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September 2017 Business Financing

Published on: 2017-09-13 10:30:26     254 times read    0  Comments
Challenge Fund : To Boost Innovative Businesses

The government’s Challenge Fund for new businesses has boosted entrepreneurship interest. But it needs to go to the most deserving startups. Recently, the World Economic Forum labeled Nepal the third fastest growing economy in the world with a 7.5 percent economic growth rate, the fastest growth rate in 23 years. Since the end of the civil war in 2006, Nepal has witnessed numerous policy reforms and large and small scale investments in many projects. And since 2012, the government has also focused on uplifting the country’s entrepreneurship potential to boost trade and economic growth.

In March, the country successfully hosted the Nepal Investment Summit after a 25 year gap and at the time the government virtually removed the problem of power cut. Now the Budget for FY2017/18 has also promised a favourable environment for investors.  

According to the budget, grants will also be provided to selected industries promoted by young entrepreneurs for technological and market promotion. Though the National Startup Summit was postponed due to a change in government, Rs One billion has been allocated by the Ministry of Finance as a Challenge Fund for startups. The fund will provide innovative and entrepreneurial youths with seed capital. Through all the instability, Nepal has been looking for an economic way out to reach the milestone of becoming a middle income nation by 2030. 

A Supportive Decision 
“This initiative of the government is definitely worthwhile for the development of startups," says Narottam Aryal, Coordinator of the National Startup Committee and Principal of Kings College. Due to the lack of a policy, the Challenge Fund for last year could not be utilised. He says that the Ministry of Finance has already made a directory on how to utilise the fund but is yet to turn it into a project. 

While stating that promoting the startup scene means promoting innovation, Aryal points out that the Challenge Fund is an important and great step by the government for startups, especially in a country like Nepal, where banks and financial institutions cannot provide collateral free loans to new businesses. 

"The government, by announcing the challenge fund, has sent a strong message to not just the nation but also to the international community that it is now pro-entrepreneurship," says Suman Shakya, Managing Director of Nepal Entrepreneurs' Hub and Founder of Smart Paani. He says that this will encourage many investors who are willing to invest in Nepal but who have not found any past success stories.  

 How Should the Challenge Fund Work?
Though the ministry has mainly focused on providing grants to capable entrepreneurs, the requirements are vague and the fund limits itself to saying that businesses must be socially responsible and create employment. "If the government distributes funds without any fixed criteria, the money will keep on decreasing.  So, we wanted to make a revolving fund which can be refunded," says Aryal. 

He hopes that the requirements are politically correct but admits that it will require experts who can utilise the challenge fund properly. "In this way, the startup fund will go to those innovative entrepreneurs who have been able to take their business to a certain position till now and are now trying to take it to the next level. But for that they need funding.  We don’t want their growth potential to be stopped because of lack of money," he shares. 

Aryal recommends the government should play the role of a facilitator rather than taking on the whole responsibility of the fund. “The capital should be provided to the business accelerators, venture capitalists and private equities so that they can invest in different potential startups," shares Aryal. “The logic behind this is that it should not be politicised and should be taken out from bureaucratic hands to be handled professionally. The bodies that have been engaged in the development of startups for many years can handle the process more professionally," he states.

Shakya says that the grant should be provided to a business rather than an idea.  "The grant provided to the innovative entrepreneurs should not be like a grant which is randomly distributed. After the grant is provided, the government should be kept updated about the progress that is taking place due to the growth money," he says. 

Shakya also says the fund should have a clear area of focus. According to him, existing businesses and businesses piloting in the idea stage, should both be included in the challenge fund. Rather than distributing the same amount to all the entrepreneurs, they should invest according to the scalability of the business, he says.  “For an example, if the government invests Rs 1 million in a small business, this may be a big amount for them to operate but if the same amount is given to a big business, this will not even cover one year of costs. So, the area of the business which needs the fund should be clear to the government," shares Shakya. 

Aryal views that the government should set a method on how the fund should be utilised. He mentions that if the government lends Rs 100 to a private equity firm, they have to invest that money in the entrepreneurs. “The full money should be disbursed to the entrepreneurs so that others cannot take advantage of it. In case the startups need more promotion, the accelerators can charge around 0.1 percent of the amount for their promotion," says Aryal. Though this method can be very effective, the role of private sector entities to deal with the amount has been less of a priority. 

Shakya strongly believes that the government should only intervene in areas where there is no duplication. "For example, in the agricultural sector there are enough projects that are directed towards farmers but they always complain that the farmers do not get right prices. So, the initiative should be taken in such areas," he says, adding that the challenge fund should also encourage such activities that indirectly help the farmers." 

Shakya also recommends that the challenge fund should facilitate investments instead of providing direct investments. “Instead of supporting the investors with capital amount or announcing prizes to best entrepreneurs, the money from the challenge should be invested in developing infrastructures for startups," he says. 

He goes further by pointing out that Nepal sorely needs good infrastructures for startups and existing businesses. “Many NRNs want to invest in the country, but they cannot because of lack of infrastructure. As the entrepreneurs and investors themselves cannot invest in infrastructures, if the government invests in it, a positive message will be sent to the Nepali Diaspora,” he says. 

What Should the Requirements Be?
For Aryal, startups that deserve funding are those which utilise the resources of the country, are export oriented, provide import substitution and generate employment at the grassroots level.  "Innovation and scalability are a couple of things which should definitely not be missed," he says. 

Shakya states that none of the startups should expect it to be easy. To get the fund they should move from the idea stage.  "Most of the startups in Nepal expect free money.  However, for the challenge fund, the criteria should be kept in such a way that first they need to prove themselves to get funding.  Their product should be viable, prototyping should be compulsory, they should test it in the market and also have a proof of concept," says Shakya.  

According to him, only growth oriented and impactful startups should get the funding.  He states that even a six month old company can do wonders if they are given the chance. Therefore, the fund should be distributed only after assessing their growth in a complete unbiased manner.


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