With a sound startup ecosystem, innovative business ideas in Nepal can be realised and companies can grow to remarkable heights.
--BY SHABDA GYAWALI
Nepal has the potential to birth a unicorn company, i.e. a privately held startup company valued at over USD 1 billion. But there are many challenges that hinder the growth of startups. Usually, startups mean tech-enabled company. So, these companies don’t need huge capital as they are not building bridges, buildings or hydropower plants. But they need money for human capital. In Nepal, the foreign direct investment (FDI) ceiling of Rs 50 million has limited the growth of many potential ventures. Startups might need money only for future rounds, but they don’t need all the investment at once. That reform needs to take place. In Nepal’s context, crowd funding is largely absent as a source of capital to invest in a business. So, we need foreign investors.
Another challenge is that we mostly invest in human capital or software. Software mostly comes from outside. If not software, the talent which can develop software comes from foreign countries. In that case too, there are visa restrictions. For instance: If a startup is doing well in a foreign country, and if we want to bring the CEO of that company to share his knowledge or take some responsibilities in the company, there are many visa problems.
Aside from that, the problem of startups is that sometimes they have to open a letter of credit (LoC) to import necessary materials or machinery for production of goods, for which they don’t have assets to keep as collateral in banks.
If we look at Indian unicorn companies, the entities have been set up in Singapore or somewhere else where there is no issue of anti-money laundering. If we see the trend, there were 18 unicorns in India in 2019. Out of that 11 or 12 companies have Chinese investment.
If we are to have unicorn companies, there should be an automatic route for investment where the agreement is signed today and money will be arranged tomorrow. When it takes more than 12 months for the investment to be realised, the startups won’t be able to pay salaries to their staff. It will impact cashflow. Also, if a Nepali wants to invest money in a country like Singapore, they should be allowed to. Rules should be made stringent but only that level of openness will make it easy to bring FDI.
Private equity (PE) and venture capital (VC) firms need to take approval from the Department of Industry as well as Rastra Bank if they want to invest in any company in Nepal. These processes add burden to of VCs. VCs should be allowed to register only once for all their investment. The transaction should be done through banking channel, but the process should be simpler. Issues of double taxation should also be made clear. The locking period is another hindrance. According to Nepal Rastra Bank, investors can’t make their return in six months. But VCs seek for easy entry and exit.
And it is not necessary that startups get investment from VCs, they can also get investment from individual investors. The government should introduce a regulation that the private sector can’t make an investment in areas like defence. But if a company wants to bring money in some sector, the government should route the investment automatically.
Challenges for Startups
To entrepreneurialise an idea, the business plan and finance model should be clear and we need to understand the know-how. But there is no support system to give that knowledge to startups.
There is a concept called ‘Employment Stock Option Plan’. This is used when startups cannot pay a lot to hire talent. So, they offer company stocks instead of salary. In Nepal, we have a problem to implement this in a company. We need to pay tax and have to book that as income. So, if the government opens this option, it will be helpful for startups to grow.
We observe that Nepali startups are targeting only Nepal as a market. We can target India and China but there are many other countries which have a similar market as Nepal. As Nepal’s market is not enough to scale-up, we need to think beyond Nepal. Disposable income and tech-savviness are limited in our country. So, we have to see if we can make it scalable in other countries.
We need to set few examples of a startup unicorn. Even to attract talents, it is necessary for us to establish a successful track record. The valuation might not be a billion dollars in the beginning. But if VCs come from other countries and invest in growing companies, which will increase their valuation, then people will see startups as lucrative to investment and career growth.
Most startup entrepreneurs have a short-term business mentality. So, before a champion emerges there will be a lot of failures and consolidation will take place in Nepal’s startup market. Most of the consolidation will take place in the fintech sector. In terms of the e-commerce market, the ones who are selling specific products will stay and go further. There are also opportunities in health care, agriculture and agri-tech business. Other potential areas are eye and dental clinics. So, a concept like ‘Oyo’ can be introduced in this sector and it can work in a chain.
Need for Startup Policy
There is confusion about the concept of a startup. When somebody opens a small-scale business like a grocery shop, or a soap factory, or any other company, why isn’t it called a startup? So there isn’t clarity in differences between startups and SMEs.
Also, it should be made clear what the benefits or drawbacks are of being a startup. It is not that startups are free and can do anything. But there should be a difference between an SME and startup. The policy will help in ease of licensing. If we look at developed countries, they get a tax rebate or other such benefits.
Dolma’s Investment Model
The idea to invest in Nepal began in December 2011. It took Dolma two and a half years to close the funding. For venture capital and private equity, the term period is 10 years. The first five years is called the investment period. And the next five years is called the harvesting period. Now, as the investment period has already completed, Dolma is not doing investment. However, we can do a follow-up investment. In total, we have invested in nine companies. Out of nine companies, two companies are from the hydro sector, two companies are from the solar sector. These four projects are under construction. All the projects will be completed by December 2021. Two of them will end by this year and two of them will come next year.
Partial investments have already been done in all eight companies. However, in one company, which is a solar project, there is a problem with the power purchase agreement (PPA). Because of viability gap funding, we are uncertain about it. So, we have not filed FDI for the investment. The other eight companies have already received investment. Among them, we have already exited partially from Cloud Factory. These all are called preferred equity. We are investing in preferred equity in two ways. It means we only make money if the company is making a profit. In preferred equity, we can use the dividend. Or preferred equity can be redeemed if we raise new equity or we have to redeem from reserves.
Though Dolma Impact Fund does not specifically invest in startups, we have invested in companies which already have proof of concept. For instance: Sasto Deal. We have invested around Rs 90 million in Sasto Deal observing the opportunities in electronic retail market.
The article is based on a conversation with Gyawali who Investment Director at Dolma Impact Fund.