MazieNakhro, PhD
The Government of Nagaland declared 2010-2011 as the “Year of Entrepreneurs.” It had 1000 youth to undergo training in entrepreneurship and gave them an impression that a sum of Rs.10 crore would be given toward the development of small to medium sized entrepreneurial businesses. For the first time in the history of our statehood, our politicians have realized that entrepreneurship in the private sector is the key to developing our economy. Their intentions are commendable. But the question is, will this government sponsored program be successful?
If it does not take off, I would attribute the failure to the following possible mistakes: First, the selection of our candidates for entrepreneurial training was possibly made along the lines of ‘random pick’ based on tribal quota and in some cases politically influenced. Some of us fail to realize that not everyone is cut out to be entrepreneurs. For example, status quo lovers or those who have a strong managerial bent cannot be natural entrepreneurs, that is, entrepreneurs cannot be simply produced or made by training alone. Rather they are born with certain innate personality traits. They possess a mixture of qualities such as creative imagination, courage to take risk, and ability to make things happen out of nothing.
According to Adam Smith, the father of political economy, an entrepreneur has unusual foresight of potential demand of goods and services. Carl Menger of Austria describes an entrepreneur as a change agent who transforms resources into useful goods and services for commercial gain. The French economist, Richard Cantillon, says that an entrepreneur is one who pays a certain price for a product to resell it at an uncertain price, thereby making decisions about obtaining and using resources while undertaking the risk of the enterprise. To put it in another way, there is no such thing as an entrepreneur without an enterprise. A real entrepreneur is an individual who creates his own business with or without any help from the government.
Second, our government should not have made promises to provide funding for the individuals it has trained. It should have had all the 1000 youths sign a waiver of any right to sue the government or bring any demand for financial assistance. Our dependence on government welfare programs has created a culture of entitlement which has often resulted in serving ultimatums to the State government. This culture of dependency and entitlement has been created by the government, so it must assume responsibility to undo its mistake.
Third, the criteria for receiving government loans should be clearly spelled out and appropriately enforced. Good stewardship demands that public monies cannot be carelessly thrown into just any new venture out there, especially if it is still in the research and testing stage. An entrepreneur must demonstrate that his business concept has been thoroughly investigated and that the business risk has already become that of turning the concept into a marketable product. And he must also show proof of serious commitment to the new venture by having invested his own money in the purchase of land, building, or other fixed business assets. Besides, he must have a qualified management team working with him to make the business a real success. Only when a competent management team is put in place, a marketing product is established, and a potential market is identified can a new venture start commercial production and marketing. This is when the government can step in to do on-site inspection and then decide whether to recommend government funding for the new business.
Perhaps the more important things our government could do to encourage entrepreneurship are putting pro-market government policies in place, ensuring law and order, building world-class infrastructure, and developing an excellent communication system. And for funding capital requirement for creation of new businesses, it should encourage the setting up of commercial banks, cooperative banks, and credit societies. In other parts of India, we have several All India Financial Institutions (IDBI, ICICI, IFCI, IIBI, SIDBI) that promote industry and entrepreneurship. And in about 18 states in India, there are two state level financial institutions (SFC and SIDC) which are already providing financial assistance to small and medium enterprises. Unfortunately, Nagaland is still yet to catch up in all these areas.
Until our government is able to provide us with these facilities, what are we supposed to do? My view is that we should still venture out even if the government does not provide any help. This is what a real entrepreneur would do. He uses whatever asset or equity he has to leverage his business undertaking. This could be in the form of converting assets into cash, that is, he uses his own sources (say, 20 – 25%) to meet at least a portion of the project costs in the start-up stage and even later plough back part of his profit earning into the business to ensure its growth and stability. He could raise additional funds from family members and relatives or borrow money from anyone at a reasonable rate of interest.
Using borrowed money for investment is a good business strategy as long as the profit earning from it is more than the amount of interest one pays on the debt. In my case as a real estate investor once, I had no choice but to use borrowed money from friends and take loans from banks and credit card companies. This is the easiest way to start a business because there is only one individual (the entrepreneur as the sole proprietor) who owns everything and runs the enterprise. In the United States, for example, more than 75 percent of the businesses fall under sole proprietorships. The downside to this form of venture is that all personal and business assets owned by the entrepreneur may be at risk if the business fails.
One way to secure big funding is to find some venture capital investors (or simply ‘angel investors’) who can be partners in a new partnership enterprise. While participating in the equity and profit, these big investors can also enjoy the right to appoint nominee(s) on the Board of Directors, inspect properties and assets, and examine documents and accounts. In addition to all these sources of finance, there may also be availability of loans from some banks for long-term capital needs like acquisition of plant, purchase of new machines, up-gradation of technology, and expansion of market or development of products. Even if the entrepreneur might not qualify to get a loan from the government or banks, he could possibly find some other individuals who can. All that he needs to do is present his business proposal to these individuals and invite them to be his business partners. And depending on the level of financial contribution and other contributing factors (e.g., technical knowledge, marketing skills, and managerial talents), all business partners may decide how much each member would get in terms of voting shares in decision-making, equity shares in the business, and percentage in profit sharing.
Another way to raise huge capital funds is by selling shares or company stocks. Usually, this requires creating a Corporation, an incorporated cooperative business organization. In this case, the number of shareholders (stock-buyers) could run from a few individuals to several thousand people and each one of them would enjoy certain special benefits depending on the level of investments or stocks owned:(i) stock-buyers become company owners; (ii) they have the power to appoint members of the Board of Directors; (iii) they can sell or transfer their stocks; and (iv) they cannot be sued even if the business fails. And although running a Corporation is more complex than other forms of businesses, its potential for growth and investment is unlimited.
As for short-term operational needs or day-to-day financial requirements of a small business or a large one, there are sundry creditors. For example, advance payment for certain orders from customers could be asked; about 45 days credit could possibly be obtained from the Power Department onelectricity bills; and about 15 days in the case of wages paid monthly to workers. And obviously there are many more great ideas to fundand run a new business. So for all those of us who believe have the qualities of an entrepreneur, there shouldn’t be anything stopping us from startinga small business or even building a big Corporation.
