Why Karnataka Should Tread with Caution While Encouraging PS…

The Karnataka government has moved to deepen its role in startup financing by encouraging state public sector enterprises (PSEs) to invest in government-backed venture capital funds, such as Karnataka Information Technology Venture Capital Fund (KITVEN). The government aims to unlock more patient capital for deep tech and frontier startups.

Announcing the move, Karnataka’s minister for electronics, IT/BT and biotechnology Priyank Kharge said the decision was aimed at strengthening institutional support for innovation, while expanding the pool of long-term capital available to early-stage companies.

“Karnataka government has taken an important step to deepen institutional support for startups and deep tech innovation,” Kharge said in a statement. 

However, experts see the policy as an extension, rather than a fundamental shift in the state’s approach to startup funding.

Sankarshan Basu, professor of finance at IIM Bangalore, said the initiative does not amount to the state transforming its public enterprises into venture capitalists. 

“The idea of Karnataka to encourage the state public sector enterprises to invest in government-backed venture capital fund – KITVEN – is probably not a direct shift from passive state support to active financial participation,” Basu said. 

Focus on Innovation Growth Story

Kharge said that state PSEs would now be encouraged to invest in funds like KITVEN, which has been backing startups across IT, biotechnology, semiconductors, AVGC and other emerging sectors for over two decades.

According to the minister, KITVEN currently has a cumulative corpus of nearly ₹190 crore, with investments across 55 startups and exits that have delivered “strong returns.” 

He highlighted dedicated vehicles, such as KITVEN Fund 5 and the Beyond Bengaluru Cluster Seed Fund, which are designed to channel capital into emerging startup hubs outside Bengaluru.

“This move will unlock long-term capital for early-stage companies working in deep tech and other frontier technologies, while also allowing profitable PSUs to participate in Karnataka’s innovation growth story,” Kharge said.

Prof. Basu, instead, described it as a complementary move, noting that “given the nature and scale of the investments required, no one channel will be adequate.”

‘One More Formal Avenue’

Basu added that public-sector participation in innovation funding was not new in principle. 

“It has always been a vehicle of investment with adequate appetite and expertise to invest in new and innovative activities, making this one more formal avenue for the same,” he said.

From the venture capital community, views are cautiously optimistic, with emphasis on governance and operational autonomy.

Vishnu Das, principal at deep tech-focused venture firm Celesta, said access to PSE capital could strengthen KITVEN’s ability to back high-risk, early-stage companies, provided it comes without restrictive conditions.

“Having worked with KITVEN and seen how they operate, I think having access to PSE capital is a good thing,” Das said, adding that KITVEN has shown willingness to “take first cheque risks for companies especially in deep tech.”

However, he cautioned that the terms attached to such capital would be critical. 

Safeguards Would be Essential

“It’s critical that these PSEs have reasonable expectations with respect to returns, exit timelines, etc. Moreover, they should not be involved in the investment decision-making, which should be left to the IC and investment team of KITVEN,” Das said, warning that excessive governance and administrative burdens could undermine early-stage investing speed.

Das also pointed to structural constraints within public-sector entities. “In my experience, PSEs have the ability, but not the risk appetite and decision-making speed,” he said, citing accountability pressures associated with deploying taxpayer capital.

Despite these challenges, Das said PSE participation could help crowd in private capital rather than distort early-stage markets. Beyond funding, he noted, PSEs could serve as large-scale test beds and early customers for deep tech startups—an advantage he described as “more valuable than capital.”

To make the model work, Das said safeguards would be essential, including minimal additional administrative burden, no overreach in investment committee processes, and limited constraints on which technologies or companies can be funded. He pointed to the Centre’s Research, Development and Innovation (RDI) framework as a reference for intent, if not a direct template.

As Karnataka seeks to scale its startup ecosystem beyond Bengaluru, and into capital-intensive sectors like semiconductors and deep tech, the success of this initiative may hinge less on the availability of public money and more on how independently and efficiently it is deployed.

Government data shows that the Karnataka Innovation and Technology Venture Fund’s latest vehicle, KITVEN Fund-5, is a SEBI-registered Category I Alternative Investment Fund with a target corpus of ₹100 crore, focused on backing startups in disruptive technologies such as artificial intelligence, machine learning, MedTech and electric vehicles.

Investments are typically made at initial cheque sizes of ₹2–3 crore per company, and the fund also prioritises ventures from tier-2/3 cities and women entrepreneurs.

Global Shift Towards Public-Private Capital

Responding to the government’s decision, Mir Amjad Husain, chief innovation officer at The National Institute of Engineering, Mysuru, said in his Linkedin post that the decision would catalyse long‑term growth and create valuable opportunities for the ecosystem.

Industry observers say that government-linked capital playing a role in venture capital is well established globally and in India, even if Karnataka’s specific PSU-to-VC model is locally novel.

In parts of Europe, government-backed entities like the European Investment Fund, Bpifrance and KfW Capital are among the most active limited partners in venture funds, boosting tech and deep tech ventures. 

China’s state-owned VC firms such as Fortune Venture Capital and Shanghai Venture Capital Company have been investing commercially for decades. Beijing recently announced a national venture capital guidance fund to catalyse private investment in frontier technologies. 

In India, central mechanisms such as SIDBI’s fund of funds for startups (FFS) have deployed over ₹9,400 crore by mid-2022 into alternative investment funds. Deep tech sector leaders have publicly called for stronger institutional LP participation to scale domestic venture capital. 

These trends reflect a broad shift toward blended public-private capital models in innovation financing around the world.

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