Giving start-ups a head start

Despite obstacles, start-ups emerge as exciting new outliers of Nepal’s economy

30 Jun 2021

- Siddhant Pandey

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.