Entrepreneurship is the process of designing, launching and running a new business. It is the capacity and willingness to develop, organise and manage a business venture along with any of its risks in order to make a profit. Due to the high risks involved in launching a start-up, a significant proportion of start-up businesses have to close due to lack of funding, bad business decisions, an economic crisis or lack of market demand. The entrepreneur puts his or her career and financial security on the line and takes numerous risks in the name of an idea, spending time as well as capital on an uncertain venture. Entrepreneurs may not acknowledge that they have taken an enormous amount of risks because they do not perceive the level of uncertainty to be as high as other people do. Frank Knight classified three types of uncertainties, firstly there is risk, which is measurable statistically. Secondly, there is ambiguity, which is hard to measure statistically and the last one is true uncertainty, which is impossible to predict.
Proper risk management strategy helps entrepreneurs in convincing investors that business is in for a long run and the entrepreneur is prepared to minimise the chance of failure. Without proper risk analysis, the entrepreneur may look more like a gambler instead of a real entrepreneur. A gambler typically fails to understand that the game is rigged; the more money they put in, the more money they lose. A clever entrepreneur looks at risk systematically, running experiments and playing it by the numbers instead of basing their hopes on a single draw. Risk appetite implies the quantification of risk tolerance and it includes three main parameters: possible losses, price of risk and risk control. Typical sources of risks for a startup would include team, market, finance, technology, etc. Does the startup have a team with the right set of skills and experience? Do they gel-together for a common goal? A market for the product? Competition in the market? Does the startup have enough funds and has a roadmap for healthy cash flow? Is the startup equipped with required technology tools? Will the technology scale when the business scales up?
Typical startups across the world access funds in the shape of equity, debt and grants. Typical private equity options are startup accelerators, angel investors, venture capitalists, equity crowdfunding, hedge funding, etc. Debt options include bank loans, a line of credit, microloans, merchant cash advance, revenue-based financing, etc. Whereas typical grant options are equity-free accelerators, business plan competition from educational institutes, government-backed grants. The banking sector in Pakistan is highly regulated by State Bank of Pakistan (SBP). SBP may incentivise banks to encourage lending to startups. SBP may offer some relaxation in risk weighting calculation for lending to startups for Capital Adequacy Ratio calculations. Securities Exchange Commission of Pakistan (SECP) blocked Crowdfunding platforms in 2017. Crowdfunding can be equity, debt or a combination of both. Pakistan Stock Exchange may set up a Small Medium Enterprises (SME), a trading platform for fetching funding for startups. Startup culture has quickly developed over the last few years in all major cities of Pakistan.
We see many startups coming up every year with wonderful ideas and efficient business plans. It is estimated that almost two-thirds of Pakistani startups are solely dependent on self-funding by the entrepreneurs. Commercial banks usually do not offer loans to startups without heavy collaterals. Hence, the startups end up facing cash flow problems and the naturally talented entrepreneurs are left with no option but to quit
We see many startups coming up every year with wonderful ideas and efficient business plans. It is estimated that almost two-thirds of Pakistani startups are solely dependent on self-funding by the entrepreneurs. Commercial banks usually do not offer loans to startups without heavy collaterals. Hence, the startups end up facing cash flow problems and the naturally talented entrepreneurs are left with no option but to quit. They usually end up working in typical jobs guaranteeing them enough money to cover their breathing expenses. The government needs to pitch in by securing the future of these risk takers in turbulent times.
It is reported that the Federal government is in the process of reaching out to International Monetary Fund (IMF) to access loans to repay CPEC/ large infrastructure projects related loan installments. IMF may put up strict road maps by increasing taxation on fuel, electricity and other revenue streams of the government. This may result in a big dip in the already fading manufacturing sector (textile, sports, etc.). IMF may also push for privatisation of national assets including Pakistan Steel Mills, PIA, etc.
Finance Minister, Asad Umar should understand that the top 100 companies in the world were once technology related startups. Pakistan also has highly talented individuals with great scalable ideas and business plans but almost no access to funding. Asad Umer is advised to look out for out of box strategies to fix the economy. He is suggested to establish a Task Force of development of avenues of financing options for startups and along with his focus on fixing economy. Local funding would also ensure major presence within Pakistan and not result in a brain drain of capable Pakistani entrepreneurs by Hong Kong, Singapore and US based undercutting venture capitalists. Prime Minister, Imran Khan’s 100 days formula would also get great boost with regulated crowdfunding especially for real estate or construction sector startups. Equity crowdfunding and equity plus rental crowd funding will allow funding for small housing projects which will kick start the economy cycle. This may also result in arrival of precast housing, 3D construction printers, low cost smart city startups.
In conclusion, this will also create a surplus of jobs for a large number of educated but unemployed youngsters in line with Imran Khan’s 100 day agenda. Let’s make Pakistan a better place for you, me and the whole nation!
The writer is a freelance columnist, senior financial & risk consultant and Ex-Chair Professional Risk Managers International Association-Prmia.org. He can be reached at [email protected] or Twitter handle: @fahadzaf
Published in Daily Times, September 8th 2018.