Finance is a critical input for any successful industrial venture. Normally,
the entrepreneur brings in technical and business skills and the financial
resources are often contributed by the community.
India had a successful model of development of entrepreneurs when the
retail market for public issues was thriving in the country. Many of today's
giants including Reliance, Pentafour, and to some extent, even Infosys
are the products of "Retail participation" in public issues. During those
times, the entrepreneurs also had the support of financial institutions
for their projects. There were IDBI s who could lend only on a term loan
basis and there were Commercial Bankers who were proud to say that their
net advances during the year was 60 % + of the incremental deposits.
However, today the financial institutions no longer want to lend on
long term term lending basis because they want to be "Universal Bankers".
Commercial Banks are proud to invest more than 60 % of the incremental
deposits in Government securities rather than lending for industrial projects.
SEBI has seen to it that all retail investors go out of IPO s. Most of
them have reverted to the pre-nationalisation policies of lending only
on the basis of "Collateral Security". Many of the so called progressive
Banks are insisting corporate entrepreneurs to produce third party collateral
security for the working capital limits. Cumulatively therefore the funding
sources for entrepreneurs have dried up on all front and is seriously affecting
the growth of the economy.
No where this difficulty is felt more than in the "New Economy". Here
the entrepreneur is trying to commercialize an Intellectual Capital and
is often creating "Virtual Properties" which have value but are intangible.
Bankers are therefore not evincing any interest in financing any software
related venture.
The only option for the software entrepreneurs today is to approach
Venture Capital financiers of various description including "Angle Investors"
and "Incubators".
Financing is an art. We often say that a Financier can kill a
project both by short financing a project as well as over financing a project.
We all know how our Banks and Financial Institutions delay their decisions
and contribute to "Short Financing" and drives ventures into "Sickness".
Venture Capitals in the recent past have given examples of how to drive
ventures into failure by "Over financing". Supporting unrealistic business
estimates, Venture Capitalists over financed dot com projects and encouraged
extravagant spending before the ventures could garner critical business
growth. When the returns were not coming through as fast as (Unrealsitically)
estimated they branded all dot com ventures as failures.
In the process, no dot com venture today is in a position to garner
funds from the market. Software companies are in no better position since
except for their office premises, all assets of software companies are
also like dot com companies. If they are developing contract software,
the expenses are basically on manpower. "Software" in boxes is a set of
bits and bytes and have no relevance to a traditional banker as an asset.
If the "Software" is on an ASP model, the software company becomes a dot
com company.
Either way, unless financiers develop the skills to assess the value
of software in development and in final release form and decide to recognize
the value at each of these stages, there is no way that finance can be
provided to software industry.
During the hay days of "Priority Sector Lending", there were cases of
financing of "Wells that had Vanished". Conservative bankers would say
that if "Wells" could vanish, how can we trust the "Bits and Bytes" in
a "CD Rom" as security. What if it turns out to be just a "Music Composition"
instead of a "Software?".
Yes, the probability cannot be ruled out. But because of the inability
of some Bankers to assess a Software project and monitor its end
use , it is not proper to stop financing to this sector altogether.
RBI has come up with some guidelines for financing Software Companies
which is basically a "Cash flow" model. The guide line does not educate
the Bankers on the nuances of monitoring the work progress and assigning
values for work in progress.
Now, as a part of "Reducing Piracy of Software" there is a need to encourage
flow of funds to the software entrepreneurs. This requires Bankers to be
re-trained in the process of financing software projects including Dot-Com
projects. Given the current status of fear amongst Bankers for Bad lending
decisions, we cannot expect them to change their attitudes over night.
It is therefore necessary to build a separate Financing institution to
support software and Dot-Com projects that have viability. Setting up such
a Financial Institution should be one of the initiatives that the Governments
at the Center and State should take up.
Such institutions can co-ordinate with private entrepreneurs who would
be willing to participate as "Incubators" or "Venture Partners".
Such Financing Strategies can be legally structured in such
a manner that the "Work in Progress" will have some "Salable Value". The
project financed can in the event of abandonment be converted into "Open
Source Projects" to convert the work in progress to finished projects.
More over, in a Government backed financing project it is possible to
structure the financing as a "Reverse Convertible Equity Financing". (RCEF)
What I mean by this term is that a finance which starts as equity and at
the option of the borrower, can be converted into debt and repaid with
interest. This would be as much risky as a Venture Capital financing but
less rewarding for the financier. It is just a concept and the working
model can be less harsh on the financier. However, such an attitude to
financing will change the confidence level of the entrepreneurs to avail
finance.
We can recall the recent episode of a Delhi entrepreneur who has obtained
a rare US Patent on a system for transmitting "Digital Smell", with 50
% equity support from the Central Government organisation, but is now stuck
with their inability to provide further funding or allow other financiers
to join in. The RCEF concept would avoid such situations.
In summary, there is a need to strengthen the financing system for software
and Dot-Com projects as a part of the strategy to reduce Software Costs
and thereby reduce Software Piracy. I urge Karnataka Government to introduce
such an innovative financial instrument as a part of an "Udyama Kranti
Yojana" (Entrepreneurial Revolution Programme) and combine it with policies
for encouragement of "Open Souce Software", and "Indigenous Software
Development". This will be an integrated strategy for "Zero Piracy without
Pain".
Naavi
June 14, 2001
Related Articles:
Encourage Open Source Initiatives and
Copyleft
Alternate Strategies to Prevent Software
Piracy- Encourage Indigenous Software Developers
Comments and Suggestions can be sent
to Naavi
