business plan, so missed milestones can mean a lower valuation or delayed funding.
- Specific Company Risk PremiumAn extra slice added to the discount rate for one particular company, on top of beta and the market risk premium, to price the unsystematic risk that the CAPM does not capture.
- Venture Capital UndertakingA domestic company that is not listed on a recognised stock exchange at the time the investment is made — the defined target that a venture capital fund must put at least 75% of its investable funds into.
- DPIIT start-up definitionThe Government of India's test for a "start-up": a business not more than 10 years old, with turnover not exceeding Rs 100 crore in any financial year, engaged in innovation.
- FVCI RouteThe route for SEBI-registered off-shore funds to make venture capital investments in eligible unlisted Indian companies — in stipulated priority sectors, or start-ups in any sector — at freely agreed prices.