Semiconductor companies are sounding alarms about the government's potential overhaul of the Design-Linked Incentive (DLI) scheme, which is being considered under the forthcoming DLI 2.0 framework. As discussions unfold regarding a transition towards support mechanisms involving equity and debt, founders of semiconductor startups are advocating for a cautious approach. They argue that overly rigid regulations and bureaucratic delays might jeopardize the very ecosystem that the initiative seeks to bolster.
While industry leaders generally appreciate the intent behind enhancing state assistance for chip design firms, they have raised valid concerns regarding the compatibility of venture capital (VC) involvement, the structure of funding options, and the necessity for a seamless transition for companies moving on from DLI 1.0.
One founder expressed that, although an equity-linked model might look appealing in theory, its effectiveness will depend significantly on how attractive it is to global investors. He pointed out that stringent rules surrounding intellectual property (IP) residency and acquisition could deter foreign venture capitalists by complicating their exit strategies, which are crucial for securing returns on investment.
As this founder noted, excessively strict IP regulations may drive international investors toward more flexible locations such as Singapore or Delaware. He called for a “light-touch regulation” approach that would safeguard strategic interests without overly controlling ownership or commercialization rights, emphasizing the importance of involving startup founders and VCs in the rule-making process.
Another executive within the startup realm made a distinct separation between debt-linked and equity-based support systems. He deemed debt-linked funding for companies that have already achieved commercialization as a beneficial strategy since it does not dilute ownership, is friendly to founders, and often encourages private capital investment.
However, he voiced skepticism regarding the government’s equity participation. He argued that startups typically prefer VC financing over state equity due to fears of bureaucratic oversight. For equity participation to be worthwhile, it would need to be offered at a premium compared to private investors in the same funding round. He also questioned how this new mechanism would differ from the existing Research, Development, and Innovation (RDI) fund.
Additionally, he stressed the importance of maintaining a grant-based model for early-stage companies focused on research and development, akin to DLI 1.0, warning that eliminating grants could deplete the pipeline of future chip designers.
Yet another founder pointed out the execution risks and cash flow challenges faced by startups that have already made significant technical advances under DLI 1.0. This executive urged the government to ensure ongoing support for firms that have successfully created test chips and shown readiness for production, or those that have raised considerable additional funds since the initial phase of the program.
He highlighted that the extensive requirements for detailed project reports (DPRs) and prolonged evaluations are already causing delays. For startups on the verge of initiating production, these delays can have serious financial repercussions, including substantial outstanding payments owed to IP vendors, fabrication plants, and advanced packaging partners.
"We are facing $6.4 million in fees that we must pay to IP vendors, fabs, and packaging partners if we proceed with production," he explained.
In contrast, it’s worth noting that in China, a massive government-led investment initiative was launched in 2014 known as the China Integrated Circuit Industry Investment Fund—popularly referred to as the Big Fund. Established in September 2014 with nearly $200 billion in commitments from government and state-backed investors, this fund aims to bolster the semiconductor sector.
The Big Fund primarily invests through equity stakes in companies, as acknowledged by one of the startup founders mentioned earlier. It operates as a state-guided investment vehicle that channels capital into semiconductor firms by acquiring ownership stakes, rather than merely providing subsidies.
Ownership shares in the Big Fund are held by governmental bodies, including the finance ministry and state financial institutions like the China Development Bank, reflecting their vested interest in equity investments. This means the fund takes ownership positions in various segments such as fabrication facilities, design companies, and material or equipment suppliers, all aimed at nurturing growth and enhancing industry capacity.
While DLI 2.0 has the potential to significantly advance domestic chip design, the semiconductor startup community emphasizes that its framework must strike a balance between strategic control and commercial adaptability. Founders assert that ensuring continuity for established players, providing non-dilutive support for companies at the commercialization stage, offering grants for early-stage R&D, and aligning rules with the interests of venture capital are crucial steps if India intends to remain competitive in the global semiconductor landscape.
