Definition of “Startup” in Nepal – minus other things

Posted by Parajuli Sushil 1 year Ago 1 Comment 31 Min Read

Update: 
National Policy on Startup Business is being drafted in Nepal – join the discussion here. 

What is a "startup"?

In the internet we come across many definitions of the startups – which more or less revolve around the following concepts: 

A startup is a young company, typically founded by one or a group of entrepreneurs, with the aim of developing and delivering innovative/disruptive products, services, or technologies. Startups are characterized by their high growth potential. Unlike established companies, startups often operate in uncertain and dynamic environments, and their success often hinges on securing additional resources. 

The above definition will help us in understanding the meaning of a “startup”. Let’s go through each of the major keywords that defines a “startup”. 

  1. Young company: While there is no strict definition of how young a company must be to be considered a startup, it is generally understood that startups are in the early phase of their lifecycle. This phase can range from the initial ideation and development stage to the early commercialization and growth stage. 
  2. Founded by entrepreneurs: Startups are founded and driven by entrepreneurs who are passionate about their vision and willing to take risks. The founding team plays a crucial role in shaping the startup’s direction and driving its growth.
  3. Developing and delivering: Developing involves various stages, including ideation, research, prototyping, and product development. Delivery involves bringing the developed product or service to market and making it accessible to customers. 
  4. Innovative products, services or technologies: Startups are typically founded on innovative ideas, technologies, or business models that aim to disrupt existing markets or create new ones. They often bring fresh approaches to solving problems and provide unique solutions.
  5. High growth potential: Startups have the potential for rapid growth and scalability. They strive to build products or services that can be easily scaled up to serve a large customer base or expand into new markets.
  6. Uncertain and dynamic environment: Startups operate in uncertain environments with a high degree of risk. They face challenges such as market validation, competition, regulatory hurdles, and technological advancements. Managing and mitigating risks is a constant concern for startups.
  7. Need to secure additional resources: Startups often operate with limited resources, including financial capital, manpower, and infrastructure. They are resource-constrained in the early stages and focus on maximizing their efficiency and impact.

Is there a litmus test to identify a “startup”?

There isn’t a definitive litmus test to identify a startup, as the term can be subjective and varies depending on the context. However, there are certain characteristics and indicators that can help identify whether a company can be classified as a startup as listed above in the first section.

Okay, taking the risk of repeating the same ideas above, here are some factors that can be considered as a test to identify the startup: Company Age, Company Type, Annual Turnover, Original Entity, Innovative & Scalable and many more.

It’s important to note that these factors should be considered collectively, rather than relying on a single litmus test. The startup ecosystem is diverse, and individual companies may exhibit these characteristics to varying degrees. Additionally, the definition of a startup can evolve over time as a company progresses through its lifecycle and matures – where the same company would cease to be a startup any longer.

From budget speech since past 10 years

The Nepalese government aims to foster startup growth through initiatives such as start-up funds, challenge funds, and business incubation centers. These efforts promote innovation, entrepreneurship, and economic development by providing seed capital, financial assistance, and tax incentives to small and medium-scale entrepreneurs. Emphasis is placed on skill development, knowledge-based businesses, and industry expansion, particularly in sectors like agriculture and information technology. The government also seeks to enhance financial access, encourage technology adoption, and empower young entrepreneurs. While recent progress is acknowledged (relating to the challenge fund of the Startup Enterprise Loan – as discussed below), the delayed implementation of these plans over the past decade has hindered the potential growth and competitiveness of Nepal’s start-up ecosystem, frustratingly missing out on opportunities for aspiring entrepreneurs. It is crucial for the government to expedite the execution of these initiatives and provide robust support to unleash the country’s entrepreneurial potential and drive economic growth.

Here are the relevant extracts of the budget speech that made the commitment towards the development of the startup ecosystem throughout the last decade, while failing miserably in its implementation until the recent startup challenge fund (which we will discuss below):

Definition of Startup in Nepal

The Start-Up Enterprise Loan Fund Procedure, 2079 defines “startup” as:  
In Nepali: स्टार्टअप उद्यम भन्नाले “उद्यमशिल समुहले वस्तु, सेवा र प्रक्रियाको विकास, उत्पादन, सञ्चालन र वितरणमा नविन अन्वेषण एवम् सृजनशिल सोचको प्रयोग गरी व्यावसायिक रुपमा सञ्चालन भई स्तरोन्नतीको सम्भावना रहेको उद्यम वा व्यवसाय सम्झनु पर्दछ ।”
In English: A startup enterprise refers to a business or enterprise formed by entrepreneur/s through the utilization of novel research and innovative thinking in the advancement, production, operation, and distribution of goods, services, and processes, that has the capacity to be enhanced / scaled up. 

As generally understood, it refers to a new or growing business that is young, innovative, scalable and has a need to secure additional resources. Entrepreneurs and individuals engaged in the startup community have offered subjective definitions of startups based on their personal perspectives and experiences. However, to facilitate regulatory and policy formulation, the governments tend to provide more definitive and precise definition of startups. This ensures clarity and consistency in identifying and supporting startups within the regulatory framework. 

In order to facilitate the inspired involvement of entrepreneurs with the latest knowledge, ideas, thinking, and capabilities in startup ventures, it is desirable to establish an effective mechanism for the smooth, clear, organized, and impactful implementation of startup funds. With this in accordance, the Government of Nepal has issued the Start-Up Enterprise Loan Fund Procedure, 2079 in 2079.11.10

Promises, promises, more promises and infinitesimal delivery

It is deeply frustrating to witness the release of the program by the government after an exasperating decade filled with nothing but promises, promises, and more promises. The prolonged delay in implementing these initiatives has resulted in a sense of disillusionment and disappointment. The continuous mentions of support for start-ups, the promotion of innovation, and the provision of concessional loans created a glimmer of hope, only to be met with infinitesimal delivery. The wasted potential, missed opportunities, and the impact on aspiring entrepreneurs during this frustrating period cannot be overlooked. It is high time for the government to take immediate and effective action to fulfill their commitments and provide the necessary support for the growth and success of start-ups in the country.

The very late and yet so infinitesimal delivery of Startup Enterprise Loan Fund

After the Loan Fund Procedure, a notice called “Notice Regarding Submission of Project Proposal for Startup Enterprise Loan” was issued under the Start-Up Enterprise Loan Fund Procedure, 2079, dated 2079.12.16 informing interested start-up enterprises about eligibility for applying for loan concessions as a part of the startup challenge fund. The notice provides information on the eligible industries, criteria for applying for business and enterprise loans, ineligibility factors, maximum loan limits, submission process, and required documents. The notice emphasizes accurate information disclosure, disqualifying proposals with inaccurate or falsified documents, and the prescribed format for loan applications.

Relevant notices and news: Notice 1 | Notice 2 | Notice 3 | Notice 4 | News

Key Points in the Concessional Loan Facility
Key Points in the concessional loan facility provided under स्टार्टअप उद्यम कर्जाका लागि परियोजना प्रस्ताव पेश गर्ने सम्वन्धी सूचना for the purpose of providing the concessional loan facility are listed below which gives us relevant pointers that helps identity a “startup”: 

Eligible Industries: The notice lists various start-up industries eligible for concessional loans, including agriculture, forestry, tourism, technology, health services, education, transportation, infrastructure, automobile, improvement of traditional technology, mining, assisting domestic life, production and processing of foods and waste management.

Application Criteria: Start-ups must meet specific criteria, such as being registered and in operation for no more than 7 years, fulfilling certain financial and operational thresholds: 

  1. Satisfy at least three criteria from 
    • Paid up Capital: Paid up capital of not more than NRs 5 million (NRs 50 lakhs),
    • Gross Income: Gross income of the enterprise not more than NRs 5 million (NRs 50 lakhs),
    • Fixed Capital: Fixed capital (except land and building) of not more than NRs 20 million (NRs 2 crore),
    • Employees: Not more than 10 full time employees,
  2. Satisfy at least two criteria from, and utilizing technology, innovation, and intellectual property protection.
    • Use of Information Technology: Utilization of technology and innovation (creative thinking) in resolving consumer issues in production and distribution of goods and services,
    • Allocation of Expenditure: Expenditure allocation of at least 5% of total expenditure for product development, market research & development,
    • Intellectual Property Protection: Either registered intellectual property of industry as patent or design or software or eligible to be registered as patent, design or software.

Ineligible Enterprises: The notice outlines the enterprises that cannot apply for start-up loans, including unregistered businesses, those simply involved in trading and not utilizing technology and innovation, subsidiaries of existing companies, blacklisted entities, entities not registered in tax, single shareholding company, and those classified as medium and large industries under Industrial Enterprise Act, 2076 among others.

Loan Limits and Collateral: The maximum loan limit is NRs 2.5 million to be provided under project financing arrangement. 

National Policy

The discussions and provisions mentioned above highlight the importance of a national policy relating to startups in Nepal. A comprehensive and well-defined policy framework is crucial to provide clear guidelines, support, and incentives for aspiring entrepreneurs. A national policy can address the specific needs and challenges faced by startups, fostering a favorable ecosystem that encourages innovation, entrepreneurship, and economic growth. It can outline mechanisms for accessing capital, creating funding opportunities, providing tax incentives, facilitating business registration processes, and promoting research and development. Additionally, a national policy can promote skill development, mentorship programs, and industry collaborations to nurture the growth and success of startups. By establishing a robust national policy, Nepal can unlock the full potential of its startup ecosystem, creating a conducive environment for job creation, economic diversification, and technological advancement.

Sadly, as of date we do not have a comprehensive national policy relating to the development and fostering of the startup ecosystem in Nepal: National Policies issued by the Government of Nepal. Some annual government plans however do mention the need of developing the startup ecosystem and the concept of challenge funds to foster the novel research and innovation in the country – links here Annual Plans and Policies – Government of Nepal (OPMCM). The industrial policies of the country – links here Industry Policies – Ministry of Industry, Commerce and Supplies also makes the sound of crickets, as per usual. 

From Seed Stage to IPO - cease to be a “startup”?

The financial journey of a startup involves multiple stages of funding and growth. It typically begins with seed funding from friends, family, or early-stage investors to research, develop a prototype and establish the commercial viability of the business. As the startup progresses, it seeks early-stage funding (Series A and B) from venture capitalists to fuel product development and market expansion. In the growth stage, later-stage funding (Series C and beyond) is obtained to scale operations and enter new markets. The ultimate goal for many startups is to go public through an Initial Public Offering (IPO), which allows them to raise substantial capital from the public. Following an IPO, the company continues to grow and may access public markets for additional funding. This post-IPO growth phase involves meeting shareholder expectations and complying with reporting requirements.

This begs a question – When does a “startup” cease to be one? 
Generally, a startup is considered to transition out of the startup phase when it achieves certain milestones such as significant revenue generation, sustainable growth, market dominance, or a successful exit (e.g., acquisition or IPO). While there is no universally agreed-upon threshold, common indicators that a startup has moved beyond the startup phase include achieving profitability, reaching a certain size in terms of employees or revenue, and establishing a stable market position. Some may argue that a startup ceases to be a startup when it undergoes a significant organizational shift, such as a change in leadership, business model, or strategic direction. So as the criteria for recognizing the startup at the initial stages begins to be no longer applicable – the entity ceases to be a startup. 

And the not so beneficial “tax benefits”

Section 12Ga of the Income Tax Act, 2058 provides a tax deduction facility for the seed capital provided to the startups. And let us see how absurd the provision really is: 

दफा १२ग, आयकर ऐन, २०५८: स्टार्ट अप व्यवसायलाई दिएको बीउ पुँजी: 
कुनै व्यक्तिले सम्बद्ध व्यक्ति बाहेकका बढीमा पाँच वटा स्टार्ट अप व्यवसायलाई प्रति व्यवसाय एक लाख रुपैयाँसम्मको बीउ पुँजी अनुदान स्वरुप उपलब्ध गराएमा सो रकम करयोग्य आय गणना गर्दा खर्च कट्टी गर्न पाउनेछ ।

Section 12Ga of the Income Tax Act, 2058 supposedly provides a tax deduction facility for seed capital provided to startups. However, let’s critically examine the absurdity of this provision:

  1. Firstly, the term “seed capital” itself becomes questionable when it is merely a grant. How can a grant given to an unrelated individual be classified as capital? Moreover, in a capitalist market, what incentive does an angel donor have to invest in the startup if it is merely a grant?
  2. Secondly, the requirement that the grant must be given to an “unassociated person” contradicts the very essence of seed capital. Seed capital is typically raised through bootstrapping or contributions from close family members and associated individuals. This provision undermines the idea of raising initial funds from related parties who genuinely believe in the startup.
  3. Lastly, the maximum amount eligible for deduction as a contribution to one startup is a meager Rs. 100,000, and this amount can be spread across five separate startups. Isn’t it glaringly obvious that such a small amount is insufficient to ignite any significant achievement or provide the necessary boost for startups?

In light of these shortcomings, it is imperative to revisit and revise the provisions related to tax deductions for seed capital. To truly foster an environment conducive to startup growth and encourage investments, the government should consider more meaningful and realistic incentives that align with the needs and aspirations of startups and their investors.

दफा ११(३न), आयकर ऐन, २०५८: व्यावसायिक छुट र सुबिधाहरु

(३न) नवप्रवर्तनकारी ज्ञान, सोच, सीप, प्रविधि, व्यवहार र तरिका प्रयोग गरी वार्षिक एक करोडसम्म कारोबार गर्ने विभागले तोकेको स्टार्ट अप व्यवसायलाई कारोबार सुरु गरेको मितिले पाँच वर्षसम्म लाग्ने करमा शतप्रतिशत छुट हुनेछ ।

Another, startup specific tax concession is provided in Section 11(3Na) of the Income Tax Act, 2058 that provided 100% tax exemption for 5 years from commencement to startup businesses as specified by the department that uses innovative knowledge, thinking, skills, technology, behavior and methods, will have a 100 percent tax exemption for a period of five years. 

Some meaningful benefits that could further help Startups in Nepal

Although the concessions and facilities provided to the industries are not very specific to the startups in particular, many relevant benefits are provided to industries under Industrial Enterprises Act both federal and provincial. Do visit this helpful news article on the same: नेपालमा स्टार्टअप व्यवसायीले जान्नैपर्ने सहुलियत, कानुनमा कहाँ कमजोरी, लजुला महर्जनको लेख

Links to the federal and provincial laws relating to the Industrial Enterprises here: 
संघिय औद्योगिक व्यवसाय ऐन, २०७६ 
बागमती प्रदेश औद्योगिक व्यवसाय ऐन, २०७६

To better support aspiring startups in Nepal, several beneficial measures could be implemented:

  1. Establish a comprehensive single-point service center that covers all aspects of startup promotion, including investment facilitation, registration, incubation, renewal, and compliance.

  2. Regularly run challenge funds, providing opportunities for startups to raise capital through equity or debt investments.

  3. Address the practical challenges associated with subsidized loans of up to 25 lakh rupees, where educational certificates serve as collateral. Detailed arrangements and coordination with the financial system, including the central bank, are necessary to ensure practical implementation.

  4. Introduce self-certification facilities for initial years, allowing startups to overcome bureaucratic hurdles by simplifying financial, labor, and environmental compliance audits.

  5. Provide relaxation on capital gains and registration taxes for property transfers from promoters to startups that meet the qualifying criteria.

  6. Create a centralized repository of government schemes related to entrepreneurship, offering free IT, legal, financial, and banking support from a pool of experts to startup ecosystem enablers.

  7. Streamline the process for patent applications, offering fast-track options for startup patents, rebates on filing fees, and facilitators for intellectual property protection.

  8. Enable faster exits for startups with simpler debt and equity structures, reducing the burden of exit compliances and allowing promoters to focus on new ventures.

  9. Introduce a special “startup certificate” issued by the coordination of the Inland Revenue Department and the Department of Industries, aiding in the identification of startups for tax purposes and conducting year-on-year assessments.

  10. Operate regular challenge funds to provide equity and debt funding support for innovation-driven enterprises, facilitating the participation of capital markets, private equity, and venture capital players.

  11. Foster global market access and knowledge exchange for startups by collaborating with countries that have potential investors or markets interested in Nepalese innovations.

Implementing these measures would provide meaningful support to aspiring startups, fostering their growth and contributing to the overall development of Nepal’s entrepreneurial ecosystem.