The Hard Truth About Nepal's Private Capital Market
After 24 years immersed in the high-stakes world of global finance, including a significant tenure with the World Bank Group's International Finance Corporation in Washington, D.C., Dipta Shah made a decision that surprised many: he returned to Nepal. His move, driven by a desire to be closer to family, also granted him an unexpected vantage point. For the past seven and a half years, Shah has been observing, participating in, and critically analyzing Nepal’s expanding private capital market, revealing a landscape ripe with potential yet grappling with fundamental misconceptions and systemic gaps.
His journey from launching IFC's first fund-of-funds program for accelerators and seed funds in emerging markets to becoming an entrepreneur himself in Nepal has equipped him with a dual lens. This unique perspective allows him to dissect the market's evolution, pinpoint its structural weaknesses, and identify the crucial ingredients needed for genuine, sustainable growth.
The Illusion of Venture Capital: High Risk, Unproven Returns
Seven years ago, Nepal's private capital market was nascent, with only a couple of funds operating in a manner resembling true private equity. Today, while more dynamic, it remains largely misunderstood, particularly the concept of "venture capital."
Shah argues unequivocally that Nepal is not a venture capital market. The core problem lies in a fundamental imbalance: the market exhibits "venture-type risk" but lacks "venture-type return." Venture capital, by definition, targets high-growth, equity-driven, often tech or tech-enabled companies, promising exponential returns in exchange for high risk. In Nepal, the pool of pure tech companies is limited, and even tech-enabled businesses are far from abundant.
Furthermore, the funding cycle suffers from a critical void. While some grant capital exists at the very early, ideation stage, and some investors enter at the pre-IPO phase, there's a gaping "valley of death" in between. This means that a seed-stage company struggles to find subsequent rounds of funding (Series A, Series B) to scale. Investors taking early risks have no clear pathway for follow-on checks, making the risk profile exceptionally high without corresponding evidence of high returns. This structural gap prevents Nepal from truly fostering a robust venture ecosystem.
When Regulation Creates Perverse Incentives
The market's immaturity is compounded by regulatory frameworks that, while perhaps well-intentioned, have created unintended loopholes and distorted investment behavior. Shah points to a specific provision that allows private equity fund managers to enter companies shortly before their Initial Public Offering (IPO), hold shares for a mere 12 months post-IPO, and then exit. This strategy can generate astronomically high Internal Rates of Return (IRRs) on paper, which are often unrepresentative of true value creation.
The issue, Shah explains, is that while allowing early risk-takers a preferential exit is a common practice globally, Nepal's provision lacks a crucial counter-balance: a minimum holding period for the private capital investor. This omission transforms private equity fund managers into something akin to investment bankers or broker-dealers, rather than long-term value creators who sit on boards and actively help companies grow over several years. The consequence is that the general public, including retail and other institutional investors, often bears the cost of these inflated returns.
Another critical concern is the quantum of capital raised by fund managers. The allure of collecting a 2% management fee on a large fund can lead managers to raise more capital than the market can responsibly absorb. Without sufficient deal flow by stage and sector, and a clear understanding of the market's structural limitations, these funds risk deploying capital poorly, leading to bleak return profiles for their investors. Fortunately, Shah observes a positive shift: second-generation fund managers are now adopting more refined investment theses, becoming sector- and stage-specific, and more deliberate about the size of their funds.
The Investor's Blind Spot: Why Operational Experience Matters
Shah’s unique perspective stems not just from his global finance background but also from his personal foray into entrepreneurship in Nepal. He credits his return to Nepal with providing him the "mental bandwidth" to understand the intricacies of small and medium-sized enterprises (SMEs) and the "sell-side" of the equation in detail. This hands-on experience, he believes, has made him a more rounded and effective capital allocator.
He challenges the prevailing model where many Nepali investors, having spent their careers primarily in banking and debt markets, now attempt to judge and invest in equity-driven ventures. While banking experience instills confidence in debt management, investing in equity demands a fundamentally different mindset and skillset. It requires an understanding of entrepreneurial pain, the risks beyond financial capital (mental, time, relationship risks), and the execution challenges of building a business from the ground up.
The good news, Shah notes, is that this "empathy gap" is beginning to close. He has encountered a growing number of high-net-worth Nepali individuals living abroad who have built and successfully exited multiple companies. These experienced entrepreneurs, now looking to deploy capital back home, represent a vital shift in the supply side of the investment ecosystem. Their operational expertise and appetite for genuine risk could be a catalyst for more informed and impactful investments in Nepal.
Beyond Capital: The Missing Pillars of a Robust Ecosystem
Beyond the financial capital gaps, Nepal's entrepreneurial ecosystem suffers from several other critical deficiencies:
- Lack of Deep Technical Knowledge: While sectors like hydropower boast ample expertise, new-age business models in digital entrepreneurship often lack the deep technical know-how required to build, sell, leverage, and scale platforms effectively. Understanding go-to-market strategies and operational nuances is still in its nascent stages.
- Limited Networks: The ecosystem lacks strong connections to overseas networks of like-minded investors, which are crucial for attracting follow-on capital and global partnerships.
- Talent and Infrastructure: A persistent lack of skilled talent and adequate physical infrastructure (like co-working spaces and innovation hubs) further hinders entrepreneurial growth.
These interconnected gaps in financing, technical expertise, networks, talent, and infrastructure collectively create a challenging environment for startups seeking to grow beyond initial ideation.
From "Grant-preneurs" to Genuine Growth: The Evolution of Catalytic Capital
Shah offers a counterintuitive take on the decreasing availability of grant money in Nepal: it's a positive development. For too long, an abundance of grants fostered a class of "grant entrepreneurs" who prioritized writing proposals over generating profit, often staging elaborate events with little tangible output or long-term impact.
Ideally, grants should function as catalytic capital seeding ideas and initial efforts, but with the expectation that these initiatives will strive for commercial viability, job creation, and genuine impact. When grants are not properly calibrated or monitored for outcomes, they can inadvertently create a dependency that stifles true entrepreneurial spirit.
Drawing from his experience with programs like the UK government's Department for Energy Security and Net Zero (DESNZ), Shah illustrates how grants can be effectively deployed. Such grants are agenda-driven, strategically aligned with broader societal goals (e.g., sustainable cooling), and focused on knowledge creation and commercial viability. The learnings, whether successes or failures, are often made public for the global good, proving out investable asset classes and informing future business models. This model of purposeful, outcome-oriented catalytic capital is what Nepal truly needs.
The Path Forward: Building a Market on Reality, Not Illusion
Nepal's private capital market stands at a crossroads. Its evolution from a debt-centric economy to one embracing equity investment is undeniable, yet it is plagued by definitional ambiguities, regulatory blind spots, and a critical shortage of experienced entrepreneurial capital. The challenges are significant, from the "valley of death" in funding to the need for deeper technical expertise and robust global networks.
However, the emergence of a new generation of more discerning fund managers and the anticipated return of high-net-worth Nepali entrepreneurs with operational experience offer a glimmer of hope. These individuals, armed with a realistic understanding of risk and a commitment to long-term value creation, are poised to inject much-needed sophistication and practical wisdom into the ecosystem.
For Nepal to truly unlock its entrepreneurial potential, it must move beyond illusions and embrace an unvarnished truth: genuine growth requires not just capital, but smart capital deployed with a deep understanding of the market's realities, supported by clear-sighted regulation, and guided by the hard-won wisdom of those who have built and risked their own. The future of Nepal's economy hinges on its ability to cultivate a market built on these foundations, where risk is met with genuine opportunity, and innovation is nurtured with realistic expectations.
