“Imagination is the beginning of creation. You imagine what you desire, you will what you imagine and at last you create what you will.” — George Bernard Shaw.
Imagine a marketplace where entrepreneurs can present the riskiest of business ideas, where investors are able to evaluate and fund the right ideas, and creativity and vision get translated into economic growth.
The US is a land of opportunity because it allows this flow of imagination to become a creation. The rhetorical examples of Mark Zuckerberg’s Facebook, Steve Jobs’s Apple and Bill Gates’s Microsoft are some of the multibillion dollar entities, which were created despite initial lack of financial resources at the disposal of these entrepreneurs. They had the willingness to take risks but they also had another advantage — access to means of raising finance.
Globally, economic managers strive to encourage people to take business risks and they create an economic infrastructure, which allows these business risks to bear fruit. Entrepreneurship fuels creativity and nations which encourage it get an edge over their competitors. Such is the significance of encouraging entrepreneurship that Singaporean economic managers, despite having a GDP per capita that is 40 times that of ours, are today concerned about being at the bottom of global entrepreneurship surveys because their current generation is living in a comfort zone and is happier taking up jobs rather than taking business risks.
We, however, are lucky in this respect. Since survival in Pakistan requires constant struggle, risk-taking comes naturally to us. Yet, despite being a nation of risk-takers, we are not a nation of entrepreneurs — primarily because our financial landscape isn’t structured to support entrepreneurship.
Our capital market is still in an infancy stage of development and our banking system is geared towards supporting the already rich, as it relies solely on asset-backed lending for established names, regardless of how brilliant a business idea might be. This has contributed to an income disparity, where the rich are getting richer while the average Pakistani survives on a monthly salary of $120 a month. In the long run, this translates into low economic growth, not to mention the social issues that arise as a consequence.
We do not have the luxury of the “long run” anymore for creating an infrastructure of angel investors, venture capitalists and private equity funds — something created by others over a number of decades. Instead, we are faced with an urgent need to develop a financial system, which supports the “right ideas” and encourages our entrepreneurs by converting their creative ideas into economic well-being.
This can be achieved by establishing a formal market — a licensed and regulated exchange which can bridge the gap between excess liquidity and businesses hungry for finances, and where small-and medium-size companies, including start-ups, can present themselves for raising capital. Instead of replicating the prevalent global models, we will need to think a step ahead of the world by keeping in mind the peculiarities of our own investment environment, and create a model which answers all our problems, or at least most of them, in one go.
To achieve most of our needs “in one go”, businesses can be categorised on the basis of their risk profile and investors on the basis of their risk appetite. High-risk investments, like fresh start-ups or loss-making companies, can only attract investment from institutional or highly sophisticated investors. Ticket size per investment can be high, which will lead to reduced liquidity and in the process, we will be able to create an infrastructure of angel and venture capital investors, who are early entrants in a business having higher risk appetite.
Similarly, small businesses with a history of profitable operations, qualifying as medium-risk investments, can attract investment from institutions, as well as high net worth individuals which will help us create a market for private equity investors, who are entrants during the second phase of fundraising. Only low-risk businesses can be open to the general public with measures ensuring that the interest of inexperienced investors is protected — a primary objective of the regulators.
The groundwork for this exchange has already been done at the Securities and Exchange Commission of Pakistan (SECP). However, the role of our stock exchanges will be crucial in its successful implementation. They will need to improve their functional, operational and managerial capacity. The expected partnership of our exchanges with an international stock exchange, post-demutualisation, can be a possible source of the requisite capacity building. If the exchanges are not able to come up with the required capacity, the SECP needs to consider granting a new licence to an investment group with an understanding and experience of the financial sector, which may include existing exchanges as well as private sector groups. Strong regulatory infrastructure, ensuring adequate disclosure requirements, role of intermediaries and market makers, use of alternative dispute-resolution mechanisms, methodology of risk profiling of investors and businesses, etc. are some of the other challenges involved in the successful launch of this exchange.
To date, knocking doors of potential investors has not helped our entrepreneurs in generating the required financial capital for their businesses. With revived activity and international interest in our capital markets, the time is ripe for the establishment of this competitive marketplace to cover lost ground and nurture our entrepreneurs.
Published in The Express Tribune, July 17th, 2013.
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