Learning from Appraisal Exercise of EEF Projects

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Learning from Appraisal Exercise of EEF Projects

• Dr. M. Rokonuzzaman
• zaman.rokon_at_yahoo.com, rzaman_at_iub.edu.bd

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Typical Life Cycle of Bangladeshi Software
Companies

• Stage 1 The company starts with adhoc operation
  with the focus on technology and serving clients
  obtained from existing professional and/or social
  network.
• Stage 2 If there is enough demonstration that
  the team is capable of delivering solutions to a
  particular market segment and clients are willing
  to pay, the challenge becomes to make operation
  profitable keeping overhead expenses as minimum
  as possible.

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• Stage 3 The focus of this stage is to turn the
  profitable business to a sustainable profitable
  company with adequate infrastructure, logistics,
  core strength and clients base.
• Stage 4 The challenge is to expand company in a
  stabilized manner leveraging the strength of core
  competence, profitable operation and highly
  committed capable team build at stage 3.

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What were we looking for?

• Potential and competence to implement the
  submitted proposal for developing high growth
  IT/software companies.

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Observations

• 1
• Salient features of business planning including
  market understanding, product positioning, and
  delivery capacity planning outlined in most of
  these proposals were very generic and
  superficial.
• We could not find strong rationale in relating
  these important aspects of business plans to
  industry reality.

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• 2
• We found that in all of these proposals, more
  than 75 of project cost has been budgeted for
  capital expenditure.
• Its our understanding that working capital
  (e.g., salary, wages, rents, utilities, training)
  consumes more than 80 of project cost in
  developing similar ventures.
• Some promoters also agreed with this
  understanding of project resource allocation.
• Promoters claimed that in order to satisfy
  stereotype perception of financial institutions,
  lion share of project cost was shown to cover
  capital expenditure.

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• 3
• It has been observed that very small amount of
  resource was allocated in market understanding,
  training, product/service RD and business
  development.
• Its our understanding that such activities
  should consume significant portion of the project
  cost.

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• 4
• In most of these proposals, it was claimed that
  substantial revenue flow would start from the
  very beginning of the project (i.e., first year).
  
• It was also claimed that such revenue flow would
  generate profits from the first year.
• It should be noted that most of these projects
  were green field projects.
• Those projects would take at least 2/3 years to
  reach the break even state.

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• 5
• It was observed in appraising several projects
  that submitted project proposals were similar in
  nature, irrespective of promoters background and
  core strength.
• It was observed, in some cases, that promoters
  did not have any intention to build the company
  in the way it was stated in the proposal.
• It was shared with us that conventional
  investment culture of financial institutions in
  financing the growth of resource based companies
  were, to some degree, forcing entrepreneurs to
  give shape to proposals which were familiar to
  Bankers.

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• 6
• In most of these proposals, true potentials and
  capacities of promoters were not reflected. In
  most of the cases, exaggerated claims were made
  about promoters ability in implementing
  submitted business plans.
• It did not necessarily mean that none of these
  promoters had the capability in building IT
  companies.
• We came to know from our field visits and
  interviews that some of these promoters were
  quite capable in building IT companies if right
  finance and guidance were provided.
• Its worth of noting that desk review of
  submitted proposals and associated appraisal
  reports prepared by financial institutions did
  not reveal this important piece of information.

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• 7
• It was noted by some promoters that Bangladesh
  Bank took too much time in processing the
  submitted proposals.
• Such prolonged delay in reaching to conclusion
  caused stress on promoters in undertaking
  decision about companys growth and sustaining
  current operation, may be loss making.

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• 8
• We observed that financial institutions mostly
  did trimming of capital expenditure instead of
  adequately focusing on issues related to
  promoters competence, market understanding,
  competition level, product/service planning,
  delivery capacity and business development
  challenges.
• It should be noted that trimming of financial
  aspect is not adequate to assess the
  attractiveness in making investment decision in
  nurturing IT/software companies.

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Probable Implications

• 1
• Information provided in submitted proposals and
  appraisal reports prepared by financial
  institutions hardly reflect the real life
  scenario.
• Investment decision taken based on this
  information will be, highly like, incorrect one.
• As a result, capable promoters may not get the
  right support for nurturing their high potential
  ideas and incapable ones may get it.
• Both of these outcomes are undesirable and
  undermine the very purpose of EEF.

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• 2
• With the fear of making wrong investment decision
  there could be recommendation in closing EEF.
• Such closure will deprive the nation of expanding
  in high potential new industries.
• It should be noted that EEF has been conceived to
  deal with associated challenges in penetrating
  high potential industries, which have inherent
  high business risks as well.
• The purpose of EEF is to share this risk with
  entrepreneurs in channeling collateral free risk
  capital.

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• 3
• Bangladesh Bank may suffer huge loss for equity
  participation in wrong ventures.
• Such loss will not only be limited to the fund
  invested to those ventures, but also on the
  inception of nations risk capital financing
  capacity as a whole.
• Failure of EEF will impede the process of venture
  financing capability development of Bangladesh.
  Such capability development is essential in
  enabling Bangladeshi entrepreneurs to penetrate
  high potential knowledge based industries.

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Suggestions

• 1
• EEF unit should increase knowledge base about
  opportunities, challenges, entrepreneurs
  capability, venture life cycle, financing need,
  intangible asset valuation, capability/potential
  assessment of software/IT companies, revenue
  model and delivery capacity related to the
  development of IT/Software companies with respect
  to national, regional and global perspectives.
• Its recommended that EEF unit should undertake
  relevant studies to build this knowledge base.

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• 2
• EEF should build the capacity to work in
  partnership with capable promoters to design
  projects in a realistic manner.
• Instead of receiving complete proposals, EEF may
  request for expression of interests (EoIs).
• Upon screening these EoIs, EEF should work with
  capable entrepreneurs to design projects
  addressing real life challenges in nurturing
  IT/Software ventures in a collegial manner.
• It should be noted that upon equity
  participation, EEF becomes 49 owner of
  participated companies.
• Therefore, it makes sense that EEF should
  actively participate in nurturing these
  companies, to protect even its own investment.

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• 3
• EEF should focus on demonstration effect in
  stimulating the growth of the IT sector.
• To achieve this objective, EEF should reach out
  to right entrepreneurs and to provide them
  adequate supports in demonstrating success
  stories.
• Its believed that such demonstrations will
  mobilize resources from different sources in an
  intelligent way to exploit the full potential of
  the IT sector.

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• 4
• EEF should take into consideration of providing
  technical assistance to supported projects and to
  the overall target sectors (e.g., software).
• Such technical assistance will reduce the
  complexity in project selection, improve the
  capability of monitoring/evaluation and lower the
  risk of failure of investments.

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• 5
• EEF should be managed as a management consulting
  services in complement to needed risk capital to
  support competent entrepreneurs to nurture the
  growth of high potential ideas or startups into
  world class companies.

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Out of the box Recommendation

• Treat the utilization of fund as sector
  development assignment link it with other
  related resources.
• 30 for improving supply side and enabling
  environment HR, finance, productivity and
  quality management, regulation, etc.
• 30 for buying equities in local companies,
  complementary in nature.
• 30 for buying equities in pre-IPO IT companies
  in target overseas markets link these companies
  to local companies for offshore service delivery.
• 10 for assignment/(fund) management.