Seed Fund in Nepal

Literally, seed money is the initial amount of capital required to dream a business. As the name suggests, this type of funding is an early stage investment (until the business is operating at breakeven stage) meant to support to physically initiate the business. This covers funding incurred in the initial stage of business even before conducting the ‘beta test’ i.e. conducting the market research, testing on a prototype, and spending on the operating  expenses.

Seed funding basically can be raised through through angel investing, friends/family funding, crowd funding and donation amount. Angel investors are those investors who listen to the business idea and fund the business on it’s basis. Angels do not have any personal/professional relationship with the funding proposer. They just listen to the idea and shortly judge the person to invest in his idea. The next funding option is the friends/family funding where the relatives and the close acquaintances invest in the idea. In this case, the investors have a close relation with the fund proposer so they know the capability of the person. So, in this category the investment is more dependent in the person and his credibility/trustworthiness than the business idea. Thus, making the business model called as FFF Model; friends, family and fools. Crowdfunding is the option to raise the required capital through the small contribution of many investors.  Crowdfunding does not provides dividend/other privileges to the investors. In fact, investors invest for the story behind the business rather than the expected rate of return.

(Fig: Startup Financing Cycle. Source: Wikipedia)

Seed Funding in Nepal:

Although  seed funding was late to be introduced in 2008 in Nepal, the segment seems to be growing rapidly. Currently, more than four institutions provide seed fund to let the wannabe entrepreneur start his/her business. The key players in this field are:

1. Uddhyami Impact Fund

Uddhyami Impact Fund - a Biruwa Ventures initiative was established in November 2012 with an aim to provide seed fund to the new startups. Organising a month long frequent interaction program, three business ideas are selected for the investment. The impact fund at it’s first phase of investment invests up to the five lakhs. The investment is done on two different basis viz. investment against equity, investment as a loan. Equity comprises of both the cash equity and sweat equity, hence supporting the financially struggling entrepreneurs.

2. Gazaab Social Ventures

In 2011, Gazaab Social Ventures, a micro-social venture capital fund, was launched in Nepal. Each year they organise business plan competition at various parts of the country and invest in the top business ideas. Recently, in 2012, they organised a business plan competition at Kathmandu where there were more than 100 competitors.  The competition was run for five days which at the end identified three business ideas to receive the seed capital upto five lakhs to commence/scale up their business. Gazaab invests the seed fund as a return for equity.

3. Change Fusion Nepal

Change Fusion Nepal  was founded in September 2008 to help local youth direct their vision and skills towards benefiting people and the planet through social entrepreneurship. Change fusion bridges the gap between the investors/donors and the aspiring entrepreneurs by bringing the both parties together and thus enabling the investors to fund the business. They invest the capital looking at the requirement of the business which takes the form of loan. There is no exact range of seed fund amount but they invest upto a couple of lakhs.

4. Youth and Small Enterprises Self Employment Fund (YSEF)

The Youth and Small Enterprises Self Employment Fund (YSEF), an initiative of Government of Nepal, was established to offer self-employment loan and free vocational training to unemployed young people from economically disadvantaged groups in Nepal. YSEF offers various skill-based training related to farming for profit, agricultural industry and service-oriented business. YSEF also provides a seed amount up to Rs. 200,000 as a loan at a low annual interest rate of 12% without any security deposit. YSEF has provided loans to 4206 projects in 37 districts in Nepal.

Despite the lack of proper laws, policies, guidelines, the number of players in this field is increasing. Since, calculation and timely revision of sweat equity is quite difficult, at times, it may invite conflict between the stockholders in the business. The next issue is if someone wants to exit the business and there is no one ready to buy back the business there would be a dilemma in this case. We lack policies and there is no proper mechanism to govern these sort of seed funding/venture capital issues. Introduction of venture capital laws is highly recommended.