This is an excerpt from the panel discussion organized by Enterprise on “Basics of Fundraising” at Calm Restaurant. The panelists included:
- Mr. Suman Joshi, Managing Partner at True North Associates
- Mr. Anand Bagaria, Managing Director of Nimbus Holdings
- Mr. Sameer Sharma, Founder of S.S. Legal
- Mr. Bikram Prajapati, Founder and CEO of Bajra Brick & Tile Industries Pvt. Ltd
- Mr. Rabindra Shrestha, Founder of Katman’Du Coffee / Alpine Coffee Estate.
The participants got the opportunity to ask queries regarding fundraising to the panelists where they received invaluable suggestions on how to make a company ready for investment. This is an abridged version of what was discussed in the session.
1. What are the major factors you consider before making an investment in a business?
Suman Joshi: Investors generally look at the numbers that show cash flow and scalability. In addition to that, when it comes to investing in Nepali companies, I personally look at the person behind the company. Is the person trustworthy, transparent, professional and willing to be on-board? Because at the end of the day, it all boils down to the person running the business. Investors have to deal with a lot of roadblocks and make a lot of compromises in order to find the right investment.
2. Before raising amount from a particular investor you must have had lot of options. What was the reason behind choosing that particular deal?
Rabindra Shrestha: There are several issues that will crop up when a company decides to raise funds. Debt is a hassle, as a lot of criteria has to be fulfilled in order to borrow money from banks. It is difficult to get a loan in the name of working capital requirement. Moreover, it requires to be paid back at a certain time, whereas equity provides no such rigid obligations.
Bikram Prajapati: Our company needed funds to solve working capital issues because most of our time was spent on collecting money from debtors. To keep the the business afloat and generate the required cash flow, we participated in an accelerator program that not only helped us manage our daily operations in a structured manner but also helped us receive funds from One To Watch.
3. What legal hurdles do companies face in the process of raising funds for equity and what do you recommend to avoid such hurdles?
Sameer Sharma: Companies in Nepal generally fail to maintain proper accounts of their agreements. And as we all know, businesses are not generally transparent with their financials. Everything starts from due diligence. For an investor to believe in the target company is quite challenging. Every investor wants to make a secure investment and minimize risk. I think a Share Purchase Agreement beforehand is more preferable than a Term Sheet. Nevertheless, both parties should be clear on what they are agreeing on and it should be properly documented.
4. Is there a specific time horizon and return that you have in your mind while making an investment into a Company?
Anand Bagaria: An Entrepreneur will always face issues of running short on money. We have a tendency to be emotional with our business which might prompt a person to take wrong decisions. There is no formula for investment but it rather depends on the opportunity cost to the investor for investing in that particular circumstance. I invested in Foodmandu because it has potential for growth. I also look at companies that can make a difference to the world at large. Although Tootle will drain cash over the next few years, I invested in it because it is a very new and exciting concept. Also, if i can be credited for reducing the traffic problems by just a percent, I will take that chance. If I were to invest now, I would invest in companies that add value to my existing businesses.
5. Post investment, what is your bare minimum expectation from the companies?
Suman Joshi: A company has to work harder than what it has been doing once it has received investment. It adds responsibility and the need to protect the investment of the investors. Companies have to become diligent. The investor also needs to be made aware of the broad numbers to see where the company is headed. A MIS (Management Information System) and proper organizational structure needs to be put right away. The company has to come up with reliable numbers to understand the business better. For example, An investor for Toolte would want to know the number of rides it makes in a day. With these information, an investor too can use his experience, network, and skills to analyze where the company stands and how they can improve.
6. What crucial factors, in your experience, should a founder pay attention to, in order to market themselves to potential investors?
Rabindra Shrestha: Entrepreneurs must have a clear Business Plan. The information regarding all the figures of the business needs to be made available to the investor. Investors also look at the objective of the company. An important issue that investors look at is how the money is going to be spent. The investment should drive the business to generate higher cash flows.
Bikram Prajapati: When i received investment, my investors asked for the five year plan of my company. And it took us almost a year to finalize the deal and receive funding. Although, I had a one-time opportunity to buy an equipment at a cheap price, my investor was apprehensive in investing as it did not align with our six months objective as it would not have enabled us to achieve our short term goal.
7. In order to incentivize their employees, a lot of Founders want to give Stock Options to their key team members. Have any companies in Nepal practically done that? What are the Legal issues/provision to do so?
Sameer Sharma: We do have a provision for ESOP (Employee Stock Ownership Plan) in our Companies Act and there are some large institutions like Banks that provide ESOP. One of the issues for startups and small businesses in Nepal is that ESOPs have to be purchased with your own funds. The Company Act states that a company cannot assist an employee in buying shares. The concept of ESOP is that you are funding what you are buying, maybe in different tranches. Another issue remains with ESOP is, what if the employee leaves the company. Similar to ESOP is sweat equity, but the problem with that again, is how to value a sweat equity.
8. People are apprehensive on whether a new investor will take over the company. Do you think an investor’s involvement in the board adds value or do you prefer a passive investor?
Rabindra Shrestha: In my personal experience it has added immense value. One of our problem was immediately solved thanks to the network of our investor. If there is assurance about the functioning of the company between the founder and investor then it simply requires minimum involvement. It is up to the company to decide the type of involvement they want from an investor. A founder should always be positive, humble and be able to prioritize what matters.
Suman Joshi: The investor is not there to run your business, they’re just there to invest and get returns. In most cases, investors do not get involved in the day to day function. If the company cannot scale to the investor’s expectation, the investor will want to push you to work harder, and offer their expertise to help you move in the right track. Especially in Nepal, investing in companies poses fair amount of risks, so the investors’ expectations should be met.
9. What are the specific terms and conditions like ‘Reserve Matter’ that a founder should be careful about before getting into agreement with the investor?
Sameer Sharma: Reserve matter is a standard clause in a share purchase agreement where investors are looking protect their investments. Founders should be careful in making a deal that does not affect the day to day operations. For certain decisions, consent of investor is mandatory. Such as making amendments to MOA, Investment capping, dividend decisions etc.
10. Can you share your experience about one deal which fell apart? What was the reason for the deal to fall apart?
Anand Bagaria: I will tell you a situation. A reason for funding is to get the company from A to B. Although, Investor might have his own terms but the immediate goal for the company is to to reach to that B. Regardless of the terms, it needs investors on board. In some cases deals do fall apart. Things do not always go the way it was envisaged. Investor needs to be comfortable to work with the company.
Suman Joshi: We had signed a term sheet with a company. The findings of due diligence was that the target company had to corroborate the share investment from company registrar office but it could not do so. There will be areas where a company is not legally up to the mark. Such things need to be sorted out beforehand. In another company, we were committed to invest but we couldn’t because the company could not demonstrate to us that the management had capability to move to the next level. In another situation, we and other investors were interested to work with a company but the company later decided after three months that it did not need investment. It was a waste of time for the investors.