Issues of human capital in Nepalese Start-ups

Issues of human capital in Nepalese Start-ups

Employee retention refers to the ability of a company to keep its employees over a prolonged period of time. It is important because it helps to improve overall corporate performance by reducing the cost and time associated with hiring and training new employees. A well-retained workforce is also a repository of knowledge, meaning they have valuable skills and experience that they bring to the company.

With the increased mobility of employees in the current job market, companies must find ways to motivate and retain their employees. This will not only improve employee satisfaction but also increase the company’s productivity and competitiveness.

This report is based on the earlier primary research (interviews with various entrepreneurs) and secondary research (review of literature, media reports, online interviews) in the context of Nepal. During the course of conducting primary as well as secondary research, we found that the issues of employee retention and turnover in startups and other contemporary companies are rather similar in Nepal’s context evident by cross verification and reference of information found through desk research. However, it also has to be noted that due to the dearth of empirical research and study on the issues pertaining to employee retention and turnover in startups and/or other contemporary businesses, there is a wide scope for researchers, academics and practitioners alike to explore this topic further.

In the context of Nepal, the issue of attracting and retaining skilled workers has presented complex challenges to various sectors in the economy including startups. For instance, the World Bank reported that in Nepal, there is a shortage of skilled labours for the entrepreneurs to choose from1. Although the retention of employees is becoming increasingly crucial for enhancing corporate performance, organisations in Nepal face constant challenges pertaining to the retention of employees.

A study done by King’s College to identify the top 5 challenges of startups, found that the issue of human capital (acquisition and retention) is the most problematic factors rated on a scale of 1 (least challenging) to 5 (most challenging) by the entrepreneurs.

Entrepreneurial Ecosystem

The average rating of each factor was derived as the arithmetic mean of all the ratings. The below chart shows the top five averaging factors rated by the entrepreneurs as the most challenging or problematic, with human capital being the top most.

Spider chart of the five factors challenging start-ups

Entrepreneurs who were interviewed stated that skilled people preferred to apply to established companies instead of start-ups due to the risk and instability associated with the latter. In terms of retention, entrepreneurs stated that their employees including their partners left for better paying jobs within Nepal or some even abroad, causing disruptions and requiring acquisition and re-investment in training new employees. Key informants noted that forming a quality team requires a diverse group with different skill sets to complement each other, but most start-ups struggle with a homogenous group formed by close friends.

The trend of outward migration has seemed to be a severe disruptive factor when it comes to attainment and retention of adequate numbers of skilled workers. Even though the majority of migration has been of unskilled workers, there is an increasing portion of skilled Nepalese individuals who are also making the decision to migrate, with a strong focus on utilising educational opportunities as their primary means. The “brain drain” phenomenon in Nepal has led to the loss of highly skilled and educated individuals who choose to migrate to other countries, leaving a shortage of such talent within the home country. This has become a significant issue in Nepal, where a large number of educated and skilled individuals have chosen to leave in search of better job opportunities and higher wages elsewhere. This has resulted in a loss of valuable human capital and expertise, affecting various sectors such as healthcare, technology, and education including start-ups within these industries.

Ground reality of start-ups of Nepal regarding human resource management

The ICT sector in Nepal has the potential for significant growth and development, particularly in the area of startups due to growing demand for technology and digital services. However, startups and their entrepreneurs are faced with myriad challenges including inadequate infrastructure, access to funding, lack of regulatory frameworks, and most importantly lack of skilled workers impacting their growth and expansion.

The pool of human capital available in the IT sector is very limited in the case of Nepal. For instance, every year in Nepal, only about 7,500 students enrol in courses related to computer science and ICT, out of which, approximately 5,500 graduate.6 However, the situation deteriorates further as roughly only 20% remain in the IT sector whilst the rest either migrate abroad or choose different career streams. Furthermore, out of the 20% workforce that remain, only a small number either join a local IT firm or involve in entrepreneurial activities.

human capital

Similarly, another study by Louis Berger in 2018 found that 66% of the firms in the ICT sector in Nepal reported facing skills related challenges wherein the firms that were surveyed indicated an attrition rate of 6.3% per annum.

Considering that there are 425 tech based startups7 in Nepal8, and that most of the firms hire only between 5 to 20 employees (owing to their small size)9, we can take a median (i.e. of 5 and 20, which is 12.5). Hence, on average if we consider 425 tech startups in Nepal employing 12.5 employees then the total number to be 5,313. Now, we also know from the above paragraph that a typical ICT firm’s employee turnover rate is 6.3% per annum in Nepal. Therefore, we can deduce that out of the 5,313 workers working in tech based startups in a typical year, if the turnover rate is 6.3%, then 335 workers from these startups quit in a normal year. However, it has to be noted that attrition rate in tech based startups in the global scenario is close to 13% and if we consider this figure, then employee turnover rate would be about 691 per year in tech based startups of Nepal.

Author’s own calculations

Punit Jajodia, an entrepreneur at Programiz who is involved in the IT sector stated that his company faces significant challenges pertaining to human resources specifically relating to employee retention and turnover. For instance, he shared that previously he recruited young people and trained them on the skills required to perform the responsibilities, but unfortunately they only lasted for a short term as many left the company. Thus, tackling the challenges of employee retention he stated that he has now started recruiting a senior pool of job applicants concerning the stability that they can bring to the company.

Although this is a valid and strategic move to attract and retain skilled and experienced employees, it could potentially lead to offering higher compensation/remuneration (thus increasing the cost-to-company) and offering lack of opportunity to younger and less experienced employees and indirectly contributing to unemployment of youths. On the plus point, it could lead to reduction in training costs whilst increasing expertise and knowledge repository of the company Programiz. Situations such as these present a challenge for entrepreneurs like Punit to decide on how to allocate critical resources and investment towards human capital formation whilst ensuring smooth operations of the company.

Competition and Compensation

The growing Business Process Outsourcing (BPO) industry in Nepal is indeed a major challenge for Nepali tech startups, as it has created intense competition for both talent and customers. The BPO industry has grown rapidly in recent years, attracting many of the skilled workers and entrepreneurs who would otherwise be working in the tech sector.10 This has created a shortage of skilled workers and increased competition for customers, making it more difficult for Nepali tech startups to succeed.

Additionally, the BPO industry has been able to offer lower prices for services, which makes it difficult for tech-startups to compete. This has put many Nepali tech startups in an existential crisis, as they are struggling to stay afloat in a market that is becoming increasingly competitive and challenging. The wage-rate gap between BPOs and local tech startups

in Nepal is indeed wide, posing a major challenge for the local tech startups. The higher salaries offered by BPOs make it more attractive for skilled workers to join the BPO industry, rather than work for local tech startups. This has created a shortage of skilled workers in the local tech market, and has made it more difficult for tech start-ups to attract and retain the workers they need to succeed.

Additionally, due to a mismatch of skills in the supply of human resources and the global demand, the capacity of technology-driven startups in Nepal to

provide outsourcing services remains low, which further retards the possibility of scaling and expansion of Nepali startups.

The World Economic Forum (WEF) considers human capital and workforce as one of the pillars of the components of the entrepreneurial ecosystem that plays an important role in the success of entrepreneurship ventures.11 Under this, the WEF identifies the below listed factors within the pillar of human capital and workforce.

● Management Talent
● Technical Talent
● Entrepreneurial Company Experience
● Outsourcing Availability
● Access to Immigrant Workforce

A study done by WEF, in collaboration with Stanford University, Ernst & Young and Endeavor, involved surveying 1042 entrepreneurs from around the globe with the goal of better understanding how successful entrepreneurial companies accelerate access to new markets and become scalable, high-growth businesses. In the study 117 entrepreneurs throughout the Asia region were surveyed and it was found that ‘human capital workforce’ for the Asian entrepreneurs were the most important pillar for the growth and success of their company in comparison to entrepreneurs from other regions of the world. Therefore, the necessity and importance of human capital acquisition and retention is profound for startups to operate and scale.

Start-up culture and job insecurity:

Startups operate in a very volatile environment with limited resources and the threat of existential crisis continuously looms through the founding years. In global context, 90% of the start-ups fail for various reasons12, and the numbers in Nepal will not be very different, although the exact data in our context is very different. There are 835 start-ups in Nepal13, and entrepreneurs face imposing challenges as Nepali culture promotes safety and stability when it comes to choosing a career. For instance, careers in banks, government organisations, large private establishments, international organisations are a priority for the majority of young and experienced

employees. This leaves entrepreneurs in Nepal a limited pool of workers to choose from and equally difficult to keep them motivated and committed.

Additionally, new startups in Nepal go through a slow initial cash flow and operate without profits for a prolonged duration14. Such a situation is leading to financial distress and retarding the start-up’s ability to meet its operating expenses, invest in new opportunities, and grow its business. However, this is also making it difficult to attract and retain top talent, particularly in industries where competition for skilled workers is high such as the IT sector in Nepal. As startups are not generating enough revenue to meet its operating expenses, they are forced to reduce their workforce or implement cost-cutting measures, creating a negative work environment and lower morale among existing employees leading to a volatile and insecure career prospectus. This is resulting in high turnover, as employees are compelled to look for more stable and secure job opportunities elsewhere in more conventional industries and business organisations. All of these factors are creating a vicious cycle for startups, as high turnover is further impeding growth and stability, making it even harder to overcome financial challenges.

Rajan Chakradhar, the co-founder of ‘Upcycle Nepal-Revive’, a company that upcycles unused fabrics into utility products, stated that it is a challenge to find the right type of workers required for the production process and to make them stay with the company for a longer duration. As attracting the right type of workers becomes a challenge, start-ups such as ‘Upcycle Nepal-Revive’ due to limited choice will have to acquire workers that may not meet the job requirements such as skills, experience and expertise. This will lead to upcoming start-ups such as Upcycle to divert their valuable resources and time in training the new employees who have a high probability of leaving the company in a short duration thus increasing the attrition rate.

Another challenge startups face is developing and maintaining a positive company culture. Startups are typically made up of a small number of employees who work closely together, and a negative company culture can quickly spread and infect the entire team.

Startups also face the challenge of limited resources, which can make it difficult to provide employees with the training and development opportunities they need to grow and succeed. This is especially true for startups in Nepal, where limited access to funding and infrastructure can make it difficult to provide employees with the tools and resources they need to be productive.

In conclusion, startups face numerous challenges in relation to human capital, and these challenges can have a profound impact on a company’s success. Startups must work hard to attract and retain top talent, foster a positive company culture, provide opportunities for employee development, and manage rapid growth in order to succeed. By addressing these challenges and making human capital a priority, startups can set themselves up for long-term success and growth.


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