Giving start-ups a head start

About 250 years ago when King Prithivi Narayan Shah made Kathmandu the capital of unified Nepal, he realised that the city had great potential as a business centre, complementing its role as a trading hub.

He allowed in businessmen from Rajasthan in India to set up shop and allow entrepreneurship to ferment, a move expanded later by Prime Minister Chandra Shamshere Rana. One reason entrepreneurship did not have deep roots in Nepal was the concept of जागिर, a 10-5 salaried position with job security.

That is why the start-up culture took so long to start up and morph in Nepal. The proliferation of, and exposure to the Internet and the recent advent of international private equity firms, accelerators and incubators have paid a pivotal role in making this happen.

Since 2017, successive government budgets have mentioned start-ups and allocated money for their establishment, but without clarity and development. This year’s budget was no different: it also set aside Rs1 billion towards building a start-up ecosystem, including concessional loans.

What the previous governments had missed out on, this one seems to have acknowledged: start with defining a start-up. A voluminous document is doing its rounds through the corridors of our bureaucracy for comments from experts. Until they come up with a definition, let us say a start-up is an innovative idea that uses technology to address unmet demand in the market.

In the United States, the start-up sector is a $3 trillion business. In South Asia, India leads the pack with over 20,000 Start-ups in operation, of which 100 are unicorns with a combined market cap of $240 billion. Bangladesh, Pakistan and even Afghanistan have understood the importance of this sector to the economy.

Internationally, some 90% of start-ups fail to take off. Nepal has invested in 400 start-ups, all in Kathmandu, and the risk appetite for new investments is limited partly because of the absence of an enabling environment.

The cost factor for starting a tech business in Nepal is lower than anywhere else with a constant flow of eligible young graduates well versed in English who are relatively computer literate. The bandwidth for connectivity is getting better. It is an untapped market, an imitation of international successes for local markets can be implemented, and the population is young, and growing.

There are challenges with the lack of legal and policy environment posing the greatest risk. Ideas are the premise of any start-up. Intellectual Property Right (IPR) is the most important legal recourse for safeguarding those ideas, which in Nepal remains a draft and has been in discussion for quite some time.

The current law was formulated in 1964, and does not address developments that have occurred worldwide since then. A lawyer recently remarked that when he tried to register a trademark for poultry feed, the application was denied because a tobacco company had already registered it.

Thankfully, the Supreme Court gave a verdict on the Kansai Nerolac case a few years ago, which protected trademarks. Still, laws need to reflect international best practices for this sector to operate.

Financing start-ups is also a great hurdle. Banks are reluctant and risk averse to lend without collateral. If a loan is secured it is not nearly enough to meet the requirement and equity is difficult to come by. The ones who have demonstrated that they have the ability to serve a niche market and can show potential to scale up have been successful to secure equity financing.

The start-up industry is evolving despite the lack of an enabling environment.  The resilience shown by these entrepreneurs has steadily improved, and the appetite to invest in them is gaining traction. Examples are ride sharing apps that made the government change its policy, e-commerce platforms that have engaged with the government to facilitate the sector, and companies that realigned business plans to accommodate government policies.

A cloud service provider had to create a hybrid model because government officials could not comprehend what it was, and that data could be secure. They needed to see actual physical infrastructure.

But start-ups are resilient, and they will continue to compel the authorities to accommodate them as they continue to grow. They have adapted to the situation and have introduced internal safeguards to secure their ideas in a lax IPR environment.

Some are ensuring strict non-disclosure agreements, developing in-house products knowing that there will be disrupters in the market six months down the road and, focussing on networks as much as focussing on products.

The government’s new regulations will hopefully put it in a facilitating role to create a platform for ideation to grow with the help of mentors from academia and the private sector. Nepal’s start-ups are to stay, and with the right legal and regulatory framework in place, will thrive. One day there will be a Nepali unicorn in the making.



What’s in budget for startups, SMEs and FDI?

The budget of Rs. 1647.57 billion recently unveiled by the government for this fiscal year has significant provisions for startups, small and medium enterprises (SMEs) and Foreign Direct Investment (FDI). Government’s commitment towards small businesses hints that it realizes the importance of contribution of small business to the economy.

Point 68 and point 483 of the budget talk about startups. Point 68 mentions that a challenge fund of Rs. 1 billion will be created to provide seed capital of Rs. 2.5 million to startups under project financing to attract youth entrepreneurs towards startup business. However, this is not the first time the budget has mentioned of startups and tried to provide stimulus. Earlier budget also made a provision of Rs. 500 million but there was no deployment. This time it has been said that registration, renewal and other services to startups will be provided free of cost through one window policy. The same thing was said in the past too. The red tape hurdles may continue. Though the submission of files/documents are done in one window, file will have to travel same or even more distance to multiple departments. Authorized one widow center and streamlined process is the need of time for real output. ‘One window’ is losing its essence and it is not exciting any more.

The FDI policy

The budget promises to simplify policy to attract Foreign Direct Investment (FDI) into startup. As a person associated with Business Oxygen (BO2), the first international private equity fund based in Nepal, I have been more interested toward FDI and scale up financing in Small and Medium Enterprise (SME) space. This particular point caught my special attention.

Minimum FDI threshold at the moment is Rs. 50 million. At BO2, we don’t do start up financing. We consider companies that have proven track record, are in profitable operation for at least past two years and are now looking for expansion as scale up business. As the minimum FDI threshold was raised from Rs. 5 million to Rs. 50 million, we had to drop many pipeline companies in scale up stage.

FDI has always been a hot topic. Apparently, the government is doing its best to create enabling environment to attract FDI into Nepal. But increased FDI threshold, multi layered of FDI approval without defined timeline and lack of co-ordination between different government entities, have created exactly opposite vibes in practice. In general, the mentality has been that FDI means truckload of dollars for huge infrastructure projects and not petty investments, probably because of Switzerland dream we all have been fooled with.

During a discussion, when asked about the logic of FDI threshold, it was said that Nepal doesn’t need small investments, small FDIs are misused for FDI benefits such as visa and when number of small investments increase, it is difficult to monitor and regulate. What a logic!

Why don’t we allow our local companies go global and bring back foreign currencies? If Nepali Wai Wai reached to 32 countries, why can’t Nepali momos?

Point 184 mentions FDI repatriation process will be simplified—too vague to even comment. Services of one point service center will provide its services via electronic medium. I hope it doesn’t mean uploading document in the system and again submitting hard copy.

In our experience of investing in a restaurant specializing in momos, there was a backlash from the people at concerned authorities that Nepal doesn’t need FDI in momos. We need it in the areas where Nepali won’t be able to invest. The restaurant was a popular name in Kathmandu and is now making its name outside the valley too with FDI. It doesn’t sell just momos, now it also sells franchise. FDI is not just about capital but also about technology, international best practices, technical support and other growth drivers. Nepal doesn’t allow its company to go global. Is FDI only solution to our problems or targeted growth? Why don’t we allow our local companies go global and bring back foreign currencies? If Nepali Wai Wai reached to 32 countries, why can’t Nepali momos? Pizzahut and KFC entered Nepal but we are restricting our native products and businesses within the national boundary.

We are proud that Santosh Shah took nepali cuisine to an international platform. IT sector is doing great. Why can’t a local IT company be allowed to establish its own branch or customer relations office abroad where their major/target clients are?

Benefits for startups

Point number 483 mentions of two other benefits for startups. A startup will get 100 percent income tax waiver for five years from the date of start of transaction. Though most of the businesses have losses in their initial years, this is a welcome move. However, there is confusion as to whether the provision is targeted for new startups or even the existing ones can get this benefit. Another benefit under this point 483 is that a private sector industrial enterprise can provide seed capital of up to hundred thousand rupees to maximum five startups and deduct it from its taxable income. If an employee comes up with some unique business idea, employer may be more willing to provide seed capital to the staff under this scheme. Alumni of Flipkart created eight unicorns, alumni of Nepali company may follow suit. This is a unique incentive to create ripple effects though amount is very nominal and nothing is mentioned about the repayment of seed capital back to investing entity and the return on it.

But what is startup? Startup has not been defined yet and we can’t just pull up an English definition here. Will there be sector restrictions to it? Will a newly started trading business also be considered as startup for this purpose? Regulators treated e-commerce as trading till few years back. Government has to define its target beneficiaries and hopefully directives or clarification on this will come soon.

Benefits for SMEs and Covid-19 affected industries in the budget are mostly continuation from earlier budget. SME and industrial sectors have been defined by the Industrial Enterprise Act 2076 in section 17. SMEs are defined based on fixed capital amount irrespective of industry type. Therefore, SMEs can avail sector specific benefit and SMEs specific benefits. During this pandemic, overheads (salary, rent, interest) have been major issues for small business. Business Continuity Fund for salary and working capital which was rolled out last year is continued. Similarly, loan limit and sector for refinancing loan at five percent has been expanded. Businesses took benefit of these facilities last year. In fact, these facilities would not only benefit borrowers but also the banks by reducing their exposure and default risks. Still, there are complaints that banks are reluctant to process concessional loans and refinancing facility. I don’t understand why.

The government is doing its best to create enabling environment to attract FDI into Nepal. But increased FDI threshold, multi-layered FDI approval without defined timeline and lack of co-ordination between different government entities, have created exactly opposite vibes.

Other facilities include tax waivers, waiver of electricity demand charges and renewal fees for specific industry and incentives to move out of valley/industrial zone. It will be interesting to see how the “Made in Nepal” and “Make in Nepal” campaign will be programmed and how SMEs can take benefit from it.

What’s the message?

The budget has tried to give positive message to private sector and has addressed multiple issues. Programs for startup are focused to create more businesses but we need to focus on the quality of the businesses and sustainability too, not just number. Departments and officials need to be held accountable with timeline in their duties. For example, if FDI approval process is taking year/s, the concerned officer shall provide plausible explanation. Instead of creating new one windows or one point service center, usefulness of the existing ones needs to be assessed. Has it shortened the time needed for service delivery or layers in the process? If not why create another functionless or redundant unit? Everything cannot be covered in budget but directives/procedures will definitely clarify unclear issues. One standard refrain comment on budget in Nepal has always been ‘overall good but challenge is in implementation.’ Same goes for this year too.

The response of Finance Minister Bishnu Pauduel to the concerns on implementation challenge was that budget is not just to read but to implement and it will be implemented. Hope his words will come true.

Deepak Sharma is Investment and Finance Manager at Business Oxygen (BO2).

Source : Nepal Live Today