In a country burgeoning with startups, angel investors can be a boon to many entrepreneurs who can’t attain funding through orthodox instruments.
--BY MUNA SUNUWAR
Eton Technology, a software and mobile application development company, was moving through an up-swing but a scarcity of finance was restraining them from bringing in further human capital for further expansion. The web-based school management software developed by Eton in 2015 needed more manpower to upgrade and compete in the market. That’s when a business angel extended his support to the company. “We had been working with no paychecks for a full year when Mr Abhaya Poudel, helped us as an angel investor,” says Prabal Pradhan, Chief Technology Officer at Eton, adding that the enterprise has been operating in a systemised way ever since.
Principles of Angel Investing
The concept of angel investing revolves around supporting companies that are seeking need-based financial aid and are seeking to upgrade. The backing goes beyond monetary benefit. The investors not only pledge financial assistance but also provide expertise on diverse sectors to expedite the company’s growth. “Angel investors are the first non-family believers as they have faith in the passion of the entrepreneurs,” opines Ashutosh Tiwari, founder and Managing Director at SAFAL Partners, an investment management company.
Business angels specialise in providing valuable management consultation and mentoring to a new generation of entrepreneurs utilising their experience and networks. They function as part of the team. “The investor not only supported us financially but also played a part in the organisational process such as product development, networking and exposure,” Pradhan adds. The business employs 14 staff members and works with 80 educational establishments through its software called Sajilo School Manager.
Business angels are patient investors. They recognise it can take time for the company to develop. They commit to the business despite being thoroughly cognizant of the risks entailed. Fast returns and clear profits are not the primary aspirations of such investors. “If you want a fast return, this is not the right sector for you,” adds Tiwari.
The attitude of business angels is usually philanthropic rather than materialistic when it comes to supporting entrepreneurs with ingenious concepts. Profitability matters but the mission of the company plays a part in securing capital from investors. Any mission that prioritises broader social benefits fascinates investors. Niraj Khanal, CEO at Antarprerana, a business networking company asserts, “There are so many things that need to be resolved in Nepal. Entrepreneurs bring solutions to the issues prevalent in the current context. I feel that if someone makes an investment in those entrepreneurs, they will solve many problems.”
As an entrepreneur seeking investment, it is imperative to lay a foundation for trust. Angel investing is deemed risky so the entrepreneurs have to make investors believe the idea for their companies will work. While doing so, the disclosure of information and maintaining transparency helps. Ashutosh Tiwari believes that the more you know, the better decisions you can make as an investor.
“Some entrepreneurs complain of not receiving funding for their idea. But taking the risk of angel investing into consideration, it is hard to invest in ideas. Investors expect entrepreneurs seeking funding to have examined the idea in the practical market,” explains Narottam Aryal, Executive Director at King’s College. They expect businesses operating for two years or higher to have identified their customers, market and to have cultivated a product or service.
Entrepreneurs can acquire investment for debt or ownership equity. Innovation, employment generation, the formation of a board for good governance and day-to-day operational strength are some considerations the investors seek besides monetary return while investing in any company.
Scenario in Nepal
Nepal has been witnessing a proliferation in its startup culture. Growth in the number of such companies calls for investment and not every entrepreneur has the capital needed to operate their venture. The capital required to conduct businesses is not immediately available from Nepali banks. The banks require collateral, which many entrepreneurs cannot provide. Suman Shakya, Managing Director of a private company, SmartPaani, who is also a consultant, trainer and entrepreneur, says, “For startup initiatives that do not have collateral that financial institutions require to extend loans, as mandated by Nepal Rastra Bank, local angel investors can provide funding, support and mentoring. Moreover, the angel investing initiatives are relatively new in Nepal and the firms engaged in such types of investments might not have maintained proper balance sheets as their institutional operations have aged just 2-3 years in Nepal.”
There are several processes that entrepreneurs have to go through to attain money from banks. Investors state that there are many occasions where companies had to shut down because of a paucity of funding. This is where angel investment plays a critical role; they facilitate startups that don’t have assets to put up as collateral. Entrepreneurs can ask the investor to invest in their equity. Aryal says there is a trade-off between risk and investment; higher the risk, higher the premium of return and vice versa.
There are many angel investors who provide financial assistance to entrepreneurs. “Investors are uninformed of the concept and don’t realise that they are business angels,” states Bibhuti Neupane, Business Development Coordinator at Antarprerana. The concept has not been established in Nepal while globally angel investing is the most prevalent alternative investment practice.
A major boost to angel investing in the Nepali startup ecosystem came during a startup boot camp organised in August 2017 when Arun Chaudhary, managing director of Chaudhary Group announced he will invest, through his firm CG Holdings, in four business ideas. The four ideas selected for angle investing were: Himalayan Sanitary Napkins, a low-cost sanitary napkin producer, Express- “Come Hungry, Leave Happy”, a mobile fast food chain, Avon-Go, a social enterprise to support marginalised farmers with the production and market supply of avocado and dragon fruit, and Bars and Prefab, a low-cost prefab panel producer.
As angel investing is yet to develop into a standardised form of financing in Nepal, investors have to take initiatives to remain updated about the company after they make the investment. Prakash Tiwari, an angel investor who is Chief Investment Manager at Hathway Investment Nepal, says the investors have to make efforts to stay in the loop concerning the status and progress of the company after contributing the money.
There have been attempts to institutionalise angel investing. There are firms in Nepal that function to bridge the gap between entrepreneurs and investors so they can reach out to each other when in need. SAFAL Angels, an arm of SAFAL Partners has 102 registered angel investors. This institutionalised approach towards angel investing is making the process much more accessible to promising entrepreneurs and possible investors. Organisations like Antarprerana, One to Watch, Venture Next and Enterprise work on polishing the companies through their accelerator programmes, to ensure they live up to investor expectations.
Experts claim Information Technology has the largest proportion of angel investment in Nepal. “IT-related products fascinate investors for they have the potential to reach a global market,” says Prakash Tiwari.
Considering the fact that angel investment holds financial, technical and market-related risks, the angel investing scene in Nepal faces lots of challenges. Though the circle of people aware of angel investing is swelling, it is nevertheless an unfamiliar notion to most people including stakeholders.
Investors claim there is a disparity between the thinking of entrepreneurs and investors. Prakash Tiwari says, “Entrepreneurs think giving up their equity will oust them as owners of the company. Investors become reluctant to invest in companies that are not willing to give up their stake in return for the investment.”
There is no system or policy for valuation of companies. Entrepreneurs face problems while seeking investment as they have no mechanism to confirm their businesses’ net worth. On the other hand, the absence of an exit mechanism poses complications for investors. There is no framework that maps the journey from initially investing in a venture to withdrawing from the company in Nepal.
There are no acts regarding private equity and alternative financing in Nepal. Investors are apprehensive of financial fraud as there is no investment protection policy. After an investment is made, a multitude of problems crop up, including but not limited to, financial record keeping, loss of passion, using the investment for covering up their initial investment. "Another major problem is the exit strategy of entrepreneurs. After they get their investment amount back from the investors, they don’t feel the need to work for the company’s growth," mentions Prakash Tiwari. There is a lack of legal definition regarding the risks. People hesitate to invest in a sector that is not legally recognised. Concern regarding the security of their investment looms large among investors because of the lack of a legal framework.
Enhancing Angel Investing
Another factor is, the size of the investment is irrelevant. Small investments from business angels can make a huge difference; anyone who can contribute enough to support the cause is an angel investor. It is a comparatively hassle-free method of sourcing the required capital.
Given the benefits of angel investing, the government should try a new approach, one that differs from the traditional way of financing. The government should be open to investment renovations in Nepal. Introducing an investor protection policy can attract investors resulting in the development of entrepreneurship. “The categorisation and recognition of startups from the national level would be a huge help from the government,” expresses Khanal.
Ashutosh Tiwari believes the formation of a board to govern the company reduces the possibility of failure.
The personal interest of the investors drives them towards interesting investment opportunities. Prakash Tiwari opines, “Using mediation organisations makes the process systematic and effective. It will be easier for the investor as the process becomes organised and hassle-free.”
There are many non-resident Nepalis who want to invest in Nepali businesses but the lack of a suitable policy has made it challenging. According to Khanal, “The Foreign Direct Investment (FDI) policy allows a foreigner to invest USD 50,000 or more in Nepal. That amount is huge for startups or growth stage companies who may fail to manage such a massive sum.” If the government allows small-scale investments from NRNs, the flow of investment would grow.
At this nascent stage, angel investing has not been able to curb all the challenges, but the sector is developing at a substantial pace.