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.
