91562 Enhancing Access to Finance for Technology Entrepreneurs: Analysis of Highly Innovative, High Growth Start-ups in Vietnam, Cambodia, and Nepal Copyright © 2014 International Bank for Reconstruction and Development / The World Bank Mailing Address: MSN I9-900 1818 H St. NW, Washington D.C., 20433 USA Telephone: (+1) 202- 458-4070 Website: www.infoDev.org Email: info@infodev.org Twitter: @infoDev Facebook: /infoDevWBG Some rights reserved. This work is a product of the staff of infoDev / World Bank. Note that the World Bank does not necessarily own each component of the content included in the work. The World Bank therefore does not warrant that the use of the content contained in the work will not infringe on the rights of third parties. The risk of claims resulting from such infringement rests solely with you. 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Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution – Please cite the work as follows: Enhancing Access to Finance for Technology Entrepreneurs: Analysis of Highly Innovative, High Growth Start-ups in Vietnam, Cambodia, and Nepal Washington, DC: World Bank. License: Creative Commons Attribution CC BY 3.0 Translations – If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. All queries on rights and licenses should be addressed to infoDev, The World Bank, MSN: I9-900, 1818 H Street NW, Washington, DC 20433, USA; email: info@infodev.org 2 Contents About infoDev 5 III. Recommendations 51 Acknowledgments 5 1. Recommendation Stock-take Worksheets 52 Executive Summary 7 Debt 58 2. I. Background 9 2.1. Venture Debt 59 1. Financing Gap 9 2.2. Revolving Loan Fund 61 2. SMEs – Definition, Role and Access to Finance 11 2.3. Two-Step Loan Program 62 3. Sources of Financing 13 2.4. Miscellaneous 63 4. Barriers for Accessing Finance 15 3. Revenue Financing 64 5. Vietnam 17 4. Capital Raising Platform 67 5.1. Background 17 4.1. Crowdfunding 67 5.2. Legal and Regulatory Overview Funding Facilities 71 5. for Private Equity Investment 21 5.1. Sidecar Fund 71 Cambodia 25 6. 5.2. Seed Capital Facility 72 6.1. Background 25 6. Venture Capital Regime 72 6.2. Legal and Regulatory Overview for Private Equity Investment 27 Start-up Regime 73 7. 7. Nepal 29 In-kind Support 74 8. 7.1. Background 29 Proposed Actions for infoDev 75 7.2. Legal And Regulatory Overview Appendix A: Survey Questionnaire 76 For Private Equity Investment 31 References 80 8. ASEAN Economic Community 32 II. Fieldwork 33 Fieldwork 33 1. 1.1. General Findings 34 2. Investors In the Jurisdictions 36 3. Vietnam Fieldwork Findings 39 4. Cambodia Fieldwork Findings 43 5. Nepal Fieldwork Findings 47 6. Investment Readiness Checklist 49 3 Contents List of Boxes List of Tables Box 1.0: Vietnam Snapshot 17 Table 1.0: Enterprise Survey Excerpt – Availability of Finance 12 Box 1.1: Cambodia Snapshot 25 Table 1.1: Vietnam SWOT 18 Box 1.2: Nepal Snapshot 29 Table 1.2: ASEAN SME Strategies & Initiatives 32 Box 1.3: ASEAN SME Regional Development Fund 32 Table 2.0: Fieldwork Contributors 33 Box 2.0: A2F Fieldwork 35 Table 2.1: List of Investors in the Jurisdictions 36 Box 2.1: Investee Firm Survey in Vietnam 37 Table 2.2: Views from Investors and Investee Firms Box 2.2: Investee Firm Survey in Cambodia 41 in Vietnam 39 Box 2.3: Investee Firm Survey in Nepal 45 Table 2.3: Views from Investors and Investee Firms in Cambodia 43 Box 3.0: Two-step-loan Project for Small and Medium Enterprise Development and Table 2.4: Views from Investors and Investee Firms Environmental Protection in Mongolia 62 in Nepal 47 Box 3.1: Proposed Actions for infoDev 76 Table 2.5: Investment Readiness Checklist 49 Table 3.0: MDV Products/Programs 60 List of Figures Table 3.1: Comparative Features 65 Figure 1.0: The Missing Middle 10 Table 3.2: Revenue Financing 66 Figure 1.1: SME Definition 11 Table 3.3: Characteristics of Different Crowdfunding Models 68 Figure 1.2: Sources and Stages of Financing 14 Table 3.4: Suitability of Crowdfunding Models for Figure 1.3: HI Start-ups Access to Finance Barriers 15 the Developing World 70 Figure 2.0: Venture Debt 59 Figure 2.1: Revolving Loan Fund 61 Figure 2.2: Revenue Financing 64 Figure 2.3: Sidecar Fund 71 Figure 2.4: Provision Of In-kind Support 74 4 About infoDev infoDev, a global trust fund program in the World Bank Group, supports growth-oriented entrepreneurs through creative and path-breaking venture enablers. It assists entrepreneurs to secure appropriate early-stage financing; convening entrepreneurs, investors, policymakers, mentors and other stakeholders for dialogue and action. We also produce cutting- edge knowledge products, closely linked to our work on the ground. This study was made possible thanks to the Australian Department of Foreign Affairs and Trade and the Ministry for Foreign Affairs of Finland. This study was commissioned by infoDev/World Bank and produced by Pennam Partners. For more information visit www.infoDev.org or send an email to infoDev@worldbank.org. Acknowledgments This study, Enhancing Access to Finance for Technology Entrepreneurs: Analysis of Highly Innovative, High Growth Start-ups in Vietnam, Cambodia, and Nepal, was commissioned by infoDev, a global technology and innovation program at the World Bank. The study was supervised by Anushka Thewarapperuma, who also contributed to it with Anthony Lambkin of infoDev. It was prepared by Pennam Partners. Yanese Chellapen wrote the main text with the assistance of Amirthan Arasaratnam and Fangda Shen (Pennam Partners). Thanks also for the contributions of a number of individuals for facilitating fieldwork in Vietnam, Cambodia, and Nepal: Le Nguyen Pham (5Desire), Adrienne Ravez (Geeks in Cambodia), Vidhan Rana (Biruwa Ventures), and Dristy Shresta (Udhyami Impact Fund). In addition, the following parties provided legal inputs on the legal and regulatory overviews for private equity investment: Duane Morris LLC (Vietnam), Bun & Associates (Cambodia), and Apex Law Chamber (Nepal). Thanks also to Machimanda Appaiah Deviah for copy-editing. The study also benefits from comments provided by James Bui (Lotus Impact) and Julian Webb (Creeda Projects). Cover design by Stephanie Maynard. Typesetting by Stephanie Maynard. 5 Acronyms, abbreviations and defined terms A2F: Access to finance AIC: Agribusiness Innovation Center ASEAN: Association of South East Asian Nations CIC: Climate Innovation Center EFL: Entrepreneurial Finance Lab FFFs: Family, friends, and fools HI start-up: A start-up that is highly innovative and has high growth potential High growth start-up: A start-up that is growing at a significantly faster rate than its peers and is generating significant cash flow IC: Investment certificate IFC: International Finance Corporation Investee firm: HI start-up in need of capital injection JSC: Joint stock company Jurisdictions: Refers to Vietnam, Cambodia, and Nepal LLC: Limited liability company MSMEs: Micro, small, and medium enterprises Private equity: Investing in private businesses SBBN: Small Business Banking Network SMEs: Small and medium enterprises VC: Venture capital VCIC: Vietnam Climate Innovation Center 6 Executive Summary Limited access to finance is a major impediment small and The second part of the study covers the fieldwork medium enterprises (SMEs) in developing countries face undertaken in Vietnam, Cambodia, and Nepal. The when building and growing a sustainable venture. This is fieldwork gathered views from investee firms (irrespective well documented in numerous studies and reports. Equally, of whether they were successful in raising finance or not), the contribution SMEs can make at both micro and macro investors, and other stakeholders. The fieldwork was aimed levels of an economy is well known. Keeping this in mind, at understanding the severity of the financing gap for HI this study is start-up-centric, and seeks to address the lack start-ups, the stage(s) of financing impacted by lack of of access to finance experienced by highly innovative and access to finance, and the sources of financing for HI start- high-growth start-ups (HI start-ups) in Vietnam, Cambodia, ups. and Nepal. infoDev commissioned this study to assess firsthand the financing gap for HI start-ups in Vietnam, most The fieldwork covered 70 respondents across fifteen importantly, as well as Cambodia and Nepal. In addition, sectors. On an aggregated level, 72.5 percent of investee the final objective of this study is to develop a series of firms surveyed said the severity in the financing gap is high recommendations, relevant to HI start-ups, which can (70 percent in Vietnam, 100 percent in Cambodia, and 60 directly or indirectly increase access to finance for HI start- percent in Nepal). 35 percent of investee firms surveyed ups in these countries. successfully obtained finance; with 64.29 percent of them getting investments of over $50,000. This substantiates the The first part of the study provides contextual background view that only a small proportion of HI start-ups successfully to the financing gaps and associated barriers, which secure investments greater than $50,000. restrict access to finance for HI start-ups. These barriers are driven by both supply and demand sides of the Feedback received during the fieldwork emphasized both on financing equation. Supply side barriers include: high lack of access to finance and on other non-financing factors transaction costs associated with financing; high that directly or indirectly contributed to access to finance. levels of credit risk associated with HI start-ups; These non-financing factors were grouped into four main high collateral required by financial institutions; non- categories: investment readiness level of investee conducive legal and regulatory environments firms; legal, business, and start-up infrastructure; for investment in HI start-ups; lack of start-up holistic business skills of entrepreneurs; and expertise and dedicated resources by financiers; and mentoring. Based on responses from investors and finance products that are not tailored to HI start- other stakeholders, an investment-readiness checklist was ups’ needs and circumstances. Demand side barriers developed to provide entrepreneurs guidance on what include: reliance by HI start-ups on informal financing they need to do to prepare themselves for capital raising, sources; lack of awareness on the process to apply and what are some expectations of investors. For instance, for funding from formal financing sources; low levels of investors expressed a strong preference for HI start-ups to financial literacy by HI start-ups; and the fear of losing have multiple founding team members with complementary control by involving external investors. skillsets. This ensures continuity of operations, allows founders to leverage each other’s skills, and reduce This section also contains a broad overview of the country investment risks for the investor. This improves the likelihood frameworks governing the start-up sector, together with of an investee firm getting funded. some of the initiatives relating to access to finance. 7 Executive Summary Based on the fieldwork the following additional Following fieldwork, a set of recommendations was observations can be made at the local level: developed, outlined herein as a stock-take worksheet. The recommendations are categorized into three categories: •• Vietnam: Pre-seed financing is the most difficult to financing instrument, financing mechanism or access. Venture capital (VC) financing is easiest to structure, and financing catalyst. access for HI start-ups. The other predominant source of funding for start-ups is from family and friends. The financing instrument category explores financing products, which by their nature and/or features are better •• Cambodia: Pre-seed and start-up financing are most tailored to HI start-ups when compared to traditional difficult to access. Private equity financing provides financial products. An example of a financial instrument is HI start-ups with the highest access to finance. Angel an IP-based loan product that accepts intellectual property investors and grant funding are the predominant sources as collateral rather than tangible assets. of finance for HI start-ups. The financing mechanism or structure covers measures that •• Nepal: Pre-seed financing is most difficult to obtain while can directly facilitate access to finance by improving access private equity and venture capital financing provide HI to investors for HI start-ups (for instance, a crowdfunding start-ups with the highest access to finance. Family and platform). friends are the predominant source of finance for HI start-ups. Lastly, financing catalyst recommendations address non- financing impediments, which if overcome will have a positive impact on access to finance. 8 I. Background 1. Financing Gap HI start-ups in developing countries generally lack financial Facilitating access to finance for the start-up sector is a resources and access to a sufficient customer base to priority across the world, given the role HI start-ups play effectively scale and grow their businesses. Access to in an economy. HI start-ups make significant contributions traditional growth capital including debt and equity is not to the economic growth of a country, create jobs, and are only limited but often prohibitively costly due to factors such drivers of innovation. However, due to their high risk profile as inefficient legal and regulatory policies, and inadequate and the reasons already listed, they have difficulty attracting financial markets. finance, and are often overlooked by funders. For firms competing in highly innovative and high growth The gap in financing in the start-up sector varies depending sectors - specifically ICT, clean technology and agribusiness on the amount of funding a HI start-up is looking for. All the challenge of accessing growth capital is particularly else being equal, HI start-ups looking for capital raising of acute. Young firms possess few tangible assets that can less than $50,000 or more than $1,000,000, have a higher be leveraged as collateral for loans. Despite increasing likelihood of getting finance. This is because there are more interest and attention from both public and funders willing to finance at these levels. These include private sectors to address this gap, access to microfinance institutions, grant providers, and family and seed and early stage finance of $50,000 to friends for capital raising of less than $50,000. Due to their $1,000,000 remains limited for HI start-ups investment criteria and fund size, venture capital funds (Zavatta 2008). The financing gap between small-scale mostly service the $1,000,000+ venture capital market. As capital sources (self-financing and microfinance institutions) a result, the $50,000 to $1,000,000 bracket is generally and larger sources of growth capital (banks and private referred to as the missing middle. capital markets) in developing countries could be attributed to three reasons. First, identifying which companies are viable investment opportunities is cumbersome and costly. Second, these companies typically need, not just growth capital, but technical assistance and capacity building to manage high growth efficiently and sustainably. Thus, transaction costs for private investors, relative to the return on their modest investments, are too high1. Third, developing countries vary widely with respect to their size, stages of development, education, skill levels of workforce and infrastructure. Therefore, HI start-ups in Vietnam, Cambodia and Nepal face unique challenges in their local contexts as they grow and scale their ventures. 1 For instance, in Vietnam transaction costs on investments in HI start-ups can on average go up to $40,000. These costs will vary based on investor profile and jurisdiction, and the complexity of the investment (including extent of due diligence, investment certificate, and holding investment structure). 9 1. Financing Gap Capital Raising Bracket < $50,000 Missing Middle > $1,000,000 Ventures are Ventures are high less risky compared Ventures can be as risky risk, business model has to other segments; as the missing middle; not been proven; lack of business model is generally investment is of a ‘bite-sized’ alignment between funders more advanced and proven (to nature; access to and HI Start-ups in a certain extent); HI Start- more funders. this segment. ups are a better fit for VC funds at this stage Figure 1.0: The Missing Middle This study investigates the most pressing, unmet, early-stage Before proceeding further it would be useful to understand financing needs of HI start-ups in Vietnam, Cambodia, and the overall SME sector to provide context and put into Nepal. During the fieldwork, a range of stakeholders in perspective the role and importance of SMEs on an these countries were interviewed to get their views on their economy. Information (including statistics and initiatives) respective local financing landscapes and what could be relating to HI start-ups in Vietnam, Cambodia, and Nepal done to improve access to finance. Consideration was given are almost non-existent, so SMEs in general can serve as a to initiatives implemented in these countries, and available proxy for HI start-ups throughout this study. sources of capital and their adequacy. 10 2. SMEs – Definition, Role and Access to Finance The World Bank defines SMEs as enterprises with a and $15 million in assets. SMEs are defined differently in the maximum of 300 employees, $15 million in annual revenue, three countries: Cambodia Nepal Small enterprise: a firm Vietnam with 11-50 full time employees Small enterprise: a firm with or with assets of $50,000 to SME: a firm with less than 300 assets of $2,000 to $300,000 $250,000 (excluding land) full-time employees or with assets of $500,000 (or less) Medium enterprise: a firm with Medium enterprise: a firm with 51-100 full time employees or assets of >$300,000 to with assets of >$250,001 to $1,000,000 $500,000 (excluding land) Figure 1.1: SME Definition2 SMEs play a crucial role in any economy. They make •• SMEs make up to 96 percent of all enterprises in ASEAN3 significant contributions to the gross domestic product (GDP) of a country, create jobs, and add to the export capacity of a •• SMEs account for 50 to 95 percent of employment in country. Their importance is highlighted in the Association of ASEAN countries South East Asian Nations (ASEAN) Strategic Action Plan for •• SMEs generally account for 30 to 53 percent of GDP in SME Development (2010–2015): ASEAN •• SMEs account for 19 to 31 percent of exports. 2 Note: Currency standardized to U.S. dollars for easy comparison 11 3 Nepal is not an ASEAN member 2. SMEs – Definition, Role, and Access to Finance In light of their importance to economies, SMEs (and equally constraint. Research undertaken by the IFC and McKinsey HI start-ups) must be provided with enabling business and Company provides disquieting information about environments that will allow them to develop, grow, and the credit gaps experienced by micro, small, and medium become sustainable ventures. A major challenge faced by enterprises (MSMEs) in Asia (Stein, Goland and Schiff 2010). SMEs in developing countries is access to finance (including Generally, 70 percent of MSME financing is sourced from seed and expansion capital). According to the IFC Stock- banks to fund growth. However, the research showed that taking Report to G20 (2010), 45 to 55 percent of (1) more than 85 percent of MSMEs in East Asia, South Asia, formal SMEs in developing countries do not have and Sub-Saharan Africa do not get access to bank funding access to loans from formal financial institutions. The ratio and (2) around 45 percent of the credit gap ($900 billion to increases to 65 to 72 percent if informal SMEs and micro $1.1 trillion) is in East Asia. enterprises are counted. The World Business Environment Survey4 of more than 10,000 businesses in 80 countries, The table below provides further background on the found that on average 43 percent of businesses with 20 availability of finance in East Asia and Pacific, South Asia, to 99 employees in low income countries rated access to Cambodia, Nepal, and Vietnam. finance or cost of finance as a major constraint to current operations. In high-income countries, only 11 percent of businesses of the same size rated access to finance as a Firms with Firms using Investments a bank Loans Value of banks to Investments Investments financed by loan/Letter requiring collateral finance financed Investments financed equity or of Credit collateral needed for investments internally financed by by supplier stock sales Economy (%) (%) a loan (%) (%) (%) banks (%) credit (%) (%) East Asia & Pacific 37.6 76.6 176.7 23.9 71.7 15.1 2.5 5.2 South Asia 30 82.2 211.6 26.9 73.1 19 0.6 3.4 Cambodia 20.7 89.9 173.7 11.3 44.3 6.1 7.7 - Nepal 39.1 80.9 259.7 17.5 80.7 12.4 0.3 3.9 Vietnam 49.9 90.8 217.7 21.5 74.7 12 0.8 3.8 Table 1.0: Enterprise Survey Excerpt - Availability of Finance Reprinted from: enterprisesurveys.org/Data/ExploreTopics/finance#--13 The following observations from the above table can be •• Investments made by SMEs are predominantly financed made: internally, which means this will invariably impede growth and innovation financing given deferment of investments •• The majority of loans require collateral to be provided up until these can be financed internally; and (ranging from 80.9 percent to 90.8 percent) with collateral needed being in the 173.7 percent to 259.7 •• Investments financed by equity or supplier credit are percent range for Cambodia, Nepal and Vietnam negligible, which means there is room to improve these avenues of funding. 4 World Bank Group, Enterprise Surveys Database, 2010; http://www.enterprisesurveys.org; World Business Environment Survey 12 3. Sources of Financing A HI start-up can access both formal and informal sources Family, friends, fools: Family, friends and fools (FFF) play of financing to seed, proof, commercialize, grow or expand. a vital part in financing HI start-ups at the seed and start-up Generally, financing is in the form of debt, equity or a stages.. FFF generally invest at the seed stage in a venture hybrid of both. Debt financing is not synonymous with bank and do so predominantly based on a personal assessment of funding, and can come from other sources. It is common the entrepreneur rather than an assessment of the venture for entrepreneurs to receive investment in the form of a itself. FFF are passive investors, have limited expectations loan from their immediate network without having to sell of return on investment, and their financing tends to be equity in the venture. While banks are the main source of done on an informal basis. Obtaining FFF financing can also formal funding for SMEs in East Asia, bank funding is not an help build traction in a fundraising round. With the advent avenue that HI start-ups can generally avail of themselves of crowdfunding, FFF will play a bigger role in funding HI due to lack of trading history and positive cash flows, nature start-ups. Crowdfunding could also help tap into diaspora of operations, and the composition of balance sheets with a remittances to augment the investment capacity of an FFF heavy reliance on intangible assets. group by being a conduit between diaspora remittances and HI start-ups. Sources of financing that HI start-ups can explore are outlined below: Angel investors: Angel investment fills the gap between FFF financing and venture capitalists. Angel investors can Bootstrapping: This is a self-funding source of finance be current or previous entrepreneurs, high net-worth where the entrepreneur funds the HI start-up from her/his individuals or professional investors attracted by private own financial resources and from any revenue generated. equity assets. As opposed to FFFs, angel investors invest in This allows the entrepreneur to maintain full control and different HI start-ups for an overall high return across their ownership of the business. However, this can severely investment portfolios. The arrangement between the angel restrict the development and growth of the venture since it investor and the HI start-up is formal. Angels invest with is operating with lean financial capacity. the aim of capturing the capital growth of the HI start-up; capital injection is generally by way of equity or convertible Grants: Grant funding is capital that does not need to be notes. In addition, start-ups benefit from angels through repaid. Grant funding is an important source of finance in mentoring, management inputs, or active participation on developing countries. This may sometimes be the only way the advisory/directors’ boards. entrepreneurs can access capital in the early stages. Grants are generally disbursed through government related entities, Angel investors could also be part of an angel group, which development finance institutions, or start-up competitions. makes syndicated investments. Here, several investors pool Grants are highly competitive and the application process their money into a specific HI start-up. An angel group can be as rigorous as raising capital from external parties. provides angel investors the opportunity to raise more capital and also leverage off each other expertise to assess investment opportunities. 13 3. Sources of Financing Venture capital: Venture capital is a more formal Venture capital (and angel investment to a certain extent) and larger variant of an angel investor group. Venture is referred to as ‘smart money’ because entrepreneurs see capital is pooled via a fund, which is managed by a fund venture capitalists as both financing sources and strategic manager. Investors in the venture capital fund do not partners that can assist their growth, and leverage their actively participate in the fund. The fund manager has networks and expertise at the same time. In addition, a the responsibility to generate deal flow, assess investment HI start-up could benefit from any synergies across the opportunities, monitor the investment portfolio, assist HI investment portfolio of the venture capital fund. HI start-up start-ups with growth and expansion, and maximize returns could attract follow-up capital more easily from the same for investors with appropriate exit strategies. Venture capital venture capitalists or from new ones. is provided at the start-up, and early and late expansion stages. Of relevance to the countries in this study is the Comparatively, obtaining venture capital is more complex emergence of impact investment as an investment theme. in that HI start-ups are subjected to a more rigorous Investors not only look for financial returns but also channel screening process. Before approaching venture capitalists, investments to generate positive social or environment entrepreneurs need to ensure their ventures are investment impacts. ready, they have reviewed the investment criteria of venture capitalists, and their ventures, prima facie, satisfy the investment criteria. If the entrepreneur is successful, the terms and conditions attached will need to be carefully considered and understood. Venture capitalists are professional investors and will seek to minimize their investment risk through their investment terms. Early expansion Late expansion Start-up Seed Pre-seed Boot Boot Grant, FFF, strapping strapping, angel investor Super angel grant and and micro and venture FFF VC capital Venture capital Figure 1.2: Sources and Stages of Financing 14 4. Barriers for Accessing Financing Access to finance is impeded by various factors, both on the •• Lending assessment criteria used by banks strict and side of funders (supply-side barriers) and investee firms inflexible. These are not necessarily tailored to the start- (demand-side barriers). up sector. Supply-side barriers include the following: •• High transaction costs for funders to assess and service the start-up sector when compared to the •• High levels of collateral required (predominantly ‘hard’ relatively low amounts of finance they require. assets) by banks. HI start-ups do not generally have ‘hard’ •• Poor legal and regulatory frameworks in assets on their balance sheets, since their assets are developing countries that do not incentivize funders to mainly intangibles. service the start-up sector. •• Higher levels of credit risk associated with the start- •• A lack of dedicated start-up resources (including up sector. This impacts lending rates and loan terms. technical expertise) among funders to properly service HI start-ups are subjected to higher lending rates and the start-up sector. shorter loan terms. Investee firms Supply-side barriers Demand-side barriers Lending assessment Legal/regulatory Process awareness framework Informal funding Collateral source Credit risk Financial literacy Dedicated start-up Control dilution resource Transaction cost Figure 1.3: HI Start-ups Access to Finance Barriers 15 4. Barriers for Accessing Financing Demand-side barriers include: •• HI start-ups’ (and other SMEs) tendency to rely heavily on informal funding sources (such as family) to fund businesses rather than explore formal funding sources. •• Lack of financial literacy, including complicated and non-tailored application procedures, that generally deters HI start-ups from exploring formal funding. •• Lack of funding/investment process awareness leading to poor presentations of business cases by HI start-ups. This ultimately has an adverse effect on access to finance. For instance, HI start-ups may not convey adequate information on their market as part of their business case. This could be due to a lack of access to market intelligence, which in turn leads to not properly identifying the right market segment(s) and wrongly estimating market potential. •• Entrepreneurs in developing countries historically prefer to maintain control over their businesses. They therefore tend to avoid financing that can lead to equity dilution and loss of control. 16 5. Vietnam 5.1. Background The snapshot below provides a broad overview on the economic, financing, legal, and regulatory landscape in Vietnam. It also provides an illustrative list of ongoing initiatives and measures that could, directly or indirectly, affect access to finance in Vietnam. Box 1.0 Vietnam Snapshot Highlights Competitiveness The population of Vietnam is around 89 million. Vietnam ranked 70 out of 148 economies on the 2013-14 global competitiveness index. The GDP was $140 billion in 2012 with a 5.1 percent growth (the slowest in 13 years) Access to finance is considered to be the most problematic factor while doing business in Vietnam. Banks have a high portion of non-performing loans on their balance sheet; this will have negative impact on start-up financing. Vietnam experienced a drop in ease of access to loans (104 to 113). However, improvements have been made in venture capital Growth in credit for 2012 was 8.9 percent (short of the 15 percent availability (96 to 78) and financing through local equity markets to 17 percent set by the central bank) (70 to 57) SMEs were allowed to defer their income tax and VAT payments in Strength of investor protection (130 to 134) and protection of 2013. minority shareholders’ interests (99 to 126) have also declined. Reprinted from: Asian Development Outlook 2013, ADB Reprinted from: The Global Competitiveness Report 2013-14 Investors Incubators/accelerators •• IDG Ventures Vietnam •• CMC Fund •• Becamex TIC •• DFJ VinaCapital •• Mekong Capital •• Founder’s Institute •• CyberAgent Ventures •• SEAF Blue Waters Growth •• 5Desire Fund •• Prosperous Vietnam •• Hatch.vn Corporation •• Vietnam Business Challenge Fund •• Saigon Hi Tech Park •• Savvi Angels •• Mekong Brahmaputra Clean •• VSV Accelerator •• Unitus Impact Development Fund (focuses also on Cambodia and Nepal) •• Egg Agency •• Kusto Tiger Fund •• LGT Venture Philanthropy 17 5. Vietnam The following table was sourced from the Venture Capital and Private Equity Country Attractiveness Index – 2011 Annual. It provides an overview on the strengths, weaknesses, opportunities, and threats in financing in Vietnam. Strengths Weaknesses ••Abundance of natural resources ••Nascent VC population, lacking practical experience in various ••Comparatively low labor costs sectors ••Political stability ••Administrative procedures still lagging behind regional peers ••Strong entrepreneurial culture ••Underdeveloped financial markets ••Strong and growing domestic demand. ••Relatively weak corporate governance ••Financial reporting not yet in line with international standards. Opportunities Threats ••Rise in standard of living is creating demand for products and ••More time consuming to do business given relatively stricter services, particularly in urban centers government regulations ••Exports to US, China, and ASEAN are growing ••High inflation rate ••Vietnamese enterprises have a greater appetite and scope for ••Escalating cost of borrowing. operational and financial improvements ••Infrastructural demand is driven by the transformation of the economy. Outlook ••High potential in consumer sectors ••Strong commodities production, with potential for more natural resource exploration and infrastructure development ••Concern about inflation rate presents challenges for the public sector to gain investor confidence ••Potential for higher growth, provided economic reforms are implemented efficiently to reduce the cost of doing business in Vietnam Table 1.1: Vietnam SWOT Reprinted from: Venture Capital and Private Equity Country Attractiveness Index – 2011 Annual The SME framework in Vietnam was part of the five-year While local government ministries and organisations are plan of 2011-2015, detailed in Decree 56/2009/ND-CP, responsible for building and administering the programs, June 30, 2009. On May 5, 2010, the government released central government approval is needed to maintain Resolution No. 22/NQ-CP to effectively fast-track the consistency and for appropriate integration. implementation of the decree. The decree allows for new laws to be written that take a In Vietnam, SME support programs available are divided favorable and less onerous view of the SME community. based on sectors and geography. Primarily, support available However, its effectiveness is yet to be seen. Information based on whether the SME operates in the economic on SMEs is fragmented and there is little transparency and development sector, social development sector or if it is consistency in interpretation. This has led to the government based in certain geographical areas. SMEs owned by women suggesting that information about and for SMEs be made or with higher female employees get priority assistance. available via a centralized portal. 18 competitions for entrepreneurs, local businesses, and The government is working on initiatives to support SMEs, individual users, and peer-learning sessions. such as a credit guarantee scheme and an SME development fund. The State Bank of Vietnam is now required to assume •• infoDev is also piloting a virtual business the responsibility to strengthen financial institutions to incubation model in Vietnam. This initiative provides support SMEs with products and services. The framework a way to extend the reach of business incubation extends to setting up business incubators to help SMEs beyond Hanoi and Ho Chi Minh City and into rural areas. realize commercial success of their ideas and technologies. Important objectives of the pilot are to assess the impact and cost-effectiveness of virtual incubation and, by way Other support mechanisms that are part of the SME of a strong monitoring & evaluation component, to framework include recognizing the importance of derive the necessary lessons for potential future scaling- intellectual property, facilitating registration, protection and up in Vietnam and/or replication in other countries. transfer of IP; facilitating SMEs to meet ISO and other global •• infoDev launched the Mekong Women’s standards; training and assistance to meet appropriate Entrepreneurship Challenge in 2012, covering corporate governance standards, and funding road shows to women entrepreneurs in Vietnam, Cambodia, and showcase resources available to SMEs. Lao PDR. MWEC tackles problems that women in developing countries identify as major impediments Given below is a list of some initiatives by local and foreign to female-led growth-oriented firms: lack of relevant organizations (including infoDev), directly and indirectly business information and knowledge, lack of supportive related to enhancing access to finance: networks, and lack of self-confidence, in addition to cultural barriers. MWEC’s goal is to facilitate the •• As part of its Climate Technology Program, infoDev expansion of women-owned businesses by providing is setting up the Vietnam Climate Innovation qualified women with the necessary tools to improve and Center (VCIC), to enable local firms to develop and grow their businesses, including financing, one-on-one commercialize innovative climate technology solutions. support, peer-based learning, and training workshops VCIC will operate on a four ‘pillars’ program, which and seminars. The program focuses on highly motivated includes access to finance, technology commercialization, women who are small business owners or managers venture acceleration, and market development. The eager to expand their businesses. VCIC is expected to launch in the second half of 2014. infoDev is also looking at facilitating the set-up of a seed •• The International Development Agency committed $55 capital facility, which will act as a venture capital source million in loan in 2013 to the Vietnam Inclusive for VCIC incubatees and other HI start-ups in the climate Innovation Project. The objective of the Inclusive innovation space. Innovation Project for Vietnam is to adopt, upgrade, and develop inclusive innovations for the benefit of the Base •• mLab East Asia was launched in 2012 as a pilot by of Pyramid (BoP) population. infoDev in Vietnam. mLab East Asia offered an open platform for technology entrepreneurs and application •• The International Development Agency also committed developers to interact, work, access technical tools, and $100 million, with the Government of Vietnam co- deploy solutions to incubate and develop their business. contributing $10 million, to the Fostering Innovation mLab East Asia also served as a bridge between investors through Research, Science and Technology and businesses to commercialize and take products from (FIRST) Project. The objective of the FIRST Project laboratories to the market. A related initiative in Vietnam is support science, technology and innovation (STI) is the mobile application hub (mHub). mHub is in Vietnam by designing and piloting of STI policies, a multi-stakeholder network that organizes informal enhancing the effectiveness of project-aided research meetings on topics related to mobile technologies, and development (R and D) institutions, and encouraging the development of innovative technology enterprises. 19 5. Vietnam •• The Ministry of Science and Technology launched •• The Vietnam Green Credit Trust Fund is an the Vietnam Silicon Valley project in June 2013. initiative of the Swiss Secretariat for Economic Affairs. The project will nurture HI start-ups and provide an This financing initiative encourages entrepreneurs to enabling environment for innovation and technology adopt cleaner technologies. The financing mechanisms commercialization. The Vietnam Silicon Valley project will are grants by way of reimbursement or debt guarantee to provide a series of programs including pre-seed capacity financial institutions providing green credit. building program and an accelerator program. •• The Vietnam Business Challenge Fund, •• The Government of Vietnam has announced the creation an initiative of the Department for International of an SME Development Fund to provide financial Development, provides funding of between $100,000 support to SMEs. Loans will not exceed $1.4 million per to $800,000 to innovative companies using inclusive SME. business models and operating in agricultural, low carbon growth or infrastructure sectors. •• The Asian Development Bank (ADB) has supported Vietnam in many ways, including a recent loan of $50 million to facilitate its SME development program. The SME development program aims to: enhance the policy and planning framework for SME development; facilitate SME access to finance; improve efficiency of administrative systems that support SME development and operations; and strengthen regulatory frameworks. •• The Vietnam Energy Efficiency and Cleaner Production (EECP) Financing Program is an initiative by the International Finance Corporation (IFC). IFC works with selected banks in Vietnam to build their sustainable energy portfolios and tailor financing products. This includes medium and long-term energy financing loans, which factor in clients’ cash flows and align repayment timeframes accordingly. 20 5.2. Legal and Regulatory Overview for Private Equity Investment This legal and regulatory overview for private equity investment was prepared by legal consultants in each respective jurisdiction. The summary is generic in nature and is meant to provide broad guidance only. Funding type Other types of funding sources Characteristics Private offer (for example, convertible lending) Brief Vietnamese law refers to “private placement of securities”, which is defined as Typically, this is a situation description “an arrangement for offering securities to less than 100 investors not including where a lender reaches an professional security investors without using the mass media or internet”5. agreement with an investee However, the specific legislative framework governing “private placement of (and/or relevant shareholders) securities” is, in practice, limited to offering shares of joint stock companies (JSCs) on converting the obligation only. to repay the loan to a HI start-ups in Vietnam may take other corporate forms and the comments here corresponding amount of are aimed at “private placement” of equity in both JSCs and limited liability equity in favor of the lender. companies (LLCs), being by far the two most common corporate forms in Vietnam. In addition, “sale of equity” as used here is intended to cover both issuances of Depending on whether the new shares6 to potential investors as well as transfer of existing shares to such borrower is the investee or its investors 7. shareholder(s), the conversion would ultimately take the form of either a share acquisition or share subscription. 8 Types of Share acquisition Share subscription (purchase of newly-issued Either share acquisition or private (purchase of shares from an or treasury shares9 from a company) share subscription, as the case offers existing shareholder) may be. Maximum No limit. No limit. No limit. offering (Table continued on next page) 5 Article 6.12(a) of the [aw on Securities of Vietnam dated 29 June 2006 as amended on 24 November 2010 (the “Securities Law”) 6 It is noted that only JSCs not LLCs have “shares” per se. LLCs have chunks of “charter capital” to be contributed. “Shares” is used here throughout for consistency and to refer to a discrete amount of paid-in capital that a person (a “shareholder” in the case of a JSC and a “member” in the case of an LLC) has paid to a company. “Shareholder” is used here for both purposes. 7 NOTE: this report does not touch on share acquisition or share subscription in public companies. 8 Similarly, all other forms of seed investment such as angle investors, company matching or crowd investment would ultimately result in either share acquisition or share subscription in the investee company. 9 Investors may purchase “treasury” shares of existing JSCs, which are “stock issued by a joint stock company [arguably both public and non-public companies] and redeemed by that issuing company”. While Vietnamese law on securities sets out a number of conditions on the sale and purchase of treasury stock of public companies (Article 39 of Decree 58 dated July 20, 2012), it is silent on the same in relation to non-public companies. The better view is that the sale of treasury stock by a non-public company is treated the same as a typical JSC share subscription in terms of general conditions and licensing process. 21 5. Vietnam Funding type Characteristics Private offer Other types of funding sources (for example, convertible lending) Overview No regime in connection No regime in connection with offering share Depending on whether the of applicable with the offering itself. subscription in an LLC per se. conversion ultimately results disclosure regime When the acquisition In case of a non-public JSC, the investee must in a share acquisition or share completes, the investee firm apply to the competent licensing authority to subscription, the respective (Investee) must publicize register the private placement in advance of aforementioned disclosure the change in its ownership proceeding and the competent authority will regime will apply. structure (in case of an LLC) simultaneously register and publish details of the or change of its “founding” private placement on its website.12 shareholders (in case of a When the subscription completes, the investee is JSC)10 in a local or central obliged to report to the competent body on the newspaper for three results of the placement, pursuant to a standard consecutive issues. 11 form report. 13 Depending on the specific circumstances, the investor may need to apply to the competent licensing authority for issuance of amendment to the investee’s investment certificate (IC) or enterprise registration certificate (ERC). Regulations See above. Advertisement of the offering by a JSC on public As above. on offer media and internet is prohibited. 14 advertisements Any No No As above. exemptions for advertising and disclosure regimes (Table continued on next page) 10 Article 41 of Decree 43 dated April 10, 2013 on business registration (Decree 43). “Founding” shareholders are shareholders who have approved and signed the first charter of the JSC (Article 4.11 on Enterprises dated November 29, 2005 (the Enterprise Law). 11 Article 28.2 of the Enterprise Law. 12 Article 6.3 of Decree 58 dated July 20, 2012 (Decree 58). The actual identity of the competent authority for this purpose will depend on the exact nature and business activities of the investee. In the vast majority of cases, however, the competent authority will be the relevant provincial Department of Planning and Investment. 13 Article 6 of Decree 58. 14 Article 6.12.a of the Securities Law. 22 Funding type Other types of funding sources Characteristics Private offer (for example, convertible lending) Brief overview Typically for both JSCs and For non-public JSCs: As above. of procedures LLCs. 1. The general meeting of shareholders (GSM) 1. The seller and the investor of the investee to approve the share subscription to express intention to plan (the plan) including plans for use of sell and buy shares in the proceeds. investee via a letter of intent, 2. The investee to register the plan with the heads of terms or similar. competent licensing authority. 2. The investor carries out 3. The investee to approach and enter into share a due diligence on the subscription agreement(s) with selected investors investee. (the SSA). The selected investor may enter into 3. The investor and the seller preliminary agreements prior to the SSA and/or enter into a share sale and carry out due diligence on the investee. purchase agreement (SPA), 4. The investee to report to the competent drafted in part based on licensing authority within 10 days from the date findings of the due diligence the offer completes. report. NOTE: In some cases the investee and/or new 4. The parties to the SPA investor will have to apply to the competent take actions as agreed licensing authority for issuance/amendment of to complete conditions an IC or ERC. precedent to closing of the 5. The legal representative of the investee will SPA and transfer of the cause the investee’s shareholders register to be shares in question. amended. 5. Subject to specific facts of For LLCs: the case, the investee and/or investors may need to apply 1. The investee and the investor to express to the competent licensing intention to sell and buy shares in the investor via authority for amendment of a letter of intent, heads of terms or similar. investee’s IC or ERC as the 2. The investor carries out a due diligence on the case may be. investee. 6. The legal representative 3. The investee and investor sign an agreement of the investee will cause with respect to the obligation of the latter to the investee’s shareholders’ contribute new capital to the investee. register to be amended (if 4. The members’ council (MC) of the LLC the investee is a JSC) or issue approves an increase of the LLC’s charter capital a certificate of ownership of by way of contribution by new member(s). capital to new investor (if the 5. The investee applies to the competent investee is an LLC). licensing authority for issuance of amendment of its IC or ERC. The investor makes capital contribution to the investee. 6. The legal representative of the investee causes investee to issue a certificate of capital contribution/ ownership of capital to the new investor. (Table continued on next page) 15 In the case of an LLC this would be a capital transfer agreement. 23 5. Vietnam Funding type Other types of funding sources Characteristics Private offer (for example, convertible lending) Statutory No specific conditions for the Conditions for non-public JSC:16 As above. conditions for offer/ offer/investment. However a. a. Having decision of the GSM in the form investment general threshold matters of the plan which must include plans for use of include: (i) general conditions the proceeds obtained from the offer on market access in relevant b. Meeting any other conditions prescribed sector for foreign investors by specialized law in case the investee’s scope in particular; and (ii) shares of activities fall inside the list of conditional offered for sale must be fully business sectors paid up by the seller. c. Meeting any general conditions on market access in relevant sector for foreign investors in particular. Security No. No. No. requirements Any other Vietnamese law provides As aforementioned. No. financial/ some mechanisms to protect investor protection law minority shareholders. Most applicable notably, Vietnamese law provides that the default voting ratio for a company’s highest decision making body (GMS in the case of JSCs and MC in the case of LLCs) is 65 percent and 75 percent depending on the importance of the matter in question (far higher threshold than the conventional 51 percent majority ratio)17. 16 Article 4.1 of Decree 58. 17 In some cases, it may be possible for companies to proscribe lower ratios but this is subject to assessment on case by case basis. 24 6. Cambodia 6.1. Background The snapshot below provides a broad overview on the economic, financing, legal, and regulatory landscape in Cambodia. It also provides an illustrative list of ongoing initiatives and measures that could, directly or indirectly, affect access to finance in Cambodia. Box 1.1 Cambodia Snapshot Highlights Competitiveness The population of Cambodia is around 14.5 million Cambodia ranked 88 out of 148 economies on the 2013-14 global competitiveness index; second last in ASEAN The GDP was $14.2 billion in 2012 with a 7.2 percent growth due to robust consumption and investment Access to financing is considered to be the fifth most problematic factor in doing business in Cambodia Growth in credit for 2012 was 34.1 percent Rankings in ease of access to loans (47 to 56) and financing Authorities are considering tightening loan-to-valuation/loan-to- through local equity market (108 to 113) have declined with a deposit ratios to preserve financial stability minor improvement in venture capital availability Reprinted from: Asian Development Outlook 2013, ADB While protection of minority shareholders’ interests has slightly improved, Cambodia has dropped to 69 in strength of investor protection ranking. Reprinted from: The Global Competitiveness Report 2013 - 14 Investors Incubators/accelerators •• Uberis Capital •• Cambodia-Laos Development •• Emerging Markets Entrepreneurs Fund S.C.A. •• TriAsia Group •• Kotra •• Golden Gate Venture •• Leopard Capital •• Cambodia Investor’s Club •• Devenco (new) •• Golden Gate Venture •• Emerging Markets Investments 25 6. Cambodia Cambodia launched its SME development framework •• Cambodia Credit Bureau, the country’s first credit to provide SMEs with an enabling environment to bureau established in 2012, is likely to have a positive increase competitiveness and productivity in 2005. The impact on access to finance for businesses, although it SME development framework considered the impact could be of most benefit to microfinance institutions and of regulatory and legal framework, access to finance, banks. Credit bureaus allow lenders to assess risk more SME support activities, and SME policies. This led to the accurately, which could lead to an increase in lending and implementation of several initiatives related to access to loan products being more appropriately priced. finance, including the creation of a credit bureau and development of finance lease products. Supportive actions •• Agence Française de Développement (AFD), and at a policy level can also be found in the updated National its subsidiary Proparco, are active in funding projects, Strategic Development Plan 2009- 2013. Supplementary directly and indirectly. AFD’s activities in Cambodia to the first SME development framework, the General include: loans, equity and quasi-equity investments in Department of Industry released its strategic framework, companies; loan guarantees to local banks for servicing Strategy 2015, with access to finance for SMEs forming one SMEs; technical assistance grants; and training and of its five intervention pillars. Strategy 2015 recognized that capacity building activities for businesses. SMEs are at a disadvantage compared to large enterprises, and more must be done to provide incentives to them. Given below is a list of some initiatives by local and foreign organizations (including infoDev), directly and indirectly related to enhancing access to finance: •• infoDev launched the first business incubator, Emerging Markets Entrepreneurs, in Cambodia in 2011 under its Creating Sustainable Businesses program. The business incubator is managed by Emerging Markets Consulting (EMC), in collaboration with the Royal University for Law and Economics and the Young Entrepreneurs’ Association of Cambodia. 26 6.2. Legal and Regulatory Overview for Private Equity Investment This legal and regulatory overview for private equity investment was prepared by legal consultants in each respective jurisdiction. The summary is generic in nature and is meant to provide broad guidance only. Funding type Private offer [Note: This would be Sophisticated/accredited offer an offer other than a sophisticated/ (e.g. – subordinated loans, Other types of funding sources Characteristics accredited offer] guarantees, etc.) (for example, convertible lending) Brief A private offer is regulated by Law on the Cambodian laws and regulations There is no specific regulation description Issuance and Trading of Non-Government do not distinguish sophisticated governing convertible lending. Securities (2007) and relevant implementing investor from public investor. The terms and conditions of regulations issued by the Security Exchange That is to say there is no the convertible loan are usually Commission of Cambodia (SECC). separate regulatory requirement determined by contractual Private offer is an offer that: for certain groups of investors. provisions. However, a loan is subject to the Civil Code. The 1. May only be accepted by the person to legal maximum lending interest whom it is made; and rate is capped at 18 percent 2. Is made to a person who is likely to be per annum by the Ministry of interested in the offer, having regard to: (a) Justice. In addition, in case a previous contact between the person making loan is granted by banking and the offer and that person; (b) a professional financial institutions, additional or other connection between the person specific regulations mainly making the offer and that person; or (c) issued by the National Bank of statements or actions by that person that Cambodia are applicable. indicate he is interested in offers of that kind. Maximum Each private offer of equity that is made to N/A Generally no limit on amount offering more than 30 persons is treated as a public of loan is imposed. However, offer. some restrictions are applied to There is no implementing regulation loans granted by banking and governing the private offer of debt securities financial institutions, such as yet. limit on large exposure and/or loans to a related party. Overview of According to Article 3 of the SECC’s Prakas N/A Generally no limit on amount of applicable on the Issuance of Equity Securities, any loan is imposed. However, some disclosure regime person who proposes to make a private required restrictions are applied offer of equity securities must file related to loans granted by banking and documents with the SECC. When the private financial institutions. offer is completed that person must report the result without delay to the SECC. Despite the above provisions, the SECC is yet to provide further details as to how the filing of the documents on private offers should take place. (Table continued on next page) 27 6. Cambodia Funding type Private offer [Note: This would be Sophisticated/accredited offer an offer other than a sophisticated/ (e.g. – subordinated loans, Other types of funding sources Characteristics accredited offer] guarantees, etc.) (for example, convertible lending) Regulations The private offer cannot be publicly N/A No restriction on advertisements on offer advertised by any means including by any specific regulation. advertisements advertisements inviting requests for information on the equity securities investment. There is no law or regulation governing advertisement of private offer of debt securities. Any No exemptions are provided by the law. N/A No restriction on advertisements exemptions by any specific regulation. for advertising and disclosure regimes Brief Detailed procedures not yet issued by the N/A No specific procedure required. overview of SECC. procedures Statutory Detailed regulations defining statutory N/A Other than the standard conditions conditions for offer/investment licensing conditions applicable to loans, for offers/ investments procedures not yet issued by SECC. no specific regulation governing including convertible loans. licensing procedures Security No requirements for security. N/A No requirements for security. requirements Any other ••Law on Commercial Enterprises (2005) N/A ••Civil Code (2007) financial/ ••Law on the Issuance and Trading of Non- ••Law on Banking and Financial investor protection Government Securities (2007) Institutions (1999) laws ••Sub-Decree on the Implementation of The applicable? Law On Issuance and Trading of Non- Government Securities (2008) 28 7. Nepal 7.1. Background The snapshot below provides a broad overview on the economic, financing, legal, and regulatory landscape in Nepal. It also provides an illustrative list of ongoing initiatives and measures that that could, directly or indirectly, affect access to finance in Nepal. Box 1.2 Nepal Snapshot Highlights Competitiveness The population of Nepal is around 30.5 million Nepal ranked 117 of 148 economies on the 2013-14 global competitiveness index The GDP was $19.4 billion in 2012, with a 4.6 percent growth Access to financing is considered to be the 9th most problematic SMEs accounted for 95 percent of registered businesses in Nepal factor in doing business in Nepal and 21.7 percent of value added to the GDP Nepal experienced a drop in ease of access to loans (91 to 107), The banking sector experienced an increase in non-performing financing through local equity market (44 to 53), and venture loans; banks were directed to have at least 10 percent of their loan capital availability (83 to 102) portfolio allocated to the agricultural and energy sectors There was also a decline in the protection of minority shareholders’ An excessive number of banking and financial institutions (213) is interests and the strength of investor protection rankings. putting pressure on the financial sector. Reprinted from: The Global Competitiveness Report 2013 - 14 Reprinted from: Asian Development Outlook 2013, ADB Investors Incubators/accelerators •• Business Oxygen •• Biruwa Ventures •• Udhyami Impact Fund •• Business Incubation Program •• Dolma Impact Fund I •• Typehost Capital 29 7. Nepal The SME industry in Nepal is regulated by the Industrial Given below is a list of some initiatives by local and foreign Enterprises Act, 1992 and the Industrial Policy 2011. While organizations (including infoDev), directly and indirectly the act provides for the definition of small and medium related to enhancing access to finance: enterprises and associated industries, the Industrial Policy provides for strategies and their implementation for •• infoDev is in the process of launching an Agribusiness industrial development. Some of the objectives of the Innovation Center (AIC) in Nepal under a larger Industrial Policy 2011 are: World Bank project for agriculture commercialization and trade (PACT). The AIC will foster and accelerate •• Establishment of industrial entrepreneurship as a growth of Nepal’s agro-processing sector, helping sustainable and reliable sector by utilizing the latest to commercialize agricultural production, increase technology and environment friendly production process agricultural income, and reduce poverty. The AIC’s services will hinge on five pillars: technical knowledge, •• Increase Nepal’s investment attractiveness by enhancing advisory services, incubation/acceleration platform, its human resources and managerial capacity. access to facilities, and access to finance. •• Business Oxygen is a $14 million private equity fund set-up by the IFC SME Ventures program together To achieve these objectives, the Industrial Policy 2011 has with the Bank of Kathmandu and Beed Management. considered the following strategies: Business Oxygen will invest risk capital in Nepal’s SMEs with a ceiling of $500,000 per investee firm. The fund •• Providing technical and financial assistance to enterprises will fill the financing gap left by banks by targeting that use environment-friendly and energy-saving entrepreneurs who cannot access bank funding due to technologies the lack of collateral required. •• Establishing funds such as the Technology Development •• The Deposit and Credit Guarantee Corporation, Fund, the Small Industries Development Fund, and the a government-sponsored corporation, provides credit Industrial Investment Protection Fund to improve the guarantees to eligible financial institutions servicing investment environment in Nepal SMEs. The credit guarantee scheme is capped at $15,000 and a financial institution can only recover 75 percent •• Allowing tax deduction for research and development of the default loan amount. While this is a noteworthy expenses to promote research and development activities initiative, it will be of limited use to the missing middle as in Nepal the level of credit guarantee is low. •• Forming a committee, which will consider industrial •• Mobile Nepal (mHub) is an initiative by infoDev policies and foreign investment policies best practices, and Young Innovations Pvt. Ltd aimed at fostering the and their relevance to Nepal mobile ecosystem in Nepal. It acts as a hub for mobile •• Use angel and venture capital funds to assist business technology entrepreneurs by providing mentoring incubators provide finance to incubates, thus creating and training programs, and serves as a conduit for employment. the creation and implementation of ideas for mobile applications. 30 7.2. Legal and Regulatory Overview for Private Equity Investment This legal and regulatory overview for private equity investment was prepared by legal consultants in each respective jurisdiction. The summary is generic in nature and is meant to provide broad guidance only. Funding type Other types of funding sources Characteristics Private offer (for example, convertible lending) Brief Section 42 of Companies Act, 2006 refers to “private placement of securities” Convertible debentures or description which is defined as “an arrangement for offering securities to less than 50 preference shares can be issued in potential investors including security investors using circular, letter or any case convertible lending is required electronic media. However, the specific legislative framework governing “private which is in practice in some of the placement of securities,” is, in practice, limited to offering shares of private companies in Nepal - subsection 3 of companies or unlisted public limited companies. section 35 of Companies Act, 2006 Securities Board of Nepal is the regulating authority for public issues. Depending on whether the borrower Private placement covers private issue as well as transfer of existing shares. is the investee or its shareholder(s), the conversion may ultimately take the form of a share subscription with voting rights. Types of Share acquisition Share subscription (purchase Either share acquisition or share private (purchase of shares from an of newly-issued or treasury subscription, as the case may be. offer existing shareholder). shares from a company). Maximum No limit. No limit. No limit. amount of offering Overview of The information on transfer or acquisition Legal stipulation does not exist The concerned company has to applicable of shares is to be given to the office for issue of equity of private report any changes in portfolio disclosure regime of the company registrar pursuant to companies and non-profit concentration subsequent of section 47 and 51 of the Companies Act companies are not governed conversion or acquisition - section 2006. by the laws regarding the issue 47 of Companies Act, 2006. of shares. Share certificate is issued to the shareholders as an evidence of investment. Regulations See above. It can be advertised on internet See above. on offer or electronic media. advertisements Any No. No. See above. exemptions for advertising and disclosure regimes Brief overview For all types of companies: The board of directors of See above. of procedures the relevant company has to 1. The buyer and seller of the shares should have a ‘meeting of the mind’ on the deal. approve any type of share transfer, and this is to be 2. The buyer may carry out due diligence on informed to the office of the the seller if required. company registrar, pursuant to 3. The buyer and seller have to sign sale and section 51 of the Companies purchase deed which is to be submitted Act 2006. to the board of directors of the company - subsection 3 of section 42 of Companies Act, 2006. 4. The company is responsible for statutory compliance for sale and purchase of shares and subsequent transfer of shares - subsection 2 of section 47 of Companies Act, 2006. 31 8. ASEAN Economic Community Box 1.3 Except Nepal, which is not part of ASEAN, Vietnam and Cambodia will benefit from ASEAN economic integration. ASEAN economic integration aims to facilitate ASEAN SME Regional the flow of goods, services, investment and capital, and human resources. Development Fund Vietnam and Cambodia will both benefit from initiatives being developed to strengthen their competitiveness at both regional and global levels with support An SME Regional from ASEAN’s developed economies. Changes would be required at the domestic Development Fund to help level from a legal, policy, and regulatory perspective to ensure that each domestic overcome the financing economy meets the harmonization process necessary to facilitate the ASEAN gap for the missing middle Economic Community integration. Such changes (for instance, an appropriate is being set up for the intellectual property rights protection mechanism) will help to enhance the appeal ASEAN region. As part of of Vietnam and Cambodia as an investment destination and attract investment this process, a conceptual from other ASEAN members as well as other foreign investors. framework report was done to consider different models Given the importance of SMEs (including HI start-ups) in ASEAN economies, of existing SME funds there is a strong focus on the development and strengthening of the SME sector. (including the EU SME Fund The ASEAN strategic action plan for SME development has outlined strategies and Kula II Fund). The report and associated actions that have been or are will be implemented, including the also sought inputs from SME following: agencies. The current proposal is to Strategies Activities set up the SME Regional Development Fund as a •• Enhance access to finance •• Establish an ASEAN SME Regional Development Fund for SMEs central fund, which will be a co-investor in individual •• Access to financing - •• Strengthen technology business incubators in ASEAN; funds. Each individual fund capacity building launch ASEAN business incubator network will be established in an ASEAN member country and •• Widening and deepening •• Develop common curriculum for Entrepreneurship in will in turn provide financing SME access to credit ASEAN to SMEs via financial •• Establish an ASEAN SME service center and SME intermediaries. financial facilities in each country •• Conduct feasibility study of SME credit systems to enhance SME access to finance Table 1.2: ASEAN SME Strategies & Initiatives Box 1.3: ASEAN SME Regional Development Fund 32 II. Fieldwork Fieldwork for this study was done in Vietnam, Cambodia, the investee firm survey questionnaire can be found at and Nepal. Its purpose was to collect information from Appendix B). In Vietnam, fieldwork was carried out through different stakeholders in the start-up community (including face-to-face interviews with investee firms and a roundtable HI start-ups, investors and facilitators), get their views on workshop where the views from investors and facilitators access to finance, and any recommendations they may have. were collectively gathered. In Cambodia and Nepal, The first step was to identify relevant stakeholders (listed in fieldwork was carried out through face-to-face interviews, the table below; some parties have remained anonymous). phone interviews, and online surveys. Next, a set of survey questionnaires was developed to facilitate discussions with the stakeholders (a sample of Country Investee Firms Investors/Banks/Facilitators/Other contributors Vietnam •• SanOTC •• IDG Ventures •• OhYeap •• DFJ VinaCapital •• 1Pay •• CyberAgent Ventures •• PTT Solution •• Becamex TIC •• Blue Up •• TechInAsia •• Berich •• Shujog •• Hula •• mLab East Asia •• Appota •• AITI •• Terra Book •• ANZ Vietnam •• Climate Change Resilience Centre •• Vietnam Chamber of Commerce and Industry Cambodia •• Osja Studio •• Cambodia Investors’ Club •• Project Alba •• Uberis Capital •• Mango Map •• Tri Asia Group •• Chibi •• Leopard Capital •• Yoolk •• Devenco •• TrendX (now Adscool) •• Golden Gate Venture •• Reminiscience •• Canadia Bank •• Kotra (Incubator and Investor) Nepal •• Rooster Logic Pvt. Ltd. •• Biruwa Ventures Pvt. Ltd. •• Pasa Yard Pvt. Ltd. •• Dolma Impact Fund •• CloudFactory •• Rooster Logic Pvt. Ltd. – investor •• Karkhana •• High Value Agriculture Project •• Watabaran Cards & Paper •• Business Universal Development Bank Ltd. •• KhetiBazaar •• CED Nepal •• R-Tech Nepal •• Hamro Bikas Bank Limited •• Danphe Energy Pvt. Ltd. •• Mega Bank Nepal Limited •• Karnali Herbal Industry, Jumla •• Udhyami Impact Fund •• Sasto Deal Pvt. Ltd. •• Business Oxygen •• Sahakarya Agro Farm Table 2.0: Fieldwork Contributors 33 1.1. General Findings Investment readiness: Entrepreneurs should be better prepared when approaching investors. They should At an aggregated level, 72.5 percent of investee firms felt already have developed an investment ready business case, that there is a high financing gap in the region. 35 percent understand the capital raising process, and consider the of them successfully received finance, predominantly investment criteria of respective investors and how these through equity issuance. However, the majority of capital would apply to them. This study contains an investment raising (64 percent) was for amounts less than $50,000. readiness checklist as a generic guide for entrepreneurs. This substantiates the view that it is harder for the missing middle to access finance. Additional findings, including Legal, business and start-up infrastructure: Both views from investors and investee firms, on a per country investors and entrepreneurs agree that a more conducive basis have been given the relevant sections below. infrastructure is needed for the start-up sector. There is a need to address the legal and business framework to The respondents’ views collected as part of the fieldwork facilitate the development and growth of HI start-ups, and have been broadly classified into four headings: to incentivize investors to allocate more financial resources to the sector. The start-up ecosystem could be improved, Finance: From the investee firms’ perspective, there is a for example, by providing more incubation facilities for HI lack of access to finance for the missing middle. They want start-ups. to see capacity building initiatives to deepen the capital pool, which could increase the likelihood of getting funded. Entrepreneurial skills: Entrepreneurs lack some While investors agree action is needed to improve the necessary business attributes and this negatively impacts investment landscape from both the supply and demand investment readiness of their ventures. There is a need to side, they felt entrepreneurs could do more to improve the train entrepreneurs so they have holistic entrepreneurial quality of investment opportunities that they present. skills in addition to existing technical expertise they bring to their ventures. Mentoring: HI start-ups can benefit from formal and informal mentoring. Mentors act as sounding boards, contribute their own expertise and experience, and assist HI start-ups address gaps in their businesses. 34 Box 2.0 A2F Field Work 3 Jurisdictions Vietnam | Cambodia | Nepal •• Tech (Online, •• Media mobile, climate, •• Healthcare other) •• Media •• Retail •• Telecommunication •• Financial services •• Hospitality •• Energy •• Manufacturing •• Agribusiness •• Infrastructure 70 participants 15 sectors 70 35 percent percent of investee firms surveyed of investee firms successfully sought finance obtained finance 70 64.29 Percentage Investee firms 35 percent 0 < 50,000 50,001- 200,001- 500,001- 1,000,001- of investee firms that obtained 200,000 500,000 1,000,000 2,000,000 finance raised < $50,000 Amount of finance raised ($) 35 2. Investors in the Jurisdictions Jurisdiction Investor Profile Vietnam IDG Ventures IDG Ventures Vietnam is a $100 million technology venture capital fund in Vietnam with Vietnam investments in over 40 companies in the technology, media, telecommunications, and consumer sectors, which include VC Corp, VSMC, VietnamWorks, Socbay, and Vinapay. DFJ DFJ VinaCapital is a joint venture between VinaCapital, a leading asset manager in Vietnam, and VinaCapital Draper Fisher Jurvetson, a global venture capital firm. DFJ VinaCapital primarily invests in technology start-ups at the early and late VC stages. DFJ VinaCapital’s investment portfolio includes TaxOnline, Yeah1, Greenvity, Chicilon Media, DirectWithHotels, GapIT, and Vietnam Online Network. CyberAgent CyberAgent Ventures is a Japanese venture capital firm with representation in Vietnam. Ventures CyberAgent Ventures is an active investor in e-commerce start-ups in and is one of the three main VC investors in Vietnam. Some of its portfolio companies are DKT, Foody, Tiki, and Vat Gia. Prosperous PVNI is an angel/venture capital network with focus on pre-seed, seed, and early stage venture Vietnam capital financing in highly innovative ventures. Its focus is predominantly in high quality consumer Investment goods and services, green food, high tech, social media, and education. Corporation (PVNI) Cambodia Devenco Devenco is a venture capital and investment consulting firm established in 2007. Devenco looks for investment opportunities that can contribute to the social and economic development of Cambodia, including in the following sectors: manufacturing, healthcare and life science, agribusiness, infrastructure, water supply, and waste management. Devenco plays an ongoing project management role in all their portfolio companies. Uberis Capital Uberis Capital is an impact investing venture capital firm with offices in Cambodia and the United Kingdom. It operates a non-profit loan fund and an impact investment fund. Uberis Capital’s investment criteria include are social innovation, business model scalability, ability to generate strong return on investment, and operating in a dynamic market. Nepal Udhyami Udhyami Impact Fund is a non-profit social venture incubated by Biruwa Ventures. Udhyami Impact Fund Impact Fund provides seed financing to entrepreneurs. It directly or indirectly provides mentoring. Business Business Oxygen is an SME venture fund established by the IFC, Bank of Kathmandu, and Beed Oxygen Management. Business Oxygen targets SMEs that cannot secure funding from financial institutions. Business Oxygen generates investment through equity or quasi-equity. Other 500 Startups 500 Startups operates an accelerator program and is also a seed investor ($25,000 – $250,000). 500 Startups invests in start-ups globally and approximately 20 percent of its portfolio is outside of the US. In 2013, 500 Startups set up a $10 million micro fund, 500 Durians, to make seed investments in South-East Asia. Golden Gate Golden Gate Ventures is a $10 million seed-level investment fund with focus on consumer Ventures internet products and services start-ups in South East Asia (including Vietnam and Cambodia) with launched products or already established distribution partnerships in the region. Golden Gate Ventures invests by way of minority equity stake. Table 2.1: List of Investors in the Jurisdictions 36 Box 2.1 Investee Firm Survey in Vietnam Severity of Financing Gap in Vietnam of investee firms 75 surveyed felt that percent Vietnam has a high financing gap High Medium Low Level of Access to Finance by Financing Stages Correlation between Stage of Finance and Level of Access to Finance 80 Percentage respondents 40 0 Pre-seed Seed Start-up ESVC LSVC PE Low Medium High Highest Level of Access (percentage) Lowest Level of Access (percentage) 0 percent Start-up 0 percent Seed 8 percent Pre-seed 0 percent Late stage venture capital 8 percent Seed 0 percent SME 17 percent Early stage private equity venture capital 8 percent Start-up 25 percent SME private equity 8 percent Early stage venture capital 42 percent late stage venture capital 83 percent Pre-seed Of all the financing stages, respondents said that Respondents said that pre-seed financing has the late stage VC financing has the highest level of lowest level of access to finance. access to finance, with none of the respondents choosing start-ups. 37 100 50 92 percent 55 percent 0 Equity Debt Yes No of investee firms surveyed were successfully financed 92 percent of investee firms sought finance in the would consider equity past issuance for future capital raising; only 67 percent would consider borrowing Source of Finance (percentage) Finance Instruments (percentage) 0 percent Bank 17 percent Angel 33 percent Family 0 percent 17 percent Debt investors & Friends Convertible note 0 percent Other 83 percent Equity 17 percent SME 33 percent Venture 0 percent Other 0 percent Other private equity capital fund financial institutions fund Surveyed investee firms sourced finance 83 percent of finance provided to surveyed predominantly from family and friends and investee firms was by way of equity issuance venture capital funds Factors impacting investment Measures to improve access readiness of investee firms (percentage) to finance (percentage) Limited growth prospect 83 percent Venture capital regime 60 percent Entrepreneur lacks credibility 67 percent Improvement in relevant legal areas 50 percent Flawed business concept 50 percent Innovation finance solutions 50 percent Pitch not properly delivered 42 percent Improvement in credit scoring 30 percent Valuation gap 42 percent Separate start-up framework 30 percent Unrealistic assumptions 42 percent Tax incentives for finance providers 30 percent Insufficient information provided 33 percent Debt/equity guarantee 20 percent Lack of awareness with financing terms 25 percent Use of financial intermediaries 20 percent Lack of familiarity with financing sources 17 percent Lack of legal familiarity 17 percent Other 17 percent Note: The above information is compiled from inputs obtained during the fieldwork in Vietnam and provides a sample representation of the financing landscape for HI start-ups in Vietnam. 38 3. Vietnam Fieldwork Findings Classification Views from investors and investee firms in Vietnam Finance ••Investors agree that there is no shortage of capital for equity investments in the missing middle. Investors say they have spare financial resources (‘dry powder’) to make investments but they are unable to deploy capital due to the following reasons: ººInvestments pitched to investors are of poor quality; the products are not strong enough and entrepreneurs cannot differentiate themselves enough. Their differentiation strategy is generally price competitiveness and better customer service. ººEntrepreneurs do display innovation in their ideas and replicate offshore models in local markets without properly understanding how and whether the particular business model will fit. ººGenerally, entrepreneurs do not assess their markets properly and demonstrate how their ventures can realistically capture a share of the market. A lack of market assessment, which is partly due to a lack of access to market intelligence, negatively impacts credibility of the investment proposal. ••Family and friends tend to be the main source of finance for pre-seed and seed funding stages. ••Entrepreneurs would like to see more venture capital firms operating in Vietnam. There are only three main VC firms servicing the local market: IDG Ventures Vietnam, DFJ VinaCapital, and CyberAgent Ventures. ••Entrepreneurs want more exposure to angel investors. An intermediary network/platform is needed to link the two groups together while providing angel investors with the opportunity to invest in vetted investment opportunities. In contrast, entrepreneurs easily get access to venture capital firms, but this does not necessarily translate into investments due to the reasons mentioned above. ••Entrepreneurs want more focus on two stages of financing: seed funding and later stage venture capital funding ($5 million+, which cannot be serviced by local venture capital firms). ••Younger entrepreneurs are more open to equity dilution compared to traditional entrepreneurs. Legal, business ••The investment regime in Vietnam is not conducive to venture capital investment. Investment is and start-up subject to red tape and is a costly procedure. For instance, since most venture capital investors infrastructure operate via offshore investment vehicles, each investment requires an investment certificate, and the fee for this can be costly. This has deterred foreign investors from entering the Vietnam market. Some foreign investors choose to co-invest with existing venture capital fund managers already operating in Vietnam and are familiar with the investment rules. ••While physical infrastructure in Vietnam is good (for instance, (free) wi-fi access), the legal/ business infrastructure needs to stimulate investments in HI start-ups. Respondents feel that the start-up sector is not a high priority for the government and there are little or no government initiatives to stimulate investments by improving the legal and regulatory framework. There is strong view that a separate start-up regime that is not subject to the same regulatory/compliance regime as other enterprises needs to be developed. ••There is a need for more effective business incubators and accelerators that would help entrepreneurs address the shortcomings mentioned above. ••A matching funding mechanism to encourage new equity providers in the Vietnamese venture capital market needs to be created. Development agencies and/or relevant government bodies can provide financial support to new venture capital funds through co-contributions to newly established funds. There are similar regimes in Singapore and Australia. Investment ••Focus is needed on an investment-readiness program to ensure entrepreneurs make their venture readiness investment-friendly before approaching investors. (Table continued on next page) 39 Classification Views from investors and investee firms in Vietnam Entrepreneurial ••Young entrepreneurs do not have appropriate business background (‘lack of business mind’), which skills has an impact on the management of the business. Investors prefer diversified teams where at least one key person has a business background to ensure that the team can execute its idea and still be well-equipped to handle financial aspects (such as cash flow monitoring/burn rate). ••Educating entrepreneurs needs stronger focus. A mix of formal (entrepreneurship courses/subjects at university level) and informal education packages should be developed. Mentoring ••Mentoring is seen as vital for entrepreneurs to up-skill themselves and benefit from sounding boards. Table 2.2: Views from Investors and Investee Firms in Vietnam Appota is a mobile platform that provides applications to San OTC was founded in 2006 as a securities trading smartphone users. Appota has 38.7 million downloads platform and financial information portal in Vietnam. It has and 6 million active users. Tuan Anh, the founder, has since added around 250,000 registered users. Son Hoang, more than ten years work experience in mobile services. He the founder, managed to secure investment from IDG actively participated in local and international ICT events to Ventures Vietnam in 2007 when San OTC started ranking attract investors and raise funding. These events included among the top 20 websites in Vietnam. TechCrunch Disrupt, Demo Asia, Start-up Asia, Founder Institute Program, and Echelon. He successfully raised series A funding and has just recently closed series B funding from Japanese and Singaporean investors. 40 Box 2.2 Investee Firm Survey in Cambodia Severity of Financing Gap in Cambodia of investee felt that 100 Cambodia percent had a high financing gap. High Medium Low Level of Access to Finance by Financing Stages Correlation between Stage of Finance and Level of Access to Finance 90 Percentage respondents 45 0 Pre-seed Seed Start-up ESVC LSVC PE Low Medium High Highest Level of Access (percentage) Lowest Level of Access (percentage) 0 percent Start-up 0 percent Seed 0 percent Late stage 0 percent Late stage venture capital venture capital 12 percent Pre-seed 0 percent SME private equity 13 percent Early stage venture capital 24 percent Early stage venture capital 25 percent Seed 38 percent Pre-seed 50 percent SME private equity 38 percent Start-up Of all financing stages, respondents found that SME Of all financing stages, respondents found that pre- private equity financing had the highest access to seed financing and start-up financing had the lowest finance. None of the respondents chose start-ups. access to finance. 41 100 50 50 percent 50 percent 0 Equity Debt Yes No of investee firms surveyed were successful in getting 62 percent of investee firms sought finance in the past finance would consider equity issuance for future capital raising; only 38 percent would consider borrowing Source of Finance (percentage) Finance Instruments (percentage) 0 percent Bank 0 percent SME 50 percent Angel 0 percent Debt 50 percent private equity fund investors Convertible note 0 percent Family & 0 percent Other friends 0 percent Venture 50 percent Other 50 percent Equity capital fund 0 percent Other financial institutions Surveyed investee firms have sourced finance 50 percent of finance provided to surveyed from angel investors and from grants investee firms was made through equity Factors Impacting Investment Measures to Improve Access Readiness of Investee Firms (percentage) to Finance (percentage) Entrepreneur lacks credibility 75 percent Use of financial intermediaries 71 percent Pitch not properly delivered 50 percent Improvement in relevant legal areas 57 percent Valuation gap 50 percent Improvement in credit scoring 57 percent Unrealistic assumptions 50 percent Separate start-up framework 43 percent Flawed business concept 38 percent Innovation finance solutions 43 percent Lack of awareness with financing terms 38 percent Venture capital regime 43 percent Lack of familiarity with financing sources 38 percent Debt/equity guarantee 29 percent Other 38 percent Tax incentives for finance providers 29 percent Insufficient information provided 25 percent Lack of legal familiarity 25 percent Note: The above information is compiled from inputs obtained during the fieldwork in Cambodia and provides a sample representation of the financing landscape for HI start-ups in Cambodia. 42 4. Cambodia Fieldwork Findings Classification Views from investors and investee firms in Cambodia Finance ••Most investors agree that start-ups have specific needs in Cambodia, and most require small-sized investments at the beginning. Cambodia does not have investment resources that cater to this size (unless the focus is on social impact), and access to loans are restricted. As a result, start-ups that need small amounts of funding to get started struggle to grow. ••Sectors that have good growth potential are agribusiness, food and beverage, other consumer products (such as health and beauty products), finance solutions (leasing), and logistics. While ICT is a sector of interest, most investors consider the market is not mature enough to experience a tech explosion (most foresee the advent of new technologies in about 4-5 years). ••Cambodia can be a ‘closed shop’ with business arrangements based largely on personal relationships and within close networks. This approach can be a challenge for foreign investors. ••There is a disconnect between investors and entrepreneurs, which is due to a lack of visibility of each to the other. More networking events are needed to facilitate connections between the two groups and more (online) coverage through, say, Geeks in Cambodia can increase visibility of the two groups. ••Family and/or friends tend to be the main source of finance for pre-seed and seed funding stages for local entrepreneurs. While there are local angel investors who support Cambodian start-ups, finding start-ups is difficult if they do are not part of entrepreneur networks or introductions are not made through mutually known intermediaries. ••Entrepreneurs feel that foreign investors see the Cambodian economy as too small, and do not understand its peculiarities and opportunities. Further, they feel that Cambodian firms are slotted into strong stereotypes. This must overcome by increasing visibility of local markets, its resources and opportunities. ••Cambodia is subject to a talent drain. Promising local entrepreneurs leave the country to find support elsewhere (such as the U.S. and Singapore). As a result, the probability of investors finding promising start-ups in Cambodia is low. There is a need to retain existing talent and also attract entrepreneurs back to Cambodia. Legal, business ••Businesses are run in an informal manner. Some businesses are not legally registered and/or do not and start-up keep proper records. This presents a challenge for investors when assessing a business and acts as infrastructure an investment deterrence since it is hard to verify information, confirm real balance sheet positions, and properly value businesses. Focus should be on transitioning to more formal levels of business with proper business processes and procedures in place. ••Increase in regulatory risks have negative impacts on business confidence and hinders investment (this applies to political uncertainty in Cambodia). ••The start-up industry is still nascent. Considerable time and resources needs to be committed to develop the sector. Every entrepreneur interviewed said they were eager to see the sector being further developed. Investment ••Local companies and entrepreneurs are unfamiliar with the investment processes of investors readiness currently servicing Cambodia. They generally do not meet investor requirements of the investors in terms of their businesses being investment ready and/or their ability to supply appropriate information. This limits access to quality investment opportunities. From a foreign investor’s point of view, entrepreneurs need education on how to make their businesses investment friendly and how to approach the investment process. The survey found that entrepreneurs were aware of this. Entrepreneurial ••There is an urgent need to up-skill entrepreneurs to develop management, accounting, financial skills and broader business skills, and develop holistic business acumen. This calls for a focus on training, professional development, mentorship, and incubation services. ••Foreign entrepreneurs based in Cambodia felt that there is a lack of resources to educate, train, advice, and support local entrepreneurs in Cambodia. Table 2.3: Views from Investors and Investee Firms in Cambodia 43 4. Cambodia Fieldwork Findings TrendX (now Adscool) was founded in 2012. It was originally TrendX could not secure equity investments on the back of a mobile application that emphasized art-of-customization the 2012 competition as it did not have enough traction, for fashion bloggers but it was later repositioned as an and lacked mentors. TrendX’s management team feels image-driven rewarding app for peer-2-peer advertising. Cambodia needs an accelerator program, and start-ups TrendX was the runner-up of Start-up Weekend Cambodia need to improve financial literacy (for instance, financial 2012 (and the winner in 2013). TrendX was endorsed forecasting and valuation) to meet investor expectations. by Microsoft as part of the 2012 Start-up Weekend competition; however, it was only a technical endorsement. 44 Box 2.3 Investee Firm Survey in Nepal Severity of Financing Gap in Nepal of investee firms surveyed 60 felt Nepal has a percent high financing gap High Medium Low Level of Access to Finance by Financing Stages Correlation between Stage of Finance and Level of Access to Finance 90 Percentage respondents 45 0 Pre-seed Seed Start-up ESVC LSVC PE Low Medium High Highest Level of Access (percentage) Lowest Level of Access (percentage) 5 percent Start-up 0 percent Seed 10 percent Seed 5 percent Late stage venture capital 10 percent Pre-seed 5 percent SME 25 percent Late stage private equity venture capital 15 percent Early stage 25 percent Early stage venture capital venture capital 20 percent Start-up 25 percent SME private equity 55 percent Pre-seed Of all financing stages, respondents found that VC Of all the financing stages, respondents found that financing, SME private equity financing provided pre-seed financing has lowest access to finance. highest access to finance. None of the respondents chose start-ups. 45 100 50 65 percent 46 percent 0 Equity Debt Yes No of investee firms surveyed of them were successfully 85 percent of investee firms have sought finance in financed would consider equity the past issuance for future capital raising; only 80 percent would borrow Source of Finance (percentage) Finance Instruments (percentage) 0 percent Bank 0 percent SME private 17 percent Angel 0 percent 17 percent Debt equity fund investors Convertible note 0 percent Other 67 percent Equity 16 percent Venture 67 percent Family 16 percent Other 0 percent Other capital fund & friends financial institutions Surveyed investee firms have sourced finance 67 percent of finance provided to surveyed from angel investors and from grants investee firms was by equity issuance Factors Impacting Investment Measures to Improve Access Readiness of Investee Firms (percentage) to Finance (percentage) Lack of familiarity with financing sources 79 percent Innovation finance solutions 67 percent Entrepreneur lacks credibility 58 percent Debt/equity guarantee 61 percent Lack of awareness with financing terms 58 percent Use of financial intermediaries 50 percent Insufficient information provided 58 percent Venture capital regime 44 percent Lack of legal familiarity 47 percent Separate start-up framework 39 percent Flawed business concept 32 percent Tax incentives for finance providers 39 percent Limited growth prospect 32 percent Improvement in relevant legal areas 33 percent Other 32 percent Improvement in credit scoring 22 percent Pitch not properly delivered 26 percent Unrealistic assumptions 26 percent Valuation gap 26 percent Note: The above information is compiled from inputs obtained during the fieldwork in Nepal and provides a sample representation of the financing landscape for HI start-ups in Nepal. 46 5. Nepal Fieldwork Findings Classification Views from investors/investee firms Finance ••Investors are mostly attracted to matured enterprises with solid financial histories, to the detriment of start-ups. ••Similar to other early evolving markets, most funding is still handled by the traditional banking sector. This is not a feasible option for start-ups since banks focus on larger established businesses, and almost always lend against collateral. There is a need for alternative debt funding (such as venture debt) to cater to start-ups. ••Alternative financing solutions should be explored to determine whether these are suitable in Nepal and can help overcome some of the impediments that restrict start-ups from accessing finance. For instance, a crowdfunding platform can be an option to attract foreign investors. ••Another option to explore is equity guarantee; this may potentially increase the investment risk appetite of investors since it will limit possible losses. ••The majority view from investee firms is that the financing gap in Nepal is high, especially at the pre-seed to start-up stages. This is in line with the view from the investors who cite high risk and poor quality of deals in the start-up space as impediments. ••Pre-seed stage funding is hardest to fund, with the least access to finance. ••There is a strong reliance on family and/or friends to finance start-ups at the pre-seed, seed, and start-up funding rounds as there is no real alternative. There is a lack of awareness in the start-up community of venture capital in general, how it can be used to fund start-ups, how deals are structured and on what terms, and what are the investment criteria of venture capital providers. Some entrepreneurs are not even familiar with the existing venture capital providers in Nepal and there are no opportunities for entrepreneurs and the venture capital providers to network and collaborate. Legal, business ••A legal and regulatory regime for investments should be implemented with the intent to develop the venture or start-up capital industry in Nepal. Measures such as tax incentives for venture capital investment and flow-through investment vehicle(s) could be considered. Separately, a legal framework dedicated to the start-up industry infrastructure should also be considered. ••Legal uncertainty poses a major hindrance to attracting offshore investors in the venture capital sector (this also to the unstable political climate). Investment ••Entrepreneurs need appropriate training to make them investment ready and ensure that the business case readiness they present to investors is investment friendly and of adequate standard. They also need to understand their markets better and how their products fit into that market. Entrepreneurial ••Nepal lacks quality and quantity of investment deal flows. This is partly due to a lack of vision in entrepreneurs, skills lack of business experience, and their inflexibility to learn and adapt. ••Start-ups need technical assistance, such as legal and business support. This is as important as access to finance. Mentoring ••Nepal lacks the ‘grey hair’ factor; there is not enough mentoring available for young entrepreneurs to assist them in their ventures. Mentoring programs need to be developed to help young entrepreneurs. Table 2.4: Views from Investors and Investee Firms in Nepal 47 48 Investment Readiness Checklist This investment readiness checklist contains practical and non-exhaustive steps that entrepreneurs of HI start-ups in Vietnam, Cambodia, and Nepal can follow when seeking equity financing from professional investors such as angel investors and venture capital funds. This checklist takes into account feedback received from investors during the fieldwork. Being investment-ready is a gradual process and incorporates several important aspects of the business (for instance, revenue model and market assessment). Addressing the criteria in the checklist will help entrepreneurs with their capital raising campaign and help them identify gaps in their business. Build the team Know your (prospective) Pitch Investors have a strong preference for investors ••Do you have your investment documents a venture with numerous founders (2-4 ••What kind of investors are you looking ready (investment overview, pitch deck, founders) with complementary for? Active, passive, purely financial, offer document/business plan)? skill-sets. strategic or a combination of these? ••Are you able to get ‘warm’ introductions ••What are their investment criteria? Is your to prospective investors? Understand the venture and venture a fit for them? ••Have you worked out your pitch strategy the environment it operates in ••What is their investment timeframe; (including elevator pitch)? ••What is the level of innovation attached when do they want to exit? ••Are you flexible and will you take to the product, process, or concept? ••On what terms do they invest? constructive feedback from prospective ••Is there a clear competitive advantage? investors? This could help with your fund- ••Has a market assessment been done to Business plan raising campaign and benefit see how the product, process, or concept your venture overall. ••Do you have a business plan? Depending fits into the target market(s)? What is the on your business model and the type of market opportunity? investor you are approaching, Due diligence ready ••Has a customer analysis been done? this can be an extensive or ••Do you have all necessary legal and ••Who are your competitors and how does ‘lean’ business plan. business documentations if an investor your venture compare to them? wants to assess your venture? This will ••What is your pathway to include incorporation documents (if any), Financial forecast (cash flow, commercialization, market, capitalization table, any licenses required, profit and loss and balance and/or growth? detailed background on the team, sheet) financial model, any existing material ••Have you undertaken financial projections Monetization contracts (including key operating for the venture? Financial projections ••What is the revenue model (or revenue agreements), background on intellectual should be done for at least three years. streams)? How do you intend to monetize property (if any), business processes, set This is important to show revenue your product, process, or concept? of accounts (if already operating), tax traction, demonstrate use of funds, ••Is the revenue model sustainable? returns (if already operating) and bank substantiate your growth story, and, to a statements. certain extent, for valuation. ••Do you have an advisory team that can Financing ••Have you stress-tested the financial assist with due diligence and ••What is the financing required now? You forecast? This should be done on a ‘what closing the investment round? should also contemplate the financing if’ basis, taking identified you will require over the next 1-2 year(s). risks into account. Exit ••How realistic is the amount required? ••For what will the funds be used? ••Have you developed an exit strategy for Valuation ••What is the current burn rate? What is the venture? ••What is the pre-money valuation? the expected burn rate? ••Does the exit strategy match with the ••Is the valuation realistic? Have ••What is your preference for capital investment timeframe of the investors? you stress-tested the valuation? injection? Debt, equity, or both. ••If not, how are you going to ••What are your preferred achieve liquidity for your investors? Risk investment terms (how much are you willing to dilute)? ••What are the risks attached to the venture, the market the venture operates in, and the broader economy? ••What are the risks for the investor? How will you mitigate these risks? ••What is the risk for the venture and the founders in relation to obtaining external capital? Table 2.5 : Investment Readiness Checklist 49 50 III. Recommendations These recommendations are aimed at improving access to Financing-catalysts (for instance enabling startup finance for HI start-ups in Vietnam, Cambodia, and Nepal. infrastructure and up-skilling) While this project aims to address the financing gap for HI start-ups, the recommendations also include non-financing •• Develop separate start-up and venture capital regimes related matters that can impact on access finance. •• Develop a start-up toolkit. This would include: The recommendations are classified into three broad groups and are summarized in stock-take worksheets: ººInvestment overview template ººInvestment offer document Financing instruments ººInvestment pitch deck •• Revenue financing – This innovative instrument can assist HI start-ups tap into quasi-equity investments ººTerm sheet •• Venture debt as an alternative to bank funding ººLoan or subscription agreement •• Asset-based lending products, which can better fit HI ººShareholders’ agreement start-ups. ººConfidentiality agreement Financing mechanisms or structures ººFinancial (including cash flow) model •• Revolving loan funds – to act as a lender to HI start-ups ººPre and post-money valuation calculator. •• Capital raising platform (such as crowdfunding platforms) •• Sidecar funds. 51 1. Recommendation Stock-take Worksheets Item Type Description Deficiency Financing instruments Venture debt Debt Venture debt is a form of venture capital generally used by HI start-ups that are cash flow Access to finance (akin to bank debt) poor and/or asset poor. Venture debt does not lead to equity dilution but is more costly than traditional debt funding. Revenue Debt/equity Providing capital in exchange for a share of the future revenue of the start-up. This alternative Access to finance financing (depending on form of financing is generally collateral-light and may not result in equity dilution. terms) Profit Debt/equity Similar to revenue financing but repayment is based on profits generated. Access to finance participating (depending on loan terms) Asset-based Debt Access to finance lending products: (i) IP-based The (material) assets of HI start-ups are generally limited to intangibles (predominantly lending intellectual property). There is opportunity for HI start-ups to monetize their IP. (ii) Cash flow- based lending Lending against cash flow of an asset, including cash flow generated by intellectual property. Bonds Debt Feasibility of using bonds for HI start-ups can be determined by: Access to finance (1) Issuing mini-bonds at individual company level (2) Issuing a thematic bond (for instance climate change-related) at an aggregated level (for instance through the Vietnam Climate Innovation Center (VCIC)). Risk-sharing Debt/equity Credit/equity investment guarantee can enhance borrowing/investment capacity of a start-up. Access to finance instrument Financing mechanisms or structures Sidecar fund Equity The pooling of angel funds under a common investment vehicle. Access to finance/ The other alternative is for a sidecar fund, not necessarily backed by angel investors, to co- vetting impediment invest alongside incubators/accelerators Seed capital fund Equity Providing seed funding via incubators/accelerators Access to finance Revolving loan Debt A revolving loan fund (RLF) is similar to a venture capital fund except that it makes investments Access to finance fund via debt instruments rather than equity. Two-step loan Debt Providing a credit line to financial institutions, which in turn lend to HI start-ups. Note: an RLF Access to finance (TSL) including can be part of a two-step loan program where the financial institution is the manager of the RLF. startup TSL and green TSL for VCIC purposes 52 Estimated Comparative implementation timeframe Developed Developing Comments Short-medium Silicon Valley Malaysia Debt This is an alternative to bank loans and can be of interest to private investors. Venture debt yields a Bank Ventures higher return than traditional bank debt due to the higher risk, but provides flexibility to start-ups (less stringent assessment criteria). Medium-long Revenue Nepal Agribusiness Revenue financing can be beneficial to address the financing gap for HI start-ups even if they are in entitlement notesTM Innovation Center pre-revenue stage. Lighter Capital (US) – use of ‘royalty’ This form of financing can be used as a substitute for bank loans by financial institutions. It can also be payment as form of used by venture funds as financing instruments or to set up a dedicated revenue financing fund. Vision Plus (Finland) remuneration for AIC assistance No exit strategy required and investors benefit from periodic distributions. Longer term than traditional debt. Short-medium Interest and capital repayments are based on the dividend distribution capacity of the HI start-up; hence it is not a fixed amount. Longer term than traditional debt. Medium IFC initiative (for This would not necessarily fit in as a bank product offering. instance in Ghana) Change in mindset for banks who are used to traditional lending; IP protection regime is not robust; potential lack of valuation expertise in the region; and IP as a collateral is not attractive given there may not be a readily available market. This would be of relevance to .start-ups already generating revenue. Long CBD Energy mini- While bond instruments provide issuers with an alternative form of funding, the feasibility of using bonds (UK issuance) bonds in the jurisdictions under consideration may, prima facie, be premature at this stage. IFC Women bonds Community bonds Short-medium EIF Ho Chi Minh City There are various credit guarantee initiatives in operation in the jurisdictions with limited success and Credit Guarantee low impact on access to loan products. Fund The Deposit and Credit Guarantee Corporation ARIZ – Danone Communities Fund USAID Development Credit Authority Medium-long Sydney Angels Using a sidecar fund can help develop the angel investment community. The sidecar will invest Sidecar Fund alongside other investors such as VC funds and/or incubators/accelerators. A co-investment will assist European Angels with the vetting process and associated transaction costs. Fund Medium-long Early Stage CIC-related seed Collaborating with incubators/accelerators can provide funds with investment-ready deal flows. Innovation funding facility (e.g. Financing (ESIF) Vietnam & Kenya) Facility (proposed) Medium An RLF can be a substitute for bank funding to HI start-ups. An RLF may offer more flexible terms tailored to HI start-ups compared to traditional lenders (for instance, longer tenure and less collateral). This is because investors in an RLF commit funds on a comparatively longer term basis. Medium Korea Eximbank Identify capital providers that can participate in a TSL scheme and conduct a feasibility study through a Japan Bank for pilot program. International Since this program would be dedicated to HI start-ups, the on-lending loan product would be designed Cooperation specifically with them in mind (for instance, longer loan term and collateral-light). 53 1. Recommendation Stock-take Worksheets Item Type Description Deficiency Financing mechanisms or structures (continued) Crowdfunding Debt/equity Crowdfunding is a financing mechanism whereby HI start-ups seeking funding are promoted Access to finance on an online platform, allowing them to find funding from the crowd (people accessing the platform). Crowdfunding is creating a disintermediation in the finance sector in that ‘sellers’ can directly get access to ‘buyers’. For the purpose of this project, only equity and debt crowdfunding are of relevance to the missing middle. Private exchange Debt/equity A platform for unlisted HI start-ups to raise funds from a pool of qualified investors. As Access to finance platform (at opposed to a crowdfunding platform, access is limited to investors that meet certain criteria South-East Asia (effectively providing a gateway to connect venture capitalists to start-ups). regional level) This is a hybrid model of an SME stock exchange and crowdfunding platform. - variant 1 of the crowdfunding recommendation Special purpose Debt/equity Similar to the above recommendations, except here the intermediary platform actually raises Access to finance vehicle (akin to the funds and then on-invests/on-lends to the HI start-up. This means that the HI start-up PE club deal) deals with one investor only. - variant 2 of the crowdfunding recommendation Venture capital Equity Provides matching funding to attract venture capital fund managers to South-East Asia Access to finance matching funding scheme Financing catalysts Venture capital Enabler Develop a regime that is conducive to venture capital funds and venture capital investments Legal/regulatory regime respectively. Start-up Enabler Develop a separate start-up legal/regulatory/tax regime with appropriate incentives to Legal/regulatory regime encourage innovation and provide a conducive investment regime Technical Enabler Provide in-specie support to HI start-ups in certain pre-identified areas. Business skills/ assistance fund investment (TAF) readiness/market research Service voucher Enabler Similar to the above recommendations, except here the intermediary platform actually raises Business skills/ scheme the funds and then on-invests/on-lends to the HI start-up. This means that the HI start-up investment deals with one investor only. readiness/market research 54 Estimated Comparative implementation timeframe Developed Developing Comments Medium-long Crowdcube IG9 Legal and regulatory framework should be amended to provide for crowdfunding-friendly regime Seedrs (investment certificate requirement and investment to be made in local currency could be a hindrance in Vietnam). Indiegogo The alternative is to explore feasibility of using a crowdfunding platform located in a crowdfunding- Lending Club (P2P compliant jurisdiction. However, a longer term view should be taken as an offshore platform will not personal lending) develop a vibrant investment community in the local market. A local platform could provide a link to local investors (angels) and market review of the investment opportunities will reduce investment costs. In addition, such crowdfunding platforms may not allow offshore ‘listing’. Medium-long Second Market IIX Asia A full-fledged stock exchange dedicated to start-ups may not work given that existing stock exchanges Sharespost in the region have not themselves gained much traction and there is poor liquidity in quoted securities. ASSOB The proposed private exchange platform will provide HI start-ups with a pool of investors interested in investing in the region, and investors with vetted and qualified deals. Its success will rely heavily on the platform operators’ diligence in scrutinizing investment deals to ensure that investors get access to good quality deals. Issues: Investment certificate cost and the requirement to invest in local currency in Vietnam. Medium Funders Club IIX Asia Vetting and active monitoring are done by the special purpose vehicle ‘manager’. Solar Mosaic (back-to- back bond structure) Medium-long Early Stage Venture Compared to grant, a matching funding scheme will allow capital to be recycled back into the Fund – NRF Singapore ecosystem and provide a more commercial arrangement. Innovation Investment Scheme (IIF) – Australia Long Early Stage Venture Venture Capital Focus should be on developing legal structure(s), say limited partnership, which can cater to collective Capital Limited Company - Kenya investment vehicles (CIVs) and provide associated tax incentives (for instance, CIVs should be flow- Partnership – Venture Capital through for tax purposes). Australia (all Company – Need to get government ‘buy-in’ to develop an onshore VC regime. distributions/returns South Africa (tax are tax free) An analysis of existing PE/VC regimes should be done to determine the best fit for East Asia and deduction for takeaway lessons as well. Venture Capital Trust investors’ equity – UK (dividend relief/ investment) income tax relief/ disposal relief) Long Generally part of the What can be considered: Legal definition of start-up; compliance-light regime for start-ups to facilitate small and medium formation and ongoing operations; investment-light regime to overcome investment barriers such enterprise regime as lowering investment certificate requirements and associated costs, and forex control; and tax deduction capital rollover for investors in start-ups. Medium VCIC Instead of providing cash investments/grants to HI start-ups, in-kind capital can be disbursed Seed Capital to through a technical assistance fund. The TAF can be paired with incubators/accelerators with Assistance Facility investment funds. African Agriculture Fund Medium Innovation & Same as above Capability Voucher – SPRING (Singapore) Innovation Voucher Program (Victoria) NSW TechVouchers 55 1. Recommendation Stock-take Worksheets Item Type Description Deficiency Financing catalysts (continued) Employee share/ Enabler To attract co-founders with complementary skills set and encourage participation of skilled Expertise/mentor/ option scheme personnel in HI start-ups (‘grey hair’). This can also incentivize participation by foreign parties. diversified team Finance Enabler A think tank that can actively pursue research on financing matters in the region; act as a Inadequate innovation center catalyst for financing initiatives; lobby for financing-related policies in the region; assist in financial developing the start-up financing infrastructure and tailored products infrastructure Start-up toolkit Enabler Tailoring investment resources for HI start-ups that can readily be accessed by the start-ups Investment and investors. readiness In-house credit Enabler There is a need to assist lenders to tailor their expertise/processes for the start-up sector. Startup expertise screening up- Various initiatives and tools have been developed to assist banks with credit assessments of skilling start-ups sector and ensure it is a an effective and efficient process. Credit screening Debt Pool a panel of lenders (for instance,. commercial banks) and outsource the screening and Startup expertise - Third party processing to an intermediary organization that specializes and is skilled in the start-up sector. provider Entrepreneurship Enabler There is a requirement for holistic training for entrepreneurs in entrepreneurship through short Skills: develop course and tertiary courses. their expertise in different aspects of starting, building, growing, and consolidating a venture. Connectivity Enabler This will allow transfer of knowledge (and talent) from both local and offshore parties to HI Knowledge/market platform start-ups, and be a conduit to improve their investment visibility. intelligence/IP development 56 Estimated Comparative implementation timeframe Developed Developing Comments Long Enterprise This proposal can form part of a start-up regime recommendation. The necessary ‘buy-in’ should Management be obtained from the government to design such scheme and to ensure that the scheme can be Incentive – UK legislated. Qualified & non- qualified option schemes – US Equity Remuneration Incentive Scheme - Singapore Medium-long Milken Institute – Asia ADB Institute The proposed Finance Innovation Center is expected to be pro-active and will be heavily involved Center SME Finance Forum in driving practical financing initiatives in the region, including undertaking feasibility studies on The Asia Foundation alternative financing instruments and financing mechanisms/structures, and working on finance- related/legal/regulatory reforms to assist HI start-ups. Frankfurt School - UNEP Collaborating Centre for Climate & Sustainable Energy Finance Short-medium SME Toolkit – IFC Determine whether it is possible to leverage existing initiatives and extend them to the start-up initiative sector. Shujog – investment readiness program Medium-long Small Business Banking Refer to previous Network column Entrepreneurial Finance Lab (credit scoring methodology) Medium ENYA An intermediary will ensure that the start-up sector is serviced properly and resources are devoted to start-ups (banks focus on larger enterprises and do not want to dedicate resources to the missing middle). A dedicated provider (centralized unit) will also streamline costs and avoid human resource duplication at each individual lender level. Medium-long Kauffman Fastrac AsiaSEED Based on the feedback received, there is a need to increase programs to improve the skills of Entrepreneurship Hanoi School of entrepreneurs. A more practical approach together with support from the start-up industry Development Institute Business - Director (including existing entrepreneurs, service providers, incubators and funders) is required. of India Of Technology and Plug And Play Entrepreneurship University/Startup Camp Topica Foundation Yup Institute Udacity – How to build a start-up Industrial Enterprise Development Institute (Nepal) Medium-long EIB Corporate Starthub.vn Innovation Platform ADB LCT-T Platform (more formal) 57 2. Debt Traditional sources of debt funding (such as banks) cannot •• The loan is for a relatively shorter tenure and may not cater to the start-up industry from a financing perspective. necessarily fit with the start-up’s long-term capital Due to the nature of their operations (deposit-taking) and management plan. It will need to repay the loan rather regulatory requirements, the terms on which banks can lend than spend financial resources on growing the business. and their approval criteria do not make the start-up sector a good fit for banks. These are some of the terms and Also, banks may not necessarily have the in-house expertise conditions attached to traditional loan products: and/or capacity to properly assess HI start-ups; given that banks tend to concentrate on established medium to large •• The lender requires the HI start-up to have positive cash businesses that have a trading history, are asset-rich, and flows have positive cash flows. •• The lender expects the HI start-up to have material Some or all of these impediments will need to be addressed tangible assets that it can offer as security if HI start-ups are to incorporate debt funding in their capital stack. The fieldwork for this study found that debt •• The lender requires a personal guarantee from the funding is not uncommon at the pre-seed to seed stages; founder(s) or related parties, given the high level of risk it predominantly emanates from FFFs. HI start-ups are also associated with a HI start-up able to tap ‘shadow’ banking sources in these jurisdictions to fund their ventures. •• The loan to valuation ratio applied to a HI start-up is generally in the lower range, this limits the borrowing capacity of the start-up 58 2.1. Venture Debt ºº It allows the venture debt provider to leverage off the involvement of the venture capital fund where the One way of providing debt funding to HI start-ups is to venture debt provider has the comfort of knowing the consider venture debt and its applicability to HI start-ups in HI start-up has undergone rigorous due diligence at the Vietnam, Cambodia, and Nepal. Venture debt is defined as time of receiving the equity injection and is subject to loans provided to a HI start-up with the latter meeting the ongoing monitoring by the venture capital fund following requirements: ºº More importantly, the presence of a venture capital fund provides a venture debt provider with recourse •• The HI start-up has material intangible asset(s) in the to the current (and any future) equity injected by form of intellectual property the venture capital fund, in addition to the collateral provided by the HI start-up. •• The HI start-up has received an existing round of venture capital. This requirement is critical because: Terms Venture Capital Venture Debt Fund Provider •• Interest and principle repayment required •• Interest rate applied is higher than traditional debt Equity injection Debt injection •• The debt is not a convertible note but the Investee Firm venture debt provider may be issued with warrants •• The security taken is limited to the investee firm assets (including IP) •• Less restrictive covenants Intangible assets (IP) are attached to the loan. Figure 2.0: Venture Debt 59 2. Debt The benefits of venture debt are: Providing debt financing to HI-Startups on an asset-based lending basis is more suitable given HI-Startups, due to their •• It allows the HI start-up to supplement their capital stack innovative nature and high growth prospect, would have with debt, bridging any gap it may have in its funding predominantly intangible assets and the ability to monetize requirements such assets to generate cash flows. Consideration should be given to developing debt products based on intellectual •• It minimizes equity dilution for existing investors, given property financing and/or cash flow asset-based financing the HI start-up can raise a combination of debt and (that is, contractual agreements). Using these assets as equity. This also means that future rounds of equity collateral can increase the appeal of HI start-ups to debt injection can be done at a higher valuation since the HI investors (including financial institutions). However, there are start-up benefits from additional time to reach some of some immediate impediments with using intangible assets its milestones. in the jurisdictions that will need to be addressed: An example of a venture debt provider is Malaysia Debt •• The strength of the security regime in Vietnam, Ventures, an innovative financier outfit put together by Cambodia, and Nepal in relation to contract enforcement the government of Malaysia, which specializes in venture debt for the ICT, biotechnology, green technology, and •• The lack of a readily available market in the region for other emerging technology sectors. Malaysia Debt Ventures intangible assets offers both conventional and Sharia-compliant products/ programs. Some of them are: •• The required expertise to service intangible asset financing. This includes the ability to properly value intangibles, further exacerbated by the lack of an available market. Product/Program Features Intellectual •• Funding amount: The lower of $3 million property or 80 percent of IP value financing •• 5-year term (including 1 year ‘honeymoon’ period) Applicability: Vietnam Cambodia Nepal •• Funding against registered IP only •• Rebate in annual interest rate. The applicability of each recommendation to each of the jurisdictions is based on feedback received Commercialization •• Applicable to early stage and/or pre- financing program commercialization companies during the fieldwork, existing local capacity, estimated •• Funding amount of up to $600,000 for implementation timeframe, likelihood of uptake, and Venture Project line, otherwise up to best jurisdiction to trial the recommendation. $1.5 million •• Funding up to 85 percent of contract value •• 5-year term •• Interest rate of between 6 to 8 percent per annum. Equity-linked •• Convertible loan product product •• Less pressure on the cash flow of the issuer •• Funder can convert into equity when a liquidity event is triggered. Table 3.0: MDV Products/Programs Reprinted from: www.mdv.com.my 60 2.2 Revolving loan fund •• The investment philosophy and strategy of a revolving loan fund is start-up-centric. The fund is not as stringent A revolving loan fund can act as a non-banking financial as banks in relation to types of collateral (that is, vehicle to provide supplementary debt capital to HI start- requirement of ‘hard’ assets) and additional guarantees ups. A revolving loan fund can co-invest with existing venture funds in the region and this can, inter-alia, help HI •• A revolving loan fund can recycle capital back into start-ups raise late series funding (> $5 million) where the venture debt, making compounding debt investments funding may not wholly come from venture capital funds. over the life of the fund. The use of a revolving loan fund dedicated to the start-up industry can be beneficial for several reasons: Applicability: Vietnam Cambodia Nepal •• The fund is equipped with the necessary expertise to deal with HI start-ups (including screening processes tailored to start-ups) •• Investors in a revolving loan fund are committed to a longer investment time horizon (generally 7-10 years) compared to bank deposits where these are at call or locked in on a short term deposit basis. This means the fund can provide loans to HI-Startups on a longer term basis Investor Repayments made HI start-up Recycling of capital on longer loan term expertise back into new venture debt HI start-ups (intangible asset- rich) Figure 2.1: Revolving Loan Fund 61 2. Debt 2.3. Two-step Loan Program Box 3.0 The other option is to leverage banks to roll out a two- Two-Step Loan Project for Small and step loan program. Two-step loan programs can launch Medium Enterprises Development and with encouragement from and participation of donors and Environmental Protection in Mongolia development agencies working in the jurisdictions under consideration. While banking institutions may not have the This is a program by Japan International Cooperation necessary expertise to service the start-up industry, a two- Agency to provide long-term financing through step loan program will provide them with an opportunity commercial banks in Mongolia to small and medium to develop in-house start-up expertise. Banks already have enterprises (SMEs). These SMEs comprise the majority the necessary licensing and lending infrastructure in place, of private businesses in Mongolia and are the main which will accelerate the roll-out of venture debt in the actors in the country’s economic development. region. Since the banks will not have to finance from their The other objective of this project is to promote funds, they will not be constrained by stringent terms and environmental conservation measures; capital approval criteria but provide loans on terms and conditions investment is targeted to counteract air pollution agreed with the originating funder. in urban regions, a problem growing in severity. The funds for the project is allocated to long-term financing of SMEs, including environmental businesses, Applicability: Vietnam Cambodia Nepal as well as for expenses for consulting services, such as training for capacity improvement of SMEs and banks. Reprinted from: www.jica.gov.jp 62 2.4. Miscellaneous Lack of expertise and resources to service start-ups in the banking sector can be overcome by using a screening If banking institutions in the jurisdictions are considering intermediary (an example of this is the Enterprise Network entering the venture debt market and/or improving their for Young Australians – ENYA, based in Australia). If banks expertise in servicing the start-up industry, they should look are looking at lending or ramping up their lending to HI at best practice initiatives by organizations worldwide and start-ups, they can outsource the screening process to a how they can collaborate with them to augment in-house centralized intermediary, set up to solely service the start-up expertise. Two of these organizations are: industry. The intermediary will be staffed by personnel with relevant and appropriate credit processing expertise. •• The Small Business Banking Network (SBBN), launched by CapitalPlus Exchange in 2010: SBBN is a global industry- The intermediary can expand its scope and act as a vetting building initiative and community platform across intermediary for equity investors, where the latter do not emerging economies. SBBN works to accelerate the have resources to undertake due diligence when investing success of financial institutions that target underserved in a HI start-up. entrepreneurs by providing high-quality operational and strategic services, peer learning opportunities, and access to best practices and industry initiatives. Applicability: Vietnam Cambodia Nepal •• Entrepreneurial Finance Lab (EFL): EFL partners with banks in emerging markets for the use of its proprietary credit-scoring tool. The tool is a digital application that measures psychometric variables and gathers other non- ¬traditional data about applicants. Statistical models are then used to generate credit scores that score applicants from least to most likely to default. This allows partnering banks to split risk more effectively, increasing capital availability for SMEs in developing countries. In Asia, EFL is active in India, Indonesia, and Pakistan. 63 3. Revenue Financing Revenue financing18 is a non-dilutive flexible financing instrument that provides financing solutions to firms without the need for traditional governance controls or forced exit, Investor typical of venture capital or private equity transactions. X percent of periodic revenue Investee firms are provided with a capital injection in allocated back exchange for a percentage of their future revenue over to the investor Capital injection the term of the financing arrangement or once a pre- as repayment agreed return is reached – generally on a cash-on cash- return basis. The financing instrument is self-amortizing in that repayments will have an embedded capital return component. Investee firm Revenue Traditionally, this financing instrument has been used in the music, pharmaceutical, and oil and gas industries. These Figure 2.2: Revenue Financing industries produce significant upside in revenue, hence the ability to leverage off their topline to fund their activities. •• No reliance on valuation: Since there is no issue of equity, This alternative financing instrument is now being used in valuation of the HI start-up is not required at the time of various forms by both investors and investee firms (including injecting capital. This means the funding process is not traditional businesses, intellectual property firms, and subject to a valuation gap and the process becomes less charities) that have recognized its merits. time consuming If a HI start-up has existing revenue streams or can •• No personal guarantee: Collateral required for a revenue demonstrate future revenue certainty, then revenue financing arrangement is limited to the assets of the HI financing as a funding option is worth considering. By start-up and does not necessitate additional guarantee by selling future revenue to raise capital, HI start-ups can the founder(s) successfully fill the capital gap between angel investors and sourcing from traditional capital markets. Revenue •• Flexible repayments: Repayments will vary depending financing compares favorably with conventional debt on the level of revenue generated by the HI start-up. and equity investment for start-ups where, under normal This provides flexibility since the revenue financing circumstances, it is a challenge for investors to achieve arrangement is tied to the company’s cash inflows (when liquidity, fair valuation, and exit. compared to a bank loan) •• No liquidity event required: A revenue financing In the funding landscape, revenue financing ranks between instrument is self-amortizing and the investor does not debt and equity, and has characteristics of both depending have to rely on an exit strategy to recoup investment on the type of transaction and associated financing terms. Generally, a revenue financing instrument has the following •• Recycling of capital: A revenue financing investor gets features: periodic repayments from the start of the arrangement and can re-invest repayments into other opportunities •• Little or no equity dilution: Investment made via revenue over time. In contrast, an equity investment is locked in financing does not require the issuance of equity to till a liquidity event is triggered investors except where warrants are provided as part of the investment •• Returns: Investors benefit from quasi-equity returns and can ascertain the returns at the start of the arrangement since the returns are pre-agreed by both investor and start-up. 64 18 Revenue financing is also referred to as royalty-based financing, revenue-based financing and revenue loan. These are examples of revue financing initiatives: Revenue Debt Financing Equity •• Lighter Capital, a capital as a service firm, offers revenue Equity dilution No No Yes loans ranging from $25,000 to $500,000 to software, Control (loss of) No No Possible technology, and knowledge-based companies located in the U.S. and Canada. Their product is a substitute for Valuation No No Yes venture capital funding and is suitable for HI start-ups Additional collateral Yes No No that have started to generate revenue. Fixed repayment Yes No No •• Vision+ is a €50 million product investment fund that Liquidity event No No Yes invests in digital products such as applications, games and services on all digital platforms. Vision+ invests between €50,000 to €500,000 into HI start-ups using a Table 3.1: Comparative Features revenue share-based investment model. HI start-ups should consider the merits of revenue financing •• Pennam Partners has put together a revenue financing and the suitability of revenue financing to their own instrument - revenue entitlement noteTM (REN ts®). The circumstances. Using revenue financing for HI start-ups REN ts® series can be used by HI start-ups (including will largely depend on availability of cash flow to make energy-related ventures), impact ventures, and other repayments. Unlike equity financing, revenue financing companies to raise funding through revenue financing. repayments are not discretionary in nature and may place •• The Agribusiness Innovation Center in Nepal is added pressure on an investee firm if they experience low contemplating using a revenue sharing model as a way to cash flow cycle(s). Such added pressure is mitigated by generate revenue. In lieu of receiving upfront payment or the fact that the revenue financing repayments will vary equity for providing services to incubatees, the AIC has according to the revenue the investee firm is generating. the option of earning royalty fees on the increase in gross However, if the investee firm experiences a revenue decline, sales for incubation support/training provided. revenue financing repayments will take this into account and self-adjust downwards. Another factor to consider is the The example on the next page demonstrates how revenue cost of capital attached to revenue financing, and whether financing works. The terms of a revenue financing the start-up is prepared to pay and can pay quasi-equity arrangement will differ on a case by case basis, and will returns. The cost of capital for revenue financing is higher impact the repayments required to service the revenue than traditional debt funding due to its riskier nature, but financing instrument. should be lower than equity. Applicability: Vietnam Cambodia Nepal 65 3. Revenue Financing Start-up Co., a labor crowdsourcing platform, requires $200,000 to increase its online footprint and expand in three offshore jurisdictions. Start-up Co. has been able to secure an investor to provide a capital injection by way of revenue financing on the following terms: •• The arrangement has a maximum term of 5 years •• As part of the issue, Start-up Co. will provide the investor with 2.5x cash on cash return •• Based on the financial forecasts, Start-up-Co. will make repayments equal to 10 percent per annum of its revenue up till the cash on cash return is met. Funding $200,000 Revenue 10 percent percent Year 1 Year 2 Year 3 Year 4 Year 5 Total Revenue $400,000 $650,000 $920,000 $1,750,000 $1,950,000 $5,670,000 Repayments $40,000 $65,000 $92,000 $175,000 $128,000 $500,000 Cash on cash return 2.5x Table 3.2: Revenue Financing 66 4. Capital Raising Platform The fieldwork for this study resulted in the following •• To provide an overall cost-effective process for start-ups observations: and investors. •• There is a good angel investor community base in all A capital raising platform can take different forms, jurisdictions. However, angel investment is not necessarily including a crowdfunding platform, a private exchange flowing into start-ups for various reasons. First, limited to qualified investors, or as an aggregator with investors still show a strong preference for traditional each investment made via a special purpose vehicle. The assets such as real estate and businesses in traditional proposal for a public offer exchange dedicated to HI start- industries. Angel investors do not want to commit to ups or using existing stock exchanges in the jurisdictions is long investment timeframe, as would be the case with not feasible given the high costs associated with a public start-ups. Also, some angel investors are unfamiliar offer and the compliances needed. The stock exchanges in with the business models of start-ups, which in turn Vietnam, Cambodia, and Nepal do not generate enough negatively impact their investment decision. Lastly, the liquidity in existing listed stocks, which further supports the ability to attract angel investment sometimes depends view that a public offer exchange is not a feasible avenue to on the personal networks of founders. If founders are explore. not directly or indirectly known to angel investors, the probability of obtaining angel investment is low. 4.1. Crowdfunding •• There is interest among foreign investors to invest in Crowdfunding has garnered global momentum and is used some of the jurisdictions. However, such interest either in community-developed projects. Broadly, crowdfunding does not crystallize itself into an initial investment or involves an invitation to the crowd via an internet platform crystallizes itself into a one-off investment. Foreign to participate in an investment opportunity. Depending on investors face various hurdles in cross-border investments investment opportunity, crowdfunding models can vary: in Vietnam, Cambodia, and Nepal. These include legal 1. Donation – providing capital with no future and regulatory impediments associated with foreign participation in the investee firm and no expected investments (for instance, the investment certificate monetary return. This model can also be reward-based requirement in Vietnam), high investment costs, lack of where crowdfunders receive products or services in local knowledge, and cultural barriers. return. A capital raising platform can help with capacity building of the start-up investment community in the region. The IG9 is the first crowdfunding platform to operate in objectives of a capital raising platform should be: Vietnam. It uses a donation model to offer projects to the crowd, and an avenue to raise funding for the •• To provide the necessary infrastructure to connect business community. investors and HI start-ups, and facilitate investment 2. Investment – providing capital with expectations of a •• To ensure HI start-ups are investment ready before using return on that investment. This form of crowdfunding the platform to raise capital can be equity or debt funding. •• To provide investors with vetted investment Crowdcube is a successful equity crowdfunding opportunities. Due diligence can be undertaken by platform. Crowdcube was started in 2010 in the the platform operator, a third party, or by the market United Kingdom and has since helped entrepreneurs (generally the case with crowdfunding platforms where to raise over £16.5 million. Crowdcube is now going prospective investors can benefit from each other’s due international by building a presence in new markets, diligence) including Sweden, Brazil, Poland, and Dubai and recently adding Italy, New Zealand, and Spain (see to Crowdcube infographic on p.69). 67 4. Capital Raising Platform Crowdfunding Business Features Pros Cons model Model Donation Donation- Philanthropic: funders donate No risk Donors do not acquire security based without expecting monetary interest. Entrepreneurs have difficulty compensation raising substantial capital. Reward- Funders receive a token gift of Low risk (primarily Potential return is small. No based appreciation or pre-purchase of fulfilment and fraud security is acquired, and there is no a service or product. This model risk). No real potential accountability mechanism. Most is evolving into a marketplace for financial return. entrepreneurs may have difficulty of its own with firms raising raising substantial capital without a considerable sums through pre- product with mass appeal to sell. sales Investing Equity- Funders receive equity Potential to share in Potential loss of investment. Equity based instruments or profit sharing the profitability of the holders are subordinate to creditors arrangements. venture. Unlimited in the event of bankruptcy. Securities potential for financial laws related to crowdfund investing gain. May attract may be complex. relatively large numbers of investors. Lending- Funders receive a debt instrument Pre-determined rate May be subordinate to senior based that pays a fixed rate of interest of return agreed upon creditors. Startups’ high failure and returns principal on a between lender and rate presents similar risk of loss specified schedule. borrower. Debt holders as an equity investment, but with are senior to equity capped potential returns. Requires holders in case of a business already generating cash bankruptcy. Secured flow. Existing/established cash flow status may make it positive businesses may consider easier for entrepreneurs this option because they can offer a to raise capital. more structured exit opportunity than typical equity offerings. Royalty- Less common than the other Potential gain is Potential loss of investment. Risk based models. Funders receive a share unlimited but the of loss comparable to that of an in a unit trust, which acquires a rate of gain is equity investment but investment royalty interest in the intellectual predetermined by the offers lower potential returns than property of the fundraising interest rate. Investment equity. The business could cease company. A percentage of presents less risk or paying royalties if it chose to operate revenue is paid out over a period return than an equity without the intellectual property in of time. The payout varies investment but more question. These instruments generally depending on the periodic than a debt instrument. attract smaller pools of investors revenue. than other crowdfunding models, so entrepreneurs may find it more difficult to raise capital with this model. Table 3.3: Characteristics of Different Crowdfunding Models Reprinted from: Crowdfunding’s Potential for the Developing World, 2013 The suitability of crowdfunding models for the developing learn how to do it successfully. The table below depicts world was considered in Crowdfunding’s Potential for the different crowdfunding models and whether it is worthwhile Developing World, 2013. The report says that crowdfunding exploring for replication in the developing world (including could significantly support innovation, growth, and jobs in in Vietnam, Cambodia, and Nepal). the developing world. It also mentions that the developing world should look at early adopters of crowdfunding to 68 Here the arethe Here are stats stats behind behind Crowdcube’s Crowdcubes success success so so far; far; the the leading leading equity crowdfunding equity crowdfunding platform platform in the United Kingdom in Kingdom the United percent percent percent percent percent percent 14 percent 10 percent 16 percent 28 percent 41 percent 21 percent 17 percent 12 percent 26 percent 5 percent 10 percent 69 4. Capital Raising Platform Most suitable Average funding Suitable for exploration in Suitable for high-growth project type sought ($) developing world? innovative start-ups? Donations-based Arts <$10,000 Yes No, if capital requirements crowdfunding are >$10,000 Reward/Pre-sale Project, <$100,000 Yes Yes, as a testing ground for crowdfunding product proof of concepts Microfinance Micro <$1,000 Yes No, if capital requirements development are >$1,000 Social lending Micro <$50,000 Yes Only if capital requirements development are <$50,000 Crowdfund investing/ Technology <$250,000 Yes with the right Yes equity innovation infrastructure Table 3.4: Suitability of Crowdfunding Models for the Developing World Reprinted from: Crowdfunding’s Potential for the Developing World, 2013 For an investment crowdfunding platform to be truly not necessarily need investor protection as would ‘mum and effective, it needs a separate tailored regime that allows dad’ investors. A private exchange could connect qualified a HI start-up to raise capital cost-effectively. This means a investors with vetted opportunities. Successful models HI start-up using crowdfunding should not be subject to that have been implemented overseas are Sharespost and the same rules and regulations as a company looking at Second Market. a public listing on a stock exchange. The offer, disclosure, and promotion regime should be ‘light’ for crowdfunding The other permutation is to facilitate investment in a offers, while ensuring investor protection. particular HI start-up via a special purpose vehicle. While a platform of sorts will be used to provide investment To test the viability of crowdfunding platforms in the alerts to investors, the investment itself will be made jurisdictions, for example in Vietnam, it would be best through a special purpose vehicle to collect all incoming to use a model that is compliant with rules in that investors. These back to back arrangements are commonly jurisdiction. The best way is to team up with an existing used to raise capital; some examples are Solar Mosaic and crowdfunding platform, carry out test cases to gather the Impact Investment Exchange. Investors can rely on intelligence and determine whether it can generate an independent ‘manager’ to assess the investment and traction in the investment community. monitor the investment on an ongoing basis. The investee firm will effectively deal with one investor as opposed to The crowdfunding model can be designed to limit multiple investors. participation to sophisticated/accredited investors, effectively a private exchange. This will generally benefit from various legal and regulatory exemptions/ exceptions since sophisticated/accredited investors do Applicability: Vietnam Cambodia Nepal 70 5. Funding Facilities Other funding facilities for start-ups are sidecar funds and Sidecar funds generally invest alongside existing angel seed capital facilities. These are structurally designed to investor networks, but a different approach will need to leverage existing resources (for instance, venture capital be taken in the countries in the study. Given the lack of funds and incubators) to facilitate operations and minimize structured angel communities, sidecar fund could align duplication. with other investors in the market, such as venture capital funds or incubators with investment funding capabilities. 5.1. Sidecar Fund This will ensure investors in the sidecar fund get exposure to qualified investment opportunities and share investment The objective of a sidecar fund is to encourage angel risks with business incubators/venture capital funds by being investment while ensuring investors are not disincentivized co-investors. to make investments in start-ups due to their lack of knowledge of the industry, the due diligence process and associated transaction costs, and lack of quality deal flow. Individual angel investors Venture capital Pooling of funds Deal flow fund Undertake co- Sidecar fund investment as a minority investor Incubator Incubatee Figure 2.3: Sidecar Fund Applicability: Vietnam Cambodia Nepal 71 5. Funding Facilities 6. Venture Capital Regime 5.2. Seed Capital Facility A venture capital regime can play a crucial role in attracting local and foreign investors. It can also develop the overall A seed capital facility is similar to a sidecar fund, except that local venture capital industry by attracting new venture it is not aimed at encouraging angel investment. Investors in capital fund managers and developing local talent. Venture the seed capital facility are not necessarily angel investors. capital regimes operate in several countries, including Rather than aligning itself with and relying on co-investors, Singapore, Malaysia, Kenya, South Africa, Australia, and the a seed capital facility works with incubators, and acts as United Kingdom. a source of financing for incubatees. This ensures investee firms have a readily available financing source once they A venture capital regime should provide a legal and need capital and are investment ready. A seed capital facility regulatory framework to govern venture capital funds, can align itself with one incubator or several incubators; venture capital fund managers, and venture capital its management can be separate from the incubator team investments. The framework should provide for a legal or internally managed by the incubator; and it can require structure that is conducive to venture capital investments. incubator(s) to participate as investors in the facility to The legal structure should generally be on a flow-through ensure there is an alignment of interest between them. basis, provide investors with protection and limited liability, and recognize participation of a fund manager. It must also As part of its Climate Innovation Center initiative in Vietnam, provide for qualifying criteria, which could include minimum infoDev is developing a seed capital facility mechanism to and maximum size for venture capital funds, eligible provide finance to CIC incubatees. The proposal is for the investments that can be made (for example, by the revenue seed capital facility to be aligned with the VCIC. The seed and/or asset size of the investee firm, and eligible sectors), capital facility will not limit itself to investee firms that come maximum investment a venture capital fund can make in an through the VCIC, but can also invest in non-VCIC related investee firm, and any mandatory divestment requirement. investee firms as long as firms address climate change challenges and meet its investment criteria. The VCIC is A legal and regulatory framework by itself is not enough; expected to be an investor in the seed capital facility, which the framework should provide appropriate tax incentives. will invest via equity or debt instruments, including but not The tax incentives can be by way of lower tax rates, tax limited to self-liquidating preferred equity and convertible holidays, or tax exemptions at the fund level and/ or notes. underlying investor level. Common practice is for venture capital funds to have flow-through status, and the divestment gains and income distributions are taxed at Applicability: Vietnam Cambodia Nepal the underlying investor level. This means the investors are not worse off compared to if they made the investment directly in the investee firm. If a flow-through treatment is not embedded in the venture capital regime, venture capital funds should be subjected to lower tax rate(s). Similarly, consideration should be given to whether tax incentives should be extended to underlying investors. For instance, in Australia investors in early stage venture capital limited partnerships are not subject to tax on any income derived from their investments. Also, a venture capital regime should provide certainty to the tax treatment of the venture capital fund managers’ remuneration, including free carry. 72 7. Start-up Regime A matching funding scheme can also help develop the Fieldwork respondents strongly preferred to see a start-up local venture capital industry in Vietnam, Cambodia, and regime developed in Vietnam. Given the nature of HI start- Nepal. Here, the government acts as a co-investor in venture ups, the view is that concessional treatment should be given capital funds on the condition that fund managers can to them and that they should not be subject to the same raise funding from external investors. Generally, there is a legal and regulatory regime as matured SMEs. According to preference for thematic venture capital funds (for instance respondents, the lack of a separate start-up regime is stifling biotechnology, ICT, or climate change). Matching funding development of HI start-ups with red tape and hindering schemes need not be limited to governments, development access to finance. Rather than being sector-driven (which finance institutions can certainly play an important role in is generally the case for SME concessional treatment), a this. Matching funding schemes can be used in tandem start-up regime can be based on the level of innovation with other funding facilities such as sidecar funds and seed of the start-up and be sector agnostic. With a separate capital facilities. start-up regime, numerous measures could be implemented to assist HI start-ups in their development and increase their attractiveness as investment. These are some of the Applicability: Vietnam Cambodia Nepal measures: •• More simplified administrative, tax, and legal compliance requirements tailored to the start-up sector; for instance, in relation to investment certificate requirements. Investors say that the investment certificate requirements, in its current form, is a major hindrance to the capital raising process, and changes are needed to improve capital flows into HI start-ups in Vietnam. •• An employee share/option scheme to allow HI start-ups attract appropriate expertise and mentors. HI start- ups have limited financial resources and cannot afford to employ people on a commercial basis. Offering equity remuneration allows start-ups to attract local and foreign participation in the venture (and aligns their interest on a longer term basis), ensures there is a diversified team, and provides for a transfer of knowledge between team members. •• Tax incentives to HI start-ups and/or their investors. For instance, angel investors can be incentivized to make direct investments in HI start-ups by getting tax reliefs on their investments. This can be by way of partial deduction on the capital contributed (similar to the enterprise investment scheme in the United Kingdom). An alternative is tax rollover relief for divestment gains as long as gains are re-invested in other start-ups. This will ensure capital is recycled back into the sector to benefit start-ups. Applicability: Vietnam Cambodia Nepal 73 8. In-kind Support While providing finance is critical, start-ups are equally advisors, approved to operate under the service voucher in need of in-kind support to develop and grow their scheme. These schemes can help attract more advisors to businesses. In-kind support can improve business the start-up sector. An example of a service voucher scheme skills, enhance investment readiness levels, reduce is the Innovation and Capability Voucher scheme offered transaction costs of raising capital, and provide by SPRING Singapore. The scheme allows HI start-ups to technical assistance they lack in-house. These will have a seek assistance on financial management, human resources, cascading positive impact on access to finance, since they innovation, and productivity. address some of the impediments that exacerbate the financing gap for the missing middle. In-kind support can In-kind support can also be provided through a start-up be provided directly and indirectly through various means, toolkit. The toolkit provides resources and insights to both including by the following: investee firms and (angel) investors to increase familiarity with the investment process, and provide them with tools to facilitate the process. While each investment is different, In-kind Support the rationale behind the start-up toolkit is to provide standardized resources, which can help minimize transaction costs and improve investment readiness HI start-ups. This Technical Service initiative should take inputs from local investors to ensure Connectivity assistance voucher Start-up platform toolkit Training fund scheme the toolkit is tailored to the jurisdiction. Fieldwork reinforced the view that technical and business Figure 2.4: Provision of In-kind Support training and skills development is critical for a thriving start-up sector. Both entrepreneurs and investors said that entrepreneurs generally need to up-skill through A technical assistance fund (TAF) is similar to an formal and informal training and mentoring. For instance, investment fund, except that it does not provide direct in Vietnam this is facilitated through universities offering capital injection into investee firms. Instead, it assists in entrepreneurship units, and incubators and accelerators funding essential support services needed by HI start- providing practical training. However, there is a need ups (for instance legal, financial, market assessment, and to review existing local training capacity to determine business development services). A TAF can be stapled to effectiveness, and identify gaps that need to be filled. a venture capital fund, can work with incubators, or act as a stand-alone initiative. As part of its holistic approach In-kind support can also be provided through a to developing innovation centers, infoDev has included connectivity platform to help connect different a technical assistance facility component in both Climate stakeholders in the start-up ecosystem. Its aim: improve Innovation Center and Agribusiness Innovation Center visibility of investee firms with investors and facilitators; initiatives. A Technical Assistance Fund can also be used assist with transfer of knowledge and flow of expertise to provide assistance to investors. It can fund or subsidize among different stakeholders in the ecosystem within a activities such as investment assessments and due diligence. particular jurisdiction and across multiple jurisdictions; and This should minimize transaction costs incurred by investors facilitate technology/intellectual property transfer. Some and can be an incentive for building capacity among angel initiatives that currently address these issues are listed here: investors. The alternative to a technical assistance fund is a service voucher scheme. This operates similarly to a TAF, except that it provides a direct bridge between HI start-ups and advisors. Start-ups can redeem vouchers with registered 74 •• MarketCONNECT (infoDev): This relates to climate innovation centers and will link promising companies Box 3.1 with global partners and expertise (including suppliers, financing sources, and export markets). Proposed Actions for infoDev •• Low Carbon Technology Transfer Marketplace (ADB): This Based on the recommendations contained in this is an assisted broker model to match buyers and sellers study, infoDev may consider the following: of low carbon technologies, which will help in technology diffusion and accelerate technology commercialization. •• Developing an investment readiness start-up toolkit tailored to each of the three jurisdictions. In •• Starthub.vn: This initiative is creating a central resource Vietnam, and Nepal, investment readiness start- of technology start-ups operating in Vietnam, thus up toolkits could be developed with the Climate increasing their visibility in the local and international Innovation Center and the Agribusiness Innovation start-up community. Additional features such as an angel Center, respectively. list-like widget for investors and a wiki-like database on entrepreneurship advice is being developed. •• Identifying existing capital raising platform(s) operating in South East Asia using test cases to gain valuable insights, and determining applicability Applicability: Vietnam Cambodia Nepal to investee firms in the jurisdictions, together with enhancing access to finance. •• Undertaking further analysis on revenue financing and its suitability to fund HI start-ups in developing countries, and raise awareness about the benefits and risks of revenue financing. •• Determining the merits of a centralized finance innovation center and how it can benefit the jurisdictions and infoDev’s programs. A centralized finance innovation center will be virtual in nature, initiate/facilitate development of finance-related initiatives for the start-up sector (such as alternative financing instruments), and act as a repository of information for lessons learned from other infoDev initiatives (for instance VCIC and AIC) with a view to disseminate those across the infoDev network. •• Exploring ways to develop the angel investor network in the jurisdictions by aligning itself to existing initiatives and providing support (including expertise) in furthering these initiatives. 75 Appendix A: Survey Questionnaire Reproduced below is the survey questionnaire used to obtain feedback from investee firms. While this particular questionnaire relates to Vietnam, the same contents were replicated for the field study in Cambodia and Nepal. The term SME has been used as a proxy term for HI start-ups throughout the questionnaire. 1) Name of investee firm 3) What is your view on the severity of financing gap in Vietnam? Reference to an investee firm means SMEs (including start-ups)(Optional) Financing gap is broadly the lack of access to funding for investee firms, generally in the $50,000 - $1,000,000 range. Low 2) Which sector(s) does the investee firm operate in? Medium Retail High Manufacturing 4) What is your view on the level of access to finance by entrepreneurs for each of the below Food and Beverages stages of finance? Media For ease of access to finance, this should be denoted with ‘high’ and limited access to finance should be denoted with Online technology ‘low’. Mobile technology Low Medium High Climate technology Pre-seed finance Technology (other) ______________________ Seed finance Financial services Start-up finance Healthcare & life science Early stage venture capital Energy Late stage venture capital Agribusiness SME private equity Hospitality & tourism Telecommunications Infrastructure Other, please specify... ______________________ Other, please specify... ______________________ 76 Appendix B 5) Out of the list below, which stage of finance 7.1.1) Please specify the finance source from your has the highest level of access to finance? last round of funding: Pre-seed finance Family & friends Seed finance Angel investors Start-up finance Venture Capital Fund Early stage venture capital SME Private Equity Fund Late stage venture capital Bank SME private equity Other financial institution 6) Out of the list below, which stage of finance Other, please specify... ______________________ has the lowest level of access to finance? 7.1.2) What financing mechanism was used to Pre-seed finance inject the capital in your last round of funding? Seed finance Equity Start-up finance Debt Early stage venture capital Convertible debt/loan Late stage venture capital Other, please specify... ______________________ SME private equity 7.1.3) How much finance/capital did the investee firm raise in your last round of funding? 7) Have you sought finance in the past? <$50,000 Yes $50,000 - $200,000 No $200,001 - $500,000 7.1) Were you successful in securing finance? $500,001 - $1,000,000 Yes $1,000,001 - $2,000,000 No $2,000,001 - $5,000,000 > $5,000,000 77 7.2) On a scale of 0 to 10, please rate your 8) How familiar are you with the venture capital experience in relation to the overall finance industry and associated venture funding sources? process (i.e. application, presentation and closing): The term venture capital in this context means sources of funding other than from private equity firms and/or the 10 4 capital markets. 9 3 10 4 8 2 9 3 7 1 8 2 6 0 7 1 5 6 0 7.3) On a scale of 0 to 10, please rate how 5 prepared you were when seeking finance/capital: 9) Formal funding sources This would include supplying all the appropriate information, presenting an adequate business case and being familiar This question is to ascertain whether an investee firm would with the investment process. consider formal funding sources. 10 4 Yes No 9 3 Would you consider equity funding? 8 2 Would you consider debt funding? 7 1 6 0 5 78 Appendix B 10) What are some of the factors that impact the 11) Out of the measures below, which ones can investment readiness of an investee firm? improve access to finance for SMEs (including start-ups)? Entrepreneurs lack credibility Tax incentives for finance providers Flawed business concept Innovative finance solutions (for instance to address Assumptions provided are unrealistic equity dilution) Insufficient information provided Debt and/or equity guarantee mechanism Limited growth prospect for investee firm Use of financial intermediaries (this will add a vetting layer and can reduce transaction cost) Pitch not properly delivered A separate legal SME framework Valuation gap (pricing) A venture capital regime Lack of awareness with finance terms and conditions (for example, board seat, first right of refusal, and Improvement in credit scoring claw back clauses) Improvement in relevant legal areas (e.g. contractual Lack of familiarity of financing sources (e.g. VC fund) and insolvency laws) Lack of legal knowledge/familiarity 12) Any additional recommendations you (e.g. legal documentations) have for improving access to finance for SMEs (including start-ups): Other, please specify... ______________________ Other, please specify... ______________________   79 References Aryal, R. 2013. 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We also produce cutting- edge knowledge products, closely linked to our work on the ground. For more information visit www.infoDev.org or send an email to infoDev@worldbank.org. About Pennam Partners Pennam Partners is an Australian based corporate advisory firm working, inter-alia, with start-ups and SMEs to facilitate their capital raising process and enhance their investment readiness level. Pennam Partners also assists financing providers/ intermediaries in developing alternative financing initiatives, and structuring investment funds. For more information visit www.pennmampartners.com or send an email to info@pennampartners.com. This study was made possible thanks to the support of the Australian Department of Foreign Affairs and Trade and the Ministry for Foreign Affairs of Finland. 82 83 © 2014 infoDev/The World Bank | 1818 H Street, NW | Washington DC, 20433 Email: info@infoDev.org | Tel + 1 202 458 8831 | Twitter: @infoDev 84 www.infoDev.org