What do Venture Capital firms in Nepal look after while investing?

Couples of years back the Nepalese financial industry learned a new jargon “Venture Capital for SME’s”; a fund to be provided to the small and medium scale enterprises against equity and help them to scale up their business. With time the VC funds at Nepal has exponentially grown up and there is now a handsome pool of money ready to start an industry. Companies like Gazzab Social Ventures, Udhyami Impact Fund (UIF) have already invested in companies while other companies like Dolma Impact Fund and Business Oxygen have already started to look after the companies and put them in the investment pipeline. Despite the variation in size of the fund, the VC companies at Nepal would basically look after the following bullets while considering the investment proposal:

·         The story of the enterprise: Firstly, the (infant) VC companies are always looking for a good story to share. The story can be a story of the struggle of the entrepreneurs before and after starting the company, the social impact of the company, the problems that the company solved, the advantages gained by the local communities etc. Being player in a new market and thus having an obligation to set an example, the VC fund would look after an ESG (environmental, social and governance practices) which basically is a tool for the storytelling and thus in order to qualify for the investment consideration, the company should always look for the better ways to frame their story.

·         The originality of the idea: VC’s invest in the companies that have an innovative business model. The ground breaking idea that has the potential to change the prevailing course of action is best fit in this type of fund. Say the company who first introduced cloud computing definitely may have received the VC but the company who now typically modifies the feature of an existing app (say dropbox) is unlikely to get the funding. Having closely looked at the UIF winner karkhana, I find their business model interesting. It’s a company that helps engineering student commercialize their innovative projects. They have already worked on 3D printer, smart metering system, robots and etc. Branded as a hacker’s space, they make, break, fail, learn and develop new technologies amongst which some might be a world changing one. Seeing this potential, UIF should have considered investing in this company. Companies that align with the prevailing copycat syndrome aren't generally appreciated in this market.

·         The capacity of the team: In the field of VC, it is often said that you are not investing in the idea but in the people. By people it means their potential, their passion, and their confidence. Anyone can go to a business consultant, get their help to write an excellent investment proposal and apply for the fund. But, when it comes to the business, it is not only about the idea and the strategy. It’s about the science and art of execution. And, this comes only through the experience. So, the whole judgment criteria would be identification of the skills the team members complement each other the capacity of the team to identify the risks, find way to minimize those risks and execute the plans.

·         Profitability of the business: The rule of investment is simple; invest penny and earn pounds. Anyone who invests money would be looking for a higher return on investment. VC projects are quite risky and majority of them fail before reaching the maturity. So, a VC investor typically has a portfolio in different businesses where one successful business is expected to compensate the loss from other unsuccessful businesses and even add profit to the whole.

In addition to these bullets, there are things like chances of conflict of interest arising while investing, legal constraints, terms between parties, detailed due diligence, stakeholders view on the business and etc. But, with the above mentioned points, the business is likely to get a green signal for obtaining the Venture Capital.

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.