Navigating Venture Investment in Nepal
Navigating choppy water of Venture Investment in Nepal
I have had this unique experience: from being a startup asking for venture capital fund (or fund in whatever name and legal implications) to starting a venture capital fund myself. I now smile at the anguish I felt when potential investors rejected our proposal after much deliberations. Particularly, since I now sit on the other side of the table.
Investment scenario: On Nascent stage
Venture investment (read: any alternative investment mechanisms (AIF)) is still in the infancy stage in Nepal. There are handful of firms which works with startups on venture investment mechanism, sadly most of them are concentrated within Kathmandu valley. Although, we see many informal investments by companies or people on companies, I am not classifying them as venture capital companies, to funnel my arguments.
There have been many efforts to give venture companies a separate legal recognition. This would greatly contribute to the development of investment ecosystem and could inject good fund in the sector. Sadly, the proposition has gather some pace but has not the desired conclusion.
Here I would like to tabulate various venture capital companies. Since, these are all closely held companies getting the details is very hard. Also, since it is tailored service, I didn’t want to put misleading information. So here I am presenting just the name of the companies:
- Dolma Impact fund
- Business Oxygen
- One to Watch
- Kriti Capital
- Team Ventures
- Aasha Ventures
In addition, there are few companies which work indirectly for investment facilitation:
- Biruwa Advisors
Summarized conclusion on venture investors:
- Most of the venture companies are based in Kathmandu
- Most look for operation period of two or more years (except Aasha ventures, to my knowledge)
- Most look for investment size of around NRS 1o Million (except Aasha ventures, to my knowledge))
- The most preferred sectors are IT, Modern Agriculture and Tourism
- The average time from negotiation to investment is around 4 months (from my rough estimate of deals I have heard of)
From the perspective of Start-ups
Since the start-up ecosystem itself is in nascent stage, most entrepreneurs are still to find the meaning, modality and availability of venture capital in Nepal. Most deal that we see happening are based on close contact or associated link.
Due to lack of proper understanding, the nascence of the sector and few relatable examples, start-ups generally fail to find consensus amongst themselves when it comes to approaching venture capital companies. Here, I try to enumerate few cases I have come across:
- We have done hard work till now, when it comes to reaping benefits why should we entertain them?
- They will mostly underestimate our value?
- If they invest they will be big fish and we will be like sitting duck, accepting their orders.
- What if venture companies listen to our idea, get our details and start their own company?
- What if after investment they will dislodge us and kick us out?
If the partners come to consensus, then they will move to next stage (actually negotiating with the venture investors). However, I have seen couple of examples where companies have broken up on their indecision to whether join the negotiations or not.
How it happens: as it seems
As an investor myself, I would like to share few of my experiences when it comes to negotiations:
Startup owners come up with their ideas (not documented), present a very rosy picture of their business and future. When asked, they have answers ready (most of the times I have not heard we have not talked about or not thought about it). The meeting ends with general conversation and following conclusion:
- Startup should bring well-documented business plan
- Startup should bring legal documents
- Startup should bring company profile and another relevant document
More often than not, I see startups preparing those documents upon request. Once they come up with documents, they meet the investors. Investors promise to look their documents and revert back. Further, haywire conversation on business continues.
Probably by this time, meeting happens online. Investor asks further details which the startup has to conjure up. Few questions apart, most conversation ends here. Legal due diligence and financial due diligence happens at the later part of this stage.
If third stage is completed, the discussion comes to negotiations. This is by far the longest and painful phase, where there are bound to be differences. Startup value highly whereas Investors wants to value less.
Afterwards, it depends upon individual case on how to move forward? Invest or not? Which modality to use? Invest after meeting some criterial? How to disburse the fund?
Suggestion to Startups before pitching for venture investment:
- First built unanimous consensus amongst your members. Answer following questions:
- why do you need the investment?
- What are the purposes of proposed investment?
- How much stake are you willing to sell and at what amount?
- How do you see your business after investment?
2. After building consensus prepare following documents ready:
- Legal documents (company registration, Vat details, Share lagat, Permission if any)
- Compliances (Audit report, Roc re-renewal)
- Financial documents (Projection for at least three years)
- Analysis (What if analysis, SWAT/PESTEL analysis, Business canvas Modelling)
- Elaborate Company Profile (Team detail with past experiences, business plan/model)
3. Be prepared for physical verification (office visit/ client profiling/ product sampling)
4. Make sure to search about the potential investors from your side
5. Be prepared with valuation
- First, value your company with help of expert
- Use various methods like (DCF, Net assets, Dunn-Rankin, Multiplier etc)
- Identify your fall back like (how much is your bottom-line)
6. Identify who will be leading negotiations from your side. Make sure, he is the one who is only involved in front-line, although he should keep every member on loop
7. Negotiate clearly with the potential investors on how you are planning to expand post investment and what you seek from investment? Reach, network, management or anything that you are looking for.
Sharing some of my experience with entrepreneurs:
- Make sure you start looking for investors once you have completed at least one year. It is really important that you understand the business, its intrinsic model, its challenges, learn about competitors etc.
- If you cannot build consensus within your partners, I firmly believe it is not time for approaching. In that case, if you think investors will help you expand your business, make a timeline, a condition that will trigger your reach for investor.
- It is absolutely important to understand that; investment is more of a negotiation. If you present loose point, investor will either get turned off or push you in negotiations. So, it is better to go for investment search once you have built a good customer base, once you have figured out the vendors, found good employers and built a robust internal governance system.
- It is absolutely necessary to build plan B. Remember, negotiations can get lengthy or can curtail at any point.
In the best case scenario, venture investment is beneficial for both investors and startups alike. If worked in co-ordination, venture capital firms help entrepreneurs to expand and scale up the business with their deep purse, industry knowledge, networks and exposures. Also, startups would help venture investors with good return, good example which would help them further their business as well.
Start-up Financing is not just about raising funds, it is a holistic process that involves proper business planning with thoughtful growth targets, deciding business valuation as per the current market standards, planning potential exit options for investors. I end with a quote, with your approach to venture investors “either you win or you learn”