How to address the funding gap and enable Nepali startupsSimply throwing money at Nepali startups is exactly how not to create a sustainable and thriving ecosystem.
The word ‘startup’ means different things to different audiences but most often, and in the context of this writing, it implies high-growth, technology-infused, Small-to-Medium Enterprises, also commonly called SMEs. For these businesses, access to finance is one but not the only missing ingredient. Factors like proximity to global networks and the availability of specialised knowledge are equally important considerations.
A popular but unsubstantiated opinion in our market is that the total sum of available capital is insufficient to fund the growth of Nepali startups. This view is not entirely accurate as the underlying issues are access, stage and instrument-related, not just a matter of being volume-driven. Given these realities, our ability to qualify the flow of well-intentioned funding is paramount to guarding against distortions in pricing and incentives, which can have negative and lasting consequences on the growth trajectory of a nascent startup ecosystem.
The prevalence of systemic issues in how startups can access funding is indisputable. However, designing policy and market interventions to rectify these deficiencies ought to move beyond the basic premise of a general funding shortfall and identify specific gaps at different stages along the ecosystem’s growth continuum. Financial intermediaries ought to reasonably project these gaps and present compelling, stage and sector-wise investment theses while providers of capital (donors, foundations, high net worth individuals) should have independently verified views. Somewhere along this spectrum is likely to be the actual capital requirement and absorptive capacity of Nepal’s startup ecosystem.
In addition to sizing the capital shortfall, a thorough understanding of the types of required funding (commercial, blended, non-commercial) and instruments (debt, equity, grants) must be developed. Equity injections are most relevant to high-growth SMEs, but straight equity need not be the only relevant tool given situation-specific requirements. For these reasons, funding vehicles that cater to a range of needs including instruments and structures between straight equity and senior debt have to be accessible to our startups. Traditional, one-size-fits-all venture capital and private equity models with fixed deployment timelines, carried interest, management fees, and self-liquidating features are unlikely to meet the diverse needs of Nepal’s technology-enabled SMEs.
In terms of knowledge, we need to work closely with our friends and partners who have exposure to international and regional markets to in-source the right type of know-how for the right stage and business model. Startups are often sector specific and while general knowledge of legal, financial and governance guidelines are a useful condition at very early stages, these are insufficient at the scale-up stage and beyond.
To help startups grow, there is a need to mobilise subject matter expertise through private, public and donor/foundation partnerships to apply lessons that have been learned in similarly nascent ecosystems in other parts of the world. This is not to suggest that what has worked in Silicon Valley or is working in Silicon Savannah can be imported wholesale into Nepal; but rather those experiences can be localised and applied to our ecosystem’s operating reality.
When it comes to networks, we should work towards building broad coalitions that cross regional and country boundaries to help make our own ecosystem robust. Technology is without borders and so must our mindset be when considering how best to enable startups. There is nothing to stop a startup based in Nepal from developing a solution that can scale globally. But for this to happen, our ecosystem needs to be better connected with more advanced ecosystems across the globe and for ideas, people and capital to flow as close to seamlessly as possible.
In developed ecosystems, the private sector is at the helm of providing stage-appropriate capital, knowledge, networks and even the physical space to enable startup growth. Entities like Y-Combinator, 500 Startups, and TechStars of the developed world have shown us the art of the possible when it comes to successful interventions. Increasingly, examples from middle-income countries and parts of the developing world, like Flat6Labs with their regional footprint across the Middle East and North Africa, NXTP Labs with their presence across Latin America, MEST with its pan-African presence, and even Investopad in India, provide blueprints of sustainable business models that enable startups.
In our ecosystem, the private sector is just starting to warm up to the potential it has in helping Nepal harness its fair share of digital dividends. The public sector is not far behind given the initiatives that it has shown an appetite for including ‘Digital Nepal’ and ‘Digital2020’. These are important elements to enabling our startup ecosystem but there has to be a substance that goes beyond advocacy, the hype of startup meets, and ecosystem maps.
There are intrinsically non-commercial segments of our ecosystem that need to be activated for commercial segments to become viable. These are where the donor and the Nepal government resources ought to be calibrated and spent. Then there are commercial opportunities where right-sized blended and private resources should be directed along with a firm government commitment.
At present, what we have is a hodgepodge of poorly harmonised and volume-driven interventions under various pretexts. Just throwing money at Nepali startups is exactly how not to create a sustainable and thriving ecosystem. Our startups, the digital economy that they will give rise to, and our youth entrepreneurs who are inspiring a new generation of Nepalis need access to a suite of funding options, relevant-knowledge, and networks to succeed in their endeavours. As ecosystem enablers, we must help facilitate this access.
Dipta Shah is the founder of a transaction advisory and management consulting firm based in Kathmandu.