In Nepal, where there are very few financing options available for small and medium enterprises (SMEs), managing funds becomes a herculean task just to ensure sustainability and growth in business. Observing the scene, two companies - One to Watch (OTW) Nepal and True North Associates (TNA) - have been helping SMEs and startups in their financing needs and through other types of support such as business development services. Since its inception in 2010, OTW Nepal, a joint venture of Nepali and Dutch individuals, has been working as an investment manager bringing in investors who invest in growth stage companies. Similarly, established in 2014, TNA is a venture capital and private equity firm which is engaged in investment, management and consulting with an aim to foster a better entrepreneurial environment in Nepal.
At an event organized in the capital on May 2, OTW announced the launch of their new fund-Nepal Impact Investment Community -2 (NIIC-2), and a partnership with TNA. With Euro 20 million,NIIC-2 will be the largest Private Equity (PE) fund in Nepal. NIIC-2 was initiated after the implementation of the Euro 3 million fund NIIC-1, an investment undertaking of OTW which started in 2015. NIIC-2 aims to invest in around 20 SMEs that are at the growth stage. It will focus on investing in scalable enterprises to generate good financial returns and to create a positive social and environmental impact.With the partnership, both OTW and TNA have entered a new phase of organizational cooperation. TNA has acquired a substantial portion of shares in OTW and the SME portfolios of both companies have been merged. Under the new arrangement, TNA chairman Suman Joshi has taken up the post of Managing Director at OTW. OTW founder Willem Grimminck remains the majority shareholder in the company and will continue as the Founder and Managing Director. Nikeeta Gautam of New Business Age met with Grimminck and Joshi on the sidelines of the event to talk about the objectives of the new collaboration, areas of coverage of NIIC-2 and challenges for developing PE market in Nepal, among other issues. Excerpts:
What led OTW and TNA to join hands to establish the new PE fund? What are the objectives of NIIC-2?
Grimminck: A strong team is essential in any organization to attract investment. We want to become stronger in both international and local markets. We seek to build new skills in our team by combining the experience and expertise of two teams from two different organizations. We want to accelerate the growth of the SMEs by accessing and unlocking the networks for them by developing through this joint venture.
How will this new entity provide its services? How will you raise the fund?
Grimminck: NIIC-1, a Euro 3 million pioneer fund, has invested in SMEs since 2015. Similarly, the 20 million Euro fund NIIC-2 will invest in about 15-20 early stage growth SMEs with a proven track record of more than two years and with sales beyond early adapters of their products and services. We will invest in companies that have potential to generate 100 jobs for every Euro 400,000 invested.
The fund will be managed by OTW and its accelerator programme will create a sourcing pipeline.
Joshi: We will be organising promotional campaigns and pitch the business concepts to interested investors. We will also find more professional investors to raise the fund. TNA is also a fund in itself having the capacity to invest on its own. This way, TNA will also make contributions to NIIC-2.
What areas of investment will NIIC-2 cover?
Grimminck: This is a separate joint venture initiation which will be managed by OTW Nepal. It comprises of two local members and one international member.
We don’t invest in startups but in early stage growth companies that have the potential to create lots of new jobs. The fund of NIIC-2 will be invested in companies that can impact the economic progress of Nepal. We will invest in companies of multiple sectors including, agri-business, infrastructure, health and education.
How will the Euro 20 million be mobilised? How will TNA and OTW move ahead their own activities?
Grimminck: With TNA on board, we have the capacity to raise funds in larger scales. With this partnership, OTW aims to develop the venture capital and private equity market in Nepal.The collaboration will help Nepali SMEs on their growth by promoting international and local co-investments, enabling follow-up investments and exits.
Joshi: We will continue the accelerator programme. This association will make the business accelerator much stronger. With the launch of NIIC-2, our entrepreneurship development activities will be expanded in different ways. We could do pitching sessions straight away or call potential investee companies to a common platform and pitch their business ideas even without having to go through accelerators. We will organise activities outside the accelerator programme as well.
We will help the companies toenhance their skills depending on their readiness. They can either pitch their business ideas to us directly or can go through the accelerator programme which makes them investment ready. Even outside these activities, we could come across companies that are searching for investment and we can directly talk to them.
PE firms are yet to be recognised by law as separate financial companies in Nepal. What challenges are there for firms like yours due to this lack of policy?
Joshi:In Nepal, private equity is not identified as a new asset class. But it has not stopped us from running PE firms. Companies have been investing even without private equity regulations in place. We have also been investing as a company and will continue to move ahead like this until the regulations are in place. However, we have been facing many challenges. For example,if any company with our investment has received a bank loan, and for some reason hasn’t met its loan servicing obligations and gets blacklisted by the bank, our investment will also be exposed. Because there is no legal framework to mitigate such risks, there is no other way for us than to become very cautious ourselves.
Meanwhile, we have been discussing with the government bodies concerned to look at this method of alternative financing. At present, banking is the only reliable source of finance.The reality is if we can have more alternative investment options, companies like us can have the opportunity to support small businesses in their growth. It can also help to make the bank loans more secured. It is because alternative investment companies make sure that their client companies are well managed and governed. Therefore, the probability of defaulting on bank loans is less. In a way, introducing regulations which incorporates provisions for alternative investment is complementary to bank lending. That is a very important message we have been trying to give the authorities here.
Grimminck: It becomes really challenging for investors to wait for a long time to complete all procedures to invest money. The procedural hassles in investment need to be reduced to ensure the processes are not time consuming. We have been complying with the existing rules and regulations. We will continue to invest as a company and will work with these challenges hoping that the regulations will become investor friendly gradually.
The draft of the National Startup Policy which is currently under preparation at the Ministry of Industry has also mentioned facilitating the growth of private equity in the country. What particular things would you like to see being incorporated in the policy?
Joshi: PE investors should be treated differently than regular shareholders. They should be immune from governance related risks like blacklisting of investee companies. Secondly, there should be legal arrangements for exit mechanisms in place for PE firms. PEs invest in businesses and exit after a time as their objective is to scale up client companies, help them grow and at the same time generate some profit from the investments.
Exit mechanisms invariably touch upon the capital market to expand the scope of IPOs which will allow the companies to issue shares so that the exit can be facilitated to PE investors. There are standards set in different markets across the world where PE investment is doing well. PEs are playing a big role to develop wealth and economy. Most markets of the world have now recognised the importance of PE and are flourishing through such types of investments. In fact, in developed and more sophisticated markets, private equity is the number one catalyst for formation of new businesses and wealth creation therefore having a multiplier effect.
We can have instances of several starters in PE in Nepal from which we can learn to understand what is needed to be incorporated in the regulations. We are not reinventing the wheels as the aspects of PE have already been tested in other markets.
What other policies are required to make it easy for SMEs to fulfill their financing needs?
Grimminck: The government needs to make a few things systematic. But there is no need for too many policies. What entrepreneurs need is a bit of space. There should be systems in place that makes things easier and not force them to spend too much time in the government offices. Entrepreneurship starts and thrives in liberal societies. Whatever the rules are, the businesses will continue.
How easy do you think has it become for Nepali youths to move ahead with innovative and creative ideas to realise their entrepreneurial ambitions?
Grimminck: The hardship in entrepreneurship is almost similar in all the countries. Entrepreneurship is difficult, but there are great rewards when you succeed. Nobody starts an entrepreneurship because it is going to be an easy ride. So, the accelerators search for tough and strong entrepreneurs who even if they fail, can pick themselves up and continue. You need a lot of perseverance to pursue entrepreneurship. Being an entrepreneur, you need to be visionary to understand where you need to go. Too many theories are not important to achieve success. You will receive feedback from the market which will tell you what is wrong and right in your business.
To get the investment from accelerators, the company has to gain its track record. The founders should make sure that he or she is able to build a team and make the company scalable. The company should make sure that you are able to have a net profit at the end of the day.
What strengths and shortcomings are there among the aspiring Nepali youths who embark on entrepreneurial journeys?
Joshi: I would like to share a few words of caution for aspiring entrepreneurs. They should not emulate what they see over the internet and hear about in the western markets as the realities are different. People also need to grind things a bit more in the Nepali context. Here, you can’t be in the structure all the time, particularly when starting and setting things up. Flexibility and perseverance are among the key factors for success.
Having an appropriate revenue model is also of much importance. The founders and work teams of the companies should keep on reflecting if their revenue model is working properly to generate enough profits.
Grimminck: They should go out, start selling and carefully see what type of model works best for them. They have to reach out to customers rather than spending more time in their offices.