Let’s start to invest in Young Entrepreneurs

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Let’s start to invest in Young Entrepreneurs

Nepal has a vision to graduate from least developed country category by 2022 to join the rank of middle income country by 2030, according to Nepal Planning Commission. Having such an ambitious goal, Nepal is ready to take-off for rapid economic development which requires contribution from every single citizen to invest in productive sectors. Since youths will be a driving force in contributing to manufacturing and production sector, it is an imperative task to encourage young entrepreneurs. As things progress, this will eventually improve Gross Domestic Product (GDP), and at the same time, reduce unemployment. One successful entrepreneur can become a nucleus to build a chain of success in an economy and produce multiplier effects. Creating even a single successful entrepreneur signifies that in background many other people are being productive; not only are there instances of innovation, but there is an upsurge of employment opportunities too. If we are able to create a number of them, then the effect is intensified. As such, social living standard improves parallelly.

With this dual impact – economic and social – of entrepreneurs in an economy, the only catalyst required now is to invest on entrepreneurship in Nepal. For that, a special mechanism can be implemented.

It is not that we don’t have entrepreneurs in Nepal. Entrepreneurship has become a growing culture. We often hear and witness that many people prefer to become an entrepreneur since the career itself is fascinating where one can be a boss while pursuing a passion. However, it is not easy to become one’s own boss seeing that it is hard to manage resources, especially in Nepal where things are challenging for entrepreneurs considering the nature of economy and the support system in place for entrepreneurs.

Studies and reports have shown that access to finance is the major problem faced by entrepreneurs in Nepal. Since youths do not have collaterals, banks find it risky to grant loan to young entrepreneurs. Nepali banking system has not been developed yet to endorse a culture of providing loans solely on the basis of the business model, even though entrepreneurs have the capacity to run a business and pay their debt back. Therefore, more than 90% of entrepreneurs who have potential to outperform in business don’t have access to finance. Developing such mechanism for banks, however, demands additional competent human resources since it involves greater risk to invest in uncollateralized loan with public deposits. Even if they want to finance a startup, they have to spend time analysing business viability and associated risk. This will distort bank from its core business.

Beside banks as source of fund, entrepreneurs can seek for few venture capitalists in the nation for finance. However, venture capitalist demand certain criteria for startups and it is not confirmed that you will get funds though you meet the entire requirements. In addition to that, venture capitalists have a specific assessment process where one has to compete with other entrepreneurs.

On the other side, financial institutions are looking for better investment opportunities to mobilize their deposits in productive sectors too. But giving away loans to entrepreneurs without collateral is out of banking norms and cost of failure of entrepreneurs should not be borne by depositors.

Looking over such scenario, banks, financial institutions, private institutions, venture capitalist, and others, can form a platform where entrepreneurs can get access to funds even if they lack collateral and promote investment in productive sectors. This platform is called Special Purpose Vehicle (SPV). It is popular in international market which analyses business and manages funds through various channels. To get things started, representatives from Nepal Rastra Bank (NRB), Department of Industry (DOI), Department of Small and Cottage Industries, venture capitalist, industry experts and bankers can work together to form policy and legal framework for SPV in Nepal.

So how does it work? First, we should know that banking system does not grant uncollateralized loan because it cannot put depositor money at risk, whereas government alone cannot provide grants and loans to entrepreneurs.  Hence, as a solution, SPV will borrow funds from banks and invest it into entrepreneurs in the form of debt and takes risks associated with the business. SPV does not only invest money, it devotes time by providing guidance and mentorship to entrepreneurs. SPV will have a team of industry experts, financial analysts, legal experts and professionals from other required domain. They will analyse business model of an entrepreneur to test revenue model and estimate future cash flow of the business. On the basis of such analysis, SPV can endorse a loan to the entrepreneur. Basically, SPV will help emerging business to expand and grow.  It provides growth fund in form of debt where an entrepreneur will pay back with interest. SPV will evaluate the business model from various dimensions and then approve businesses which have good prospects in market with promising returns. SPV will evaluate a venture on the basis of viability of business model, due diligence of an investment. Furthermore, SPV will set milestones in the form of business metrics which is measurable in terms of sales figure, profit figure and customer acquisition cost of a venture. Other metrics can be customer base rate, market share, customer retention rate, and so on. There will be pre-defined business metric for entrepreneurs and if they performed accordingly, they will be upgraded to get more of funds. And in the case of business failure, SPV will have right over tangible and intangible assets of business. Most importantly, SPV will closely monitor business operations to make sure that invested money is being used in stated aspect and business is moving ahead. For governance of SPV operation, NRB, DOI and other governing authorities will have to develop regulation for SPV which will be guideline for operation of SPV.

Adopting this mechanism will channel bank deposits into new investment area where higher return can be earned. In future days, SPV can use intellectual property as collateral while providing loan to an entrepreneur. This will further reduce risk associated while investing on growing business house. When entrepreneurs come to SPV, they will operate under banking norms and regulatory framework which brings them formal channel and reduce number of businesses operating in an informal economy.

It is not that entrepreneurs in Nepal require soft loan, or else local entrepreneurs who are receiving loan from Micro-finance would not have been able to pay back with an interest rate of 15%-18%. Actually, emerging entrepreneurs need some guidance and mentoring along with an access to fund. It has been observed in the marketplace that borrowers of micro-finance are operating within the limit of funds. These funds served as seed fund to borrowers who used it for livelihood purpose. If access to large fund is provided with their proven business model, borrowers of micro-finance can transform small livelihood businesses into large scale businesses. SPV finance and assist these local entrepreneurs (borrowers of micro finance) and emerging entrepreneurs to accelerate their business with growth fund. On this SPV model, entrepreneurs will not only get access to funds but also get insights from experts. So, the process is to build a robust business model, justify the revenue model and estimated future cash flow and get approval from SPV team to get access for growth funds.

The main thing that remains is to realize that entrepreneurs are assets of nation to create wealth in an economy. International practice shows that investing in entrepreneurs is worthwhile as saying goes “Economic recovery must be earned. And it will be earned by small business.” Therefore, to break the vicious cycle of poverty in Nepal and to achieve the economic vision of Nepal by 2022, let’s start investing in entrepreneurs of Nepal.

Abhaya Poudel has not set their biography yet

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  • Guest
    Harka Man Wednesday, 21 December 2016

    Very informative and useful article. Thank you Abhaya Ji. I look forward to reading more of your articles in this platform in the future. StartupsNepal Team, it would be great to have similar articles from different people on this website. Let's encourage more experts like Poudel sir to share their knowledge and expert advice.

  • Guest
    Krishna Gupta Monday, 06 November 2017

    Dear Abhaya sir thanks alot for your informative article.

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