Due to Covid 19, online transactions have gone up in Nepal by 30%. I believe this will be the new normal. New users were added during the lockdown.

Shabda Gyawali is Investment Director at Dolma Impact Fund where he previously held the position of Business Development Officer and Invest Manager. Gyawali has been part of the Dolma Impact Fund team since its inception in 2011 and during his tenure, Dolma has successfully raised USD 36.6 MN and deployed capital in nine companies. Currently Gyawali leads deal origination, transaction execution, regulatory approvals and post-investment management of partner companies. He oversees hydropower and healthcare projects and sits on the board of various partner companies. He is also the Alternative Director at Sasto Deal and Swet Ganga Hydro on behalf of Dolma Impact Fund. Gyawali has extensively evaluated valuations and equity investment structures for more than 70 Nepali companies. Prior to joining Dolma, Gyawali had worked at JM Family Enterprise, one of the largest privately held companies in America. He also worked at beed Management in Nepal where he provided advisory support to small and medium enterprises. He has significant experience in other emerging and frontier markets and is the Co-founder of Saraii Village, an eco-tourism venture in Sri Lanka. In an interview with B360’s Avant Shrestha, Shabda Gyawali talks about his career and work with Dolma Impact Fund and the current predicament and the future of private equity sector in Nepal. Excerpts:

How did get associated with Dolma Impact Fund and did you always want to be in the private equity sector?

If I may, I’ll start with my education. I went to study physics in undergrad, but for some reason I got interested in economics. When I was studying economics, I had the opportunity to meet various people from economic backgrounds and realised in Nepal there are two streams of economics: one in the private sector and the other in the development sector. As a young Nepali studying in America, I always wanted to come back home. I thought I will study economics, I will work in development economics, and that I will join an NGO or INGO. That’s what I thought when I started studying economics. But later I decided that in economics, the finance side is also interesting. When I came back to Nepal after my undergrad, my initial idea was to work for a ‘not for profit’ but then I read this book called ‘Unleashing Nepal’ by Sujeev Shakya. The book somehow convinced me that I should be joining the private sector rather than the development sector. I then went back for my MBA in entrepreneurship. My MBA course was focused on impact investing. There I also got to understand what venture capital and private equity is. Impact investing, venture capital and private equity is what got me interested. Soon I came across Tim Gocher, our CEO as he was planning to start up a fund and I joined him very early on. I am the first employee of Dolma Impact Fund. It was Tim and I in the beginning and other team members joined later on. I have been with the company since 2011. This was before we started investing.

How has the private equity landscape evolved from when you first started?

When I began, I guess I was very theoretical. I had studied about impact investing and private equity in business schools but I didn’t have any practical knowledge. Over the years I have been able to gain experience and knowledge that has helped me in this business. In the overall landscape, what I have observed is that the problem remains the same but there has been more maturity in both the entrepreneurs and the investors. There are lot more funds available for an entrepreneur and startups, and consequently there are many entrepreneurs who have received private equity or venture capital investment.

How has your role evolved with Dolma Impact Fund since 2011?

Even though the private equity industry is still fledging now, back then there was no concept about private equity. You can imagine 6-7 years ago. So, when we started out, our main job was to convince people. To first help them understand what private equity is and then what does private equity bring to the table and what are the benefits of private equity. I got involved in Dolma before we had any sort of funding. We used to tell investors that if you give us money, we would invest in such and such companies. And we used to tell the entrepreneurs that if we have money, we will invest it in you. It was basically, a chicken and egg situation. We had to create a lot of awareness for the entrepreneurs, for the regulators, for the market makers and intermediaries like the lawyers and accountants about private equity and what we were trying to do. So that’s what we did in the start. In the initial days, my position was Business Development Officer. Once the fund closed in 2014, I became the Investment Manager. I would basically find companies, negotiate with them, I would help in the due diligence of the company finding if it’s a good opportunity to invest or not. I was basically a relationship manager of the company as well, where you are basically the bridge between people I report to and the company. Then, I was promoted to Senior Investment Manager and now I am the Investment Director. In this role the managers would report to me. When I was an Investment Manager my responsibility would be for the portfolios I was directly involved with. As the Investment Director, I am responsible to understand what is going on, and add value to all the companies that Dolma has invested in.

What criteria does Dolma Impact look for in a startup or business before investing in it?

I think in Nepal or any other developing country, what we have to understand is that we need to tackle the fundamental problems in Nepal. However, these fundamental problems are not only problems but an opportunity as well. And I believe we have to target the big macro trends in Nepal. For example, majority of Nepalis still find it difficult to make ends meet or to satisfy their basic necessities. For us, we need to find companies that cater to the fundamental needs and once the fundamental needs are met, people would be able to invest elsewhere. So, I believe that is the broader investment strategy for Dolma. If you look at our company, we have invested in three broad categories: renewable energy, technology and health care. Again, going back to the fundamental about renewable energy; Nepal is a country that is rich in water resources. Renewable energy’s potential can be further explored and exported. In renewable energy the two basic investment thesis is that firstly, our basic infrastructure demand is being met. Once our basic needs such as electricity are being met, people will start consuming more. For example, once you have enough electricity, people will start investing in televisions or fridge or other electronic items, which is a sign of improvement in quality of life. Plus, after that if we have additional electricity, then we will be able to export. That’s the thesis of investing in energy.

I believe the tele-density penetration has gone up by 126% as of May 2020. So, everyone has a phone in hand. Plus, the government has plans for broadband internet and data getting cheap which basically means people will be using their phones or their laptops more often for various purposes. Regarding technology, when internet infrastructure is properly established, education systems tend to benefit directly or indirectly. Plus, our digital consumption goes up, people will use their phone to pay bills, fin-tech, ecommerce, food supply. Ecommerce will go up and fin-technology will go up as well.

In technology, what we have to understand in Nepal is that there are two aspects which are macro trend and digitalization which is basically when the mobile trend starts going up. I believe the tele-density penetration has gone up by 126% as of May 2020. So, everyone has a phone in hand. Plus, the government has plans for broadband internet and data getting cheap which basically means people will be using their phones or their laptops more often for various purposes. Regarding technology, when internet infrastructure is properly established, education systems tend to benefit directly or indirectly. Plus, our digital consumption goes up, people will use their phone to pay bills, fin-tech, ecommerce, food supply. Ecommerce will go up and fin-technology will go up as well. Additionally, when we look at a company, there has to be proof of concept; we just don’t invest in ideas, we invest in execution. So, there has to be some proof of concept where the team has done something or earned some revenue through their ideas. We also invest in teams. We consider how good the team is? What kind of experience do they bring? How good are they collectively and how well can they work together? So, in conclusion, the first priority is the market, the second is the team, and the third is the business model. In business model, it is not necessary that the business model needs to solve a particular problem that the company of the country is facing but that problems can be solved in various ways. The business model can show how good are they in execution, what are the economic motives, what is their competitive advantages, and their power over their suppliers and customers.

What made SastoDeal particularly qualified for Dolma Impact’s investment program?

When we invested in SastoDeal, this was not the first time we invested in the company. The recent news that we got was about the follow-on investment. Meaning we had already previously invested in SastoDeal. Among other factors, the Covid 19 can also be attributed to one of the reasons why we decided to invest. During the Covid 19 imposed lockdown, people were at home, they were not able to go out and even the government was encouraging people not to go to the markets. This meant there was also an opportunity and SastoDeal leveraged that opportunity and to leverage that opportunity, they needed investment and that is why we decided to invest. Fundamental factors are: firstly, due to Covid 19, online transactions have gone up in Nepal by 30%. Secondly, I believe this will be the new normal. New users were added during the lockdown. People who were not tech savvy or people who were reluctant to use technology for online transactions came online so that’s why we believe it was the right time for investment. Lastly, Dolma introduced SastoDeal to Flipkart, and SastoDeal’s management took it from there, supported by the company’s board. This recent partnership also reconfirms our commitment and hopes for SastoDeal and broader e-commerce market of Nepal.

What is the duration of an investment you make into a company? What kind of returns are you looking for and when do you exit?

Any private equity fund or venture capital fund has duration of 10 years. The first five years, we invest. And the other five years is the harvesting period. Typically, a private equity would stay invested for around 5-6 years. On returns, we are looking at market returns because private equity market is more illiquid than public equity market. Private equity investors take more risks than for example bank loans. So we would seek returns that are more than fixed deposit that are provided by the bank and returns that you would get in public equity like stocks. However, exit really depends on the nature of the company. For, companies that have benchmark in Nepal in terms of IPOs, for example renewable energy would be a preferable exit route. If you look at the stock market, among 200 odd companies, a lot of them are banking and financial institutions, hydropower, hotels, manufacturers and other companies. We eventually want our companies to be enlisted as well. Nepal’s stock market also has to be diversified so that in the future when we invest in a company, we would have better exit opportunities within the country and within the public market. For others if it’s not IPO’d we would look for trade sale. A trade sale basically means, if you are investing in an e-commerce company, you are looking for buyers who are already in e-commerce either locally or internationally. Or we would also try to sell it to somebody who is a pure investor who would buy the stake and who would want to remain in the company. The preferred choice would be IPO, second would be trade sale and the third choice would to sell it to the investors and fourth would be to sell it to the promoters if the price is right.

How has the global pandemic affected Dolma’s plans for Nepal? Are you restructuring plans due to the pandemic?

As you know Dolma is a fund manager, so as a fund manager we raise funds, we invest that fund and we try to raise another fund. Our first fund is already deployed. When I say deployed, we raised $36 million in 2014 which has already been invested. Fortunately, from our first fund we did not have significant, right off or any significant dent in our portfolio companies. Of course, there have been some delays but there has been no negative impact. On the contrary, some of the companies in health care, pharmaceutical or in e-commerce, we saw new opportunity. Covid 19 has impacted everybody in Nepal but as we anticipated, the impact is not that bad. But there has also been new opportunity because of Covid 19 especially for our e-commerce companies and for pharmaceutical companies. I think Nepal has the prospect and investors are still confident that we would overcome this pandemic.

How can the government and regulators help private equity potential to be realised in Nepal?

I think especially for startups there is this regulation where you cannot bring less than $500,000. Half a million dollars is big for startups. Startups are in idea phase or growth phase; I think that threshold needs to be reduced so that more companies can tap through foreign investment. Second thing is bringing in FDI needs time. Even with the one window policy, there are things that need to be streamlined. For example, in our experience, the typical process would take from three months up to a year in Nepal. But even if it takes three months, a startup or a company needs money now. Within three months the company or a startup will get closed. So, if somebody is applying for FDI that needs to be expedited - expedited as in to get the investment first and filing and paperwork to be done later – and if you think it’s deception in terms of AML (Anti- Money laundering) and CFD (Contract for Difference) then you can penalise the investor as a company but let’s not stop the investment from the government as well as the central bank.

I think Covid 19 is a good opportunity to reflect back on how you can grow. And for Nepali companies to grow, the government should be open about Nepali companies branching out abroad and allow them to be competitive. If Nepali companies are not competitive in the global market, the private sector would have to rely on cartels and syndicates.

However, I think what we usually do is blame the government. We are heavily reliant on them as well as we heavily criticise them. What we need to understand is that the private sector also needs to raise its game, they also need to think about further growth. I think Covid 19 is a good opportunity to reflect back on how you can grow. And for Nepali companies to grow, the government should be open about Nepali companies branching out abroad and allow them to be competitive. If Nepali companies are not competitive in the global market, the private sector would have to rely on cartels and syndicates. If we are competitive, people would grow more, companies would learn more. Nepali companies should be allowed to invest and expand abroad. Also, private companies should start to invest in systems and its people. When I say systems, corporate governance should be improved. There are some companies which are very good at corporate governance but a lot of other companies still need to up their game in corporate governance. Lastly, when I say invest in people, we need to look at people in the long term. In work culture, human capital is what matters the most and we need to think about how to retain them.

What are the key sectors Dolma has previously focused on in terms of investments?

Just to clarify, Dolma has invested in two hydropower companies and two solar power companies. We see opportunity in hydropower: I’d rather call it renewable energy; one because the local demand is yet to be met and there’s a large section of the population that’s still off the grid. There is not enough digital connectivity so a lot of people are off grid because of lack of electricity. And people who are on grid are only getting minimum electricity supply. Secondly, once demand is met, there is a lot of opportunity for Nepal to export. That’s why we are very hopeful about renewable energy. Another thing that we need to understand about renewable energy like solar-energy is that it doesn’t take long to set up. It can be built in a year (MW solar) on a large scale whereas hydropower takes about 3-4 years. Solar would also complement hydroelectricity especially during dry and winter season when there is minimum water flow in the rivers as solar energy can work all year round. So, solar and hydro complement each other. That’s why we have invested in solar and hydro.

What is the future for Dolma Impact fund in Nepal?

We are very hopeful in Nepal because Nepal is one of the poorest countries in terms of per capita income in South Asia. It might sound like a cliché to believe that we have an opportunity because we are situated between China and India. But yes, there is a big opportunity in Nepal. Plus post-constitution, we have peace in the country and we have a stable government. I think, Dolma Impact Fund is very hopeful about the economic opportunity in Nepal. And that’s why we are also in the process of raising the second fund, which will be bigger than the first fund to invest in Nepali companies.