Kathmandu University School of Management (KUSOM)

Raising debts and equity for Startups venture in Nepal:

Challenges and opportunity

Mid-term Examination of

Entrepreneurship and Innovation

Submitted to:

Mr. Rupesh Kumar Shrestha

Submitted by:

Abhinash Adhikari

Sweta Bhattarai

Sunny Deshar

Aastha Gyawali

Dibya Sapkota

Submission date: 12th April, 2018

Introduction:

For an idea to grow into startups, most important source in the initial phase is capital. A business

plan in piece of paper can look economical but as the venture moves on in palpability, further

requirement of capital fund keeps on emerging. An entrepreneur who is in primary phase of the

business might not be able to invest entire capital desired by the firm. For a field to grow or

expand, a good source of principal can play a tremendous role in determining the success or

failure of the project.

Apart from personal sources, debt and equity can be used to raise capital. Start-up firms are often

financed via venture capital. In Nepal, as firms start growing, they may like to become a public

company by issuing IPO shares. Later offerings by company are seasoned equity offering.

Financing is required in different stages of the business which are as follows:

• Seed money stage: A small amount of financing needed to prove a concept or develop a

product. Marketing is not included in this stage. At this stage, raising funds from external

capital can be difficult for startups due to invalidity and lack of trust in the business.

• Start-up: Financing for firms that started within the past year. Funds are likely to pay for

marketing and product development expenditures. At this phase of business, the company

has taken a growth but is still has not reached sustainability. The business is still not

totally validated. Venture capitalists are most likely to invest in the business in Nepal in

this stage. Lack of collateral, high interest rate and lack of interest inhibits company to

get financing from debt and equity.

• Second-round financing: Funds earmarked for working capital for a firm that is

currently selling its product but still losing money. At this stage, firm has taken step

towards growth but still not reached the breakeven point. Private bank grant loan to
 startup if the company has gone through all the legal process of registrations and have

enough collateral. Affordability of the interest rate is still questionable in this stage

• Third-round financing: Financing for a company that is at least breaking even and is

contemplating an expansion.

• Fourth-round financing: Money provided for firms that are likely to go public within

half a year. This round is also known as bridge financing.

Different business models require various terms of financing. For startups to raise funds revenue

model can play a major role and market of the product should be quiet clear to the investors. An

entrepreneur who is very much dedicated shows an enthusiastic behavior which is observed by

the investors. Investors want to create a win-win situation for entrepreneur and themselves and

thus keen to gain knowledge about every aspect of the business. Capitalist wants to see

potentiality in idea and the business in which they like to spend their money on. In Nepal, most

of the businesses are funded by private banks and microfinance institution. People not willing to

give ownership of the company have let the equity financing to become stagnant. However, a lot

of new businesses are into opening up the shares of their company to raise capital.

The following tables are the snapshot of investment companies and of capacity development

providers Nepal that are currently investing in startups:

Table 1 Seed investors Provider

Seed fund provider

Company Chairman/CEO Company Description
a. iCapital Ajay Shrestha iCAPITAL is an investment and holding
company that invests in the Nepalese stock
market and Small and Medium Size Enterprises
(SMEs). Its Venture Capital Fund is specifically
created to invest in innovative startups.
b. My Investment Anil B. Gajmer My Investment Group (MIG) is a corporation,
Group (MIG) working into Financial Services, Remittance,
Energy, Retail & Distribution; Consumer
Products, Software and now into Premium
Class; Bottle Drinking water. Company is
looking for Businesses with innovative ideas
and growth potential.
c. Kirti Capital & Deepesh Vidya Established with the motto of ‘creating growth
Investments Ltd. opportunities’, Kriti Capital and Investments
Limited aims to provide an efficient and
effective medium for capital mobilization to
earn superior return on capital. Kriti Capital
aspires to promote entrepreneurial and
innovative initiatives and opportunities for
committed and dynamic entrepreneurs.
d. M&S NEXT Venture Kavi Raj Joshi A support system for entrepreneurs to start and
Corp. grow their ventures in Nepal. Creator of
platforms like Entrepreneurs' Talk (E-Talk) and
Entrepreneurs' Lab (E-Lab). Company is
looking for people who believe in themselves,
and the power of ideas and collaboration.
e. Antarprerana Niraj Khanal A private company that is supporting
entrepreneurs of Nepal through investment and
mentorship. Company is looking for those
entrepreneurs seeking for investment and
mentorship.
f. Biruwa Ventures Anup Tamang Established to provide business support and
advisory services to startups and small business,
Biruwa has mentored over 350 entrepreneurs,
provided consulting services to over 40
businesses from diverse industries and provided
 investment facilitation services to a dozen
enterprises.
g. Seed Investments Subodh Seed investments invest in businesses that are
manandhar scalable and that provide goods, services and
solutions that address their customers’ needs.
The company understands the business and try
to figure out ways to achieve better outcome
h. Practical Practical Action is committed to poverty
Action- alleviation in Nepal by providing appropriate
“Accessto technology in a sustainable way by bringing
Capital for
sound technical knowledge and global
Rural
Enterprise” experience to the field of appropriate
technology development.
i. Youth Self Government Established to promote economic conditions of
Employment fund the country by providing funding to potential
business ideas
j. Next Venture Ambhav Swar Next venture corporation works toward
Corporation Sirohiya encouraging and developing entrepreneurial
talent to support economic and social growth in
Nepal and further aim to achieve this by
providing guidance, community resources and
action packed workshops in order to facilitate
entrepreneurs towards creation of sustainable
businesses.

Table 2 Private Equity Provider

Private Equity

Company Company Description

a. One to Watch The first international private equity and

impact fund dedicated to Nepal.
b. Dolma Impact Fund Dolma provides capital and expertise to growth
companies in Nepal. The fund is designed to
generate sustainable private sector employment
and stimulate further Foreign Direct
Investment into Nepal.
c. True North Associates A company created to contribute to private
sector growth in general and in particular,
 develop the Private Equity and Venture Capital
space in Nepal. It fosters entrepreneurial and
economic development in Nepal by helping
businesses become more structured,
marketable, profitable, and sustainable.
d. Business Oxygen (BO2) Business Oxygen Private Limited is Nepal’s
first private-equity fund. It help entrepreneurs
running Small and Medium Enterprises
(SMEs) to scale up their operations by
injecting equity and providing technical
assistance.

Table 3 Capacity Development Providers

Accelerators & Incubators

• Anterprerana
• Business Incubation Program
• Change Fusion
• Daayitwa
• Economy Policy Incubator
• Empowher
• Enterprise Nepal Business Accelerator Program
• Entrepreneurs For Nepal
• Everest School of Startups (ESOS)
• Himalayan Climate Initiative
• Idea Studio
• Innovation Hub
• Institution for Suitable Action for Prosperity
• KCM Business Incubation Center
• King’s College (Center for Innovation & Entrepreneurial Development)
• King’s College (Yunus Social Business Center)
• LOCUS IOE
• Microsoft Innovation Center Nepal
• MNS NEXT Venture Corp
 • Nepal AgriBusiness Incubation Center (NABIC)
• Nepal Communitere, Nepal Entrepreneurs’ Hub (NEHUB)
• Nepal Innovation Lab
• Nepal Prosperity Institute
• Nepal School of Entrepreneurship, Nepalese Young Entrepreneurs Forum (NYEF)
• NEXT Launchpad
• Robotic Association of Nepal (RAN)
• RockStart
• Samriddhi Foundation
• Startups Nepal
• Ujyalo Foundation
• Women Development Advocacy Center
• Young Innovations (YIPL)

There are a lot of challenges and opportunities here in Nepal that startups and entrepreneurs face

while raising equity and debt for startups.

Challenges:

Investing on someone else’s ideas or business has never been easy. Conflict takes place due to

Disparity of mindset of entrepreneurs and investors. Some of the challenges for startups are as

follow:

a. Ownership

Investors are looking to inject money into your startup in expectation that the startup will grow

and eventually be harvested through either an acquisition. One of the most important decisions a

startup has to make during its earliest days is how to divide up ownership of the company.
How, exactly, the ownership of your company is divided up between founders and investors is

important parameter for the future of the startup. Ownership percentage will largely determine

the how the course of action of startup in the future.

Scenario in the Nepal is that investor asks for too much ownership in the startup. This increase in

ownership means that the control might shift to the investor and the founders who were the first

to begin the venture will have very less control over the venture. Major decision making and the

direction that the startup will take will be greatly determined by who owns the control of the

venture. As an entrepreneur and founder of the company, you do not want to lose the control of

the company and would want to have reasonably high control on the decision making. But the

investors want too much stake in the ownership and control in the startup venture.

Another challenge that this kind of arrangement creates is that the other investor might not be

interested in the investment in these kind of startup. For instance, if an investor has around 50

percent ownership in a startup, other investor will be appalled to invest in that startup.

b. Substitute for investment

Investing in the startups is not the norm here in Nepal. People find that other investment

opportunity to be more lucrative than investing on the startups. Investment opportunities in

Nepal can be of following Stock market: Stock market and mutual funds. Investing in the stock

market is quite popular here in Nepal. Even though share market can be risky as well but there

are lot investors in share market. Mutual fund: Another popular form of investment in Nepal is

mutual funds. Popularity of the mutual fund also shows the risk averseness in the Nepali market.

Also, lot of people are risk averse and might just choose to put their money in the bank or

finance whenever the bank or finance company is offering healthy interest rate rather than taking
the riskier route by investing in the startup. Whereas if we look into the country such as Japan

where the interest rate is approaching 0%, there is no incentive for people to put their money in

the bank and people will rather invest in the startup.

c. Bank loan

It is very difficult for a new business to get a loan from a commercial bank for business startup.

New businesses are in fact one of the riskiest of the loan that the bank may encounter. So, banks

don’t want to lend the money for the startup because they don’t have the liberty to play with that

kind of risk. For reasons why the startup ventures might be risky for the bank, we have to take a

look at the following parameters:

Lenders expect the borrower to have:

• Capital - Business assets that can be used to create products or services and which can be

turned into cash to make payments on business loans. A new business, especially a

service business, has few business assets.

• Collateral - Cash to contribute to the business. A new business owner has little collateral

unless he or she can use personal assets or has a co-signer with assets to pledge.

• Capacity - A track record to show that the business has the capacity to generate enough

money to pay back the loan.

• Character - This is primarily a good credit rating. if you have a good credit rating,

though, it doesn't mean you can get a business loan, but a poor rating will probably get

you turned away quickly.

 • Cash flow - Another parameter while lending loan, bank tend to look at the cash flow of

the venture but for the startup they don’t have steady or healthy cash flow at its initial

stage hence bank will not lend to the startups.

While approaching for the loan the bank might have different justification or response to the

startups. Banks can be pretty creative when it comes to reasons for saying no to a startup loan.

Startups have hard time getting the loan from the banks because they don’t have scheme directed

towards the startup but rather they’ll have loan schemes directed towards the SMEs. Bank might

simply respond that we cannot give business loan to you while you don’t have the business.

d. Venture Capital

Venture capital can be great source of financing for the startup if the startup is viable, has rapid-

growth and highly-scalable idea. Venture capital is by nature is designed for the investment in

the high risk investment opportunity since the the money in the venture funds come from the

highly successful companies with cash surplus and wealthy insurance. These companies and

individual separate certain percent of their money for this risky investment. But the challenge

here is the even though the firms here represent themselves as the venture capitalist,

fundamentally they are not venture capitalist. It's not the weakness of the firms itself that VCs

does not exist in Nepal but more to do with the lack of above mentioned companies and

individuals. Also important things here is that market of Nepal in itself is quite small and many

business idea will not be scalable to that point that it will be appealing to the venture capitalist. If

the business is such that the company is only going to operate in Nepal itself only, then the

chances are that the business will to reach to the scale that the venture capitalist will want.

Another thing that is lacking in the Nepal is that there is not a lot of entrepreneurs who come
with the bright idea to begin with. Venture capitalist has to review a lot of startup ideas before

they can select the startup to invest but here in Nepal.

Even though some firm in Nepal represent themselves as venture capitalist, they operate more

like private equity firm rather than venture capitalist. Private equity by nature will buy mature

companies that are already established. The companies may be deteriorating or not making the

profits they should be due to inefficiency. Private equity firms buy these companies and

streamline operations to increase revenues. Private equity firms mostly buy 100% ownership of

the companies in which they invest. As a result, the companies are in total control of the firm

after the buyout. Venture capital firms invest in 50% or less of the equity of the companies.

Private equity firms invest a lot of money in a single company. These firms prefer to concentrate

all their effort in a single company, since they invest in already established and mature

companies. The chances of absolute losses from such an investment are minimal. Venture

capitalists spend lesser amount in each company, since they mostly deal with start-ups with

unpredictable chances of failure or success. Hence, venture capitalist will be able to provide

financial service to more companies as compared to the private equity firm.

e. Difficulty in meeting the legal requirements and compliances:

It is very difficult for the new venture to meet the legal requirements in Nepal. Just to registre

the company it usually takes from 2-3 months. Also there a lot of procedural hassles regarding

the documentation and getting the legal approval. Inability to meet these requirements can hinder

their chances of getting the financing. Investor will not want to invest their money in the startups

that are not able to meet these legal requirements and compliances.
f. High return:

Many investors in the Nepal look for the high return in the short term. A startup company cannot

generate huge revenue even in 5-6 years that it can provide high return to investors. Nepali

people and organization do have money but what they want is to double their investment over-

night which is only possible if we go casino. This is the one of the challenge startups are facing

in rising funds. For instant, a startup in Nepal Dalle Restaurant which was established 6 years

ago and it is the business with high cash flow. Right now the business is doing good in the

market, but the thing is their investor has taken 51% return for investment amount of 5 crore.

This is the scenario of Nepalese market and when investors asks for high return then the value of

the organization will goes down. If you disagree to give high return then what’s the result is, big

no for investment.

g. Bootstrapping:

Many startups are forced to the bootstrap technique due to the difficulty in financing and fear of

losing the control due to the external investment. If an entrepreneur has a bank balance, then they

can use that in their venture. Also, entrepreneurs are financing their venture with the job and

wages sacrificing their social life. Tech related startups are freelancing project to finance

themselves. This sort of arrangement can be difficult to manage and can be hard thing to balance.

Upside being the control over the business and flexibility to run it the way they want to operate.

Also there will be not outside stakeholders in the profit.

Opportunities:

Astronomical companies have established in Nepal to support the startups and subsidies from

government can tackle the challenges faced by entrepreneurs. The opportunities for business in

Nepal are as follows:

a. INGO and Government Startup Fund:

Another prospect of investments in the startups is the NGO’s or the INGO’s operating in the

country. Nevertheless, the major condition for their interest in the start ups is concerned with the

‘impact’ entrepreneurs will have on the society. Nepal government has shown little interest in the

entrepreneurial ecosystem. In the 2014 budget announcement made by the government of Nepal,

a bullet of the document states: “A startup fund will be established to support the innovative

small and medium scale entrepreneurs lacking capital and to support inventors and promote

innovation by providing startup capital. Government of Nepal will contribute Rs 500 million as

seed money to this fund and private sector and non-resident Nepal is will be invited to contribute

to this fund.” This statement has not indicated for which industry the funds will be dedicated,

still, it seems, Nepali entrepreneurs can apply for this seed money.

However, one of the downfalls of getting capital from the social enterprises is that it will create

obstacles in the acquiring of future funds. This is because, the normal investors want to

maximize their profit. And if the NGOs or INGOs have invested in the startup fund, they have a

say on the major decisions to be made for the business; the objective of social enterprises is not

always profit maximization. Because of the clash of interest between two sets of investors, this

may repel some of the investors that might actually be interested in the idea.
b. Co-operative Organization

Government of Nepal and United Nation Development Program(UNDP) have signed an

agreement in order to implement ‘Cooperative Market Development Program’ that aims to

benefit 14,000 farmers in six districts. The government of Nepal and UNDP has decided to

contribute $5 million and $2 million respectively. According to a UNDP statement, this five-year

program is set to be implemented in Dhading, Nuwakot, Kavre, Lalitpur, Makawanpur, and

Chitwan. This is the great opportunity for rising fund to those entrepreneur who want to

contribute in the field of agriculture. Similarly, there are many cooperative between between

national companies or foreign investors that look for opportunities to invest their surplus capital

c. Friends, Family and Fool’s

One of the easiest and earliest sources of financing for any startups can be the friends and

families instead of banks or venture capitalists. The major plus point of lending from the family

can be the ‘flexibility’ because they can be more flexible in terms of anything when compared to

the formal lenders like banks. . They may show flexibility such that they may agree to a less

interest rate or no interest at all, they may also agree to a longer payback period. Since they

already know everything about the entrepreneur and because of the high level of transparence

between the two parties, they are always likely to say YES without requiring a detailed business

plan.

However, there is a huge risk that any form of misunderstandings can ruin this relationship for

the rest of the life. Also, when you need huge investments, the surplus funds from individual

sources like families and friends may not be enough to cover the entire investment; they may not

possess that kind of money, so the entrepreneurs have no option but to turn to investors for
raising the capital. And finally, the friends and families may not be from the same working

background, they may prove little useful inputs to enhance the operation of the startup.

d. Crowd Funding:

An entrepreneur can access to hundreds and thousands of investors to their businesses.

Astrological investors make it easy to collect small funds and accumulate it to big funds. Indirect

crowd funding has already been observed in Nepal for social purpose such as donation and other

purposes. In Nepal, a lot of people using social media were able to collect small amount from

every person and donated it during earthquake. Crowd funding can be a complement or

substitute for traditional forms of financing like venture capital and bank loans in country like

Nepal.

The future of the Nepal startups is seen bright thus this brings the importance and huge

possibility of crowd funding in Nepal, not only to collect fund for charity but for investments in

entrepreneurship and start-ups from the public themselves. Gathering a million rupees from a

single investor might be difficult but collecting thousands from a million people is not that

difficult that too in a country like Nepal where the public are searching for ways to encourage

start-ups and ideas plus get a return for their investment.

Mark Sears, CEO of Cloud Factory says “The Nepali startup scene is heading slowly but surely

in a good direction”. Thus, in our opinion crowd funding will surely be an important platform to

encourage the budding companies that carry potentials to shape the country’s economy in a new

way. ‘Disha Nepal’ is also about to launch crowd funding in Nepal very soon. They are

committed to provide services in all of the 75 districts and reach at least 20 percent of the

graduating students all over Nepal by the end of year 2019. Crowd funding provides
opportunities to a lot of current start ups and at the same time encourage people to think about

starting up.

Along with that, the mindset towards the startups among the people also needs to be positive for

crowd funding to grow. Nepal truly deserves to have all the alternative finance systems and not

limit its financing choices to help support the startups across multiple areas. Plus, times are

changing with digital economy and the entire finance industry is transforming and throwing lots

of opportunities on a developing country like ours. Increasingly, aspiring entrepreneurs will turn

to crowd funding when traditional means of funding will prove to be undesirable or prohibitive.

Thus, crowd funding will be the future of various startups in future.

e. Angel investors:

Even though there is no good mechanism as venture capital in Nepal, a lot of investor related to

the field of entrepreneurs such as in incubators and accelerators can provide with the investment

if the idea is good and the entrepreneurs have clear picture of their idea. Clarity and the potential

in future is two things that they seek in the startup before investing.

Angel investors look at increasing the value of a business. Many in the latter category have

started to show their presence in Nepal. They have a big chunk of money needed to drive our

capacity. But, they look for your targeted market, and the problem you are going to solve, and

how scalable your business is before making an investment, they check on how strong your

compliance level is. They want to see the business growing, and increase in revenue, stressing

the necessity to show the business as an scalable one.

f. Business incubation and accelerator institute:

Many business incubation and accelerator programs has entered in the Nepal market. These

institutions guide the startup ventures with the idea and grow these businesses. Many

entrepreneurs have no idea about the raising the capital and financing for their venture. They

may not have clear idea of how to go with the things but increasing incubation and accelerator

institute have been the essential addition for the aspiring entrepreneurs to guide through the

journey of establishing the successful start up. They help startup with networking and connecting

with the potential investors. They help refine their business model so that they can better execute

their business. They can input by sharing their own entrepreneurial journey. Along with that

these institution are also helping entrepreneurs with getting the finances through the various

stages of the startup.

For example Rockstart Impact is one those institutes. Rockstart Impact is an accelerator program

focused on developing countries like Nepal with the aim of bridging the gap between

entrepreneurs and impact investors. Rockstart Impact makes 10 high potential and ambitious

companies investment-ready in 100 days. Offering a high-quality pressure-cooker program based

on proven and tested methodologies, the companies receive intensive coaching from local and

international professionals that are involved and dedicated to providing hands-on support and

networking opportunities. Since 2014, Rockstart Impact accelerated 29 companies from which

21 have secured investment pledges raising over 3 million Euros in funding.

Rockstart has provided a good platform for the startups that have already started generating some

revenue to gain an access to a vast network of mentors and investors, in-house startup

accelerators and a large group of talented entrepreneurs around. By hosting an international

community of tech-driven, fast growing startups, Rockstart makes one of the best places to start
and grow new companies. Enabling aspiring entrepreneurs to meet like-minded people, share

knowledge and work together, Rockstart offers all facilities a startup needs to work on its

business in comfort. However, accelerator programs like Rockstart unlike the incubators are

focused on accelerating the current growth not raising initial finances for new startups. Through

this platform many of Nepalese startups has established in Nepali market, some of them are

Mush Nepal, Bajra Bricks and Industry Pvt. Ltd., Red Mud, and Cotton Mill. Existence of such

kind of company has opened up a window of opportunities for Nepalese startups in rising

funds.
 References

https://glocalkhabar.com/business/b-national/finding-investors-business/

https://glocalkhabar.com/featured/59314/