Interviewed By Mahedi Hasan Omi on behalf of MBR Team

MBR: 2021 has been an exciting year for Bangladesh’s startup ecosystem as a whole. What are your thoughts on the landscape?

Nirjhor Rahman: 2021 has been a landmark year for the ecosystem, which has led by significant investments into companies such as bKash and ShopUp. 2021 has witnessed the confirmation of bKash as the first-ever unicorn from Bangladesh. We have seen marquee international investors such as Softbank, Tiger Global and Valar Ventures entering Bangladesh through these companies. Startup Bangladesh, the governmentbacked venture capital fund, has launched with seven investments. Several companies have announced investments in the Series A, B and C stages worth millions of dollars. I believe the collective capital has deployed into Bangladesh startups in the last calendar year is almost USD 440 mln, representing about 60% of all startup funding into Bangladeshi startup companies in the previous decade. So clearly, the ecosystem is accelerating in terms of funding and fundraising.

MBR: How important is the role of active early-stage investors for the growth of startup ecosystem? It would be great to know your opinion on how to improve this practice.

Nirjhor Rahman: Early-stage investors, including angels, play a critical role in supporting entrepreneurs at the time when the business model is in flux and undergoing several iterations. Much of that support includes providing liquidity in the face of intense uncertainty. But it also provides mentorship and emotional support, often to inexperienced entrepreneurs who have to learn with the flow. It includes opening the doors and accessing to potential partners and customers.

And it also includes connecting to follow-on investments, helping the companies to craft their story and vision and positioning themselves for funding from institutional investors beyond the seed stage.

We have a lot to learn from mature ecosystems regarding how to facilitate more early-stage and follow-on investments into startups. For example, so far most of the funding into the Bangladesh startup ecosystem has come from international investors, who would prefer to invest through holding companies in places such as the US or Singapore, and not directly into Bangladesh. To attract such investors, Bangladeshi companies and entrepreneurs need to set up and incorporate abroad seamlessly. At the same time, for local investors who might like to invest in such companies, they need to transfer their shares or investments freely between the local and international entities of the company in different scenarios, including potential secondary exits in follow-on rounds.

Companies with hybrid cap tables, one abroad for international investors, another one local for those based in Bangladesh, face a handicap in fundraising because of the uncertainty around exits. What happens for international investors if there is a local exit (takeover/buyout from a large local company or a local IPO)?. What happens to local investors if the company has an exit abroad?

Ideally, a company, including its founders and early local investors and angels, should transfer up to 99% or even 100% of its shares to a foreign holding company to keep things as simple as possible between the local and international entities.

This is probably the most significant regulatory hurdle that is inhibiting more investments into and liquidity for the startup sector. Beyond this, we need more flexible instruments for funding, including convertible notes and SAFE notes which allow angels and entrepreneurs to close deals quickly without haggling back and forth about assigning set valuations and dilutions when there is not enough data to do so.

We need to look at potential tax breaks, or at the very least tax write-offs for potential losses, that encourage local investors, including institutions and corporates, to invest in startups while lowering their risk. The UK provides a robust model for this through their Enterprise Investment Scheme. We also need local financial institutions to expose a tiny portion of their enormous balance sheets to the startup sector through venture debt and venture equity.

All these actions would catalyze more liquidity into the ecosystem. Liquidity induces further liquidity through a virtuous cycle, as angels and seed-stage investors would rush to get into companies with the anticipation that they can sell their shares to future investors - whether local or international, individual or institutional.

MBR: What are some local industries that you feel have immense potential to produce billion-dollar companies in the next 5 years? Any specific trends that you foresee, which will encourage foreign venture investments in the country?

Nirjhor Rahman: : I think the story of Bangladesh and Bangladeshi startups roughly follows two patterns. The first is labor arbitrage, and the other is talent arbitrage. When it comes to talent arbitrage, I look at companies like Chaldal in groceries, Paperfly, Pathao, Loop, Truck Lagbe in logistics, Shikho in education or Maya, Praava in health. These companies were started by or run by talented individuals, often with educational and professional working experience and networks from abroad, leveraging technology to consolidate large, fragmented and highly inefficient industries within Bangladesh. In the case of iFarmer in agriculture or Nitex in garments, these founders have also come from top educational institutions in the country, such as IBA, BUET or North South University. New founders are increasingly coming from a startup-experienced background and built their reputations and expertise, regardless of their educational or class background. The defining characteristic that connects all of these people is a forward-thinking talent who understand the power of technology to scale rapidly and can raise money based on their communication skills and credentials, in addition to enormous execution capacity. In contrast, these founders are competing against incumbents that operate informally, are often confined to regional and local markets and consumer bases rather than nationally and are slow to adapt to new technologies and consumer-centric practices. In such large markets, even a 1% market share can create an annual revenue of hundreds millions of dollars and enterprise values in the billions. So far, we only have one unicorn, bkash, in fintech, specifically a subset of fintech, mobile payments. Entire industries, therefore, are up for grabs by would-be founders, some of whom might be reading this article and have yet to start their ventures.

The second type of company leverages our low-cost labor against regional and international competition. We have an enormous pool of young people who are proficient in English, technology savvy and hungry for opportunities, as shown by our massive freelancing population. They include developers, content writers, graphic designers, data entry specialists, image labelers/ annotators and more.

eBangladeshi companies can build Software-as-aservice (Saas) products powered by such young people and offer them to enterprise and small business customers worldwide to solve various business problems. In addition to our talent pool, we also have two additional built-in advantages: A growing BPO industry which is already catering to a global clientele and an educated diaspora working in the technology sector in places such as North America, the EU and APAC, from where to source potential ambassadors, business development specialists, advisors, technical experts and even founders. Post-pandemic, it is easier than ever to conduct online outreach and get customers from all over the world. I can think of Gaze, Alice, MarkoPolo and OpenRefactory as examples of Bangladesh-based companies building Saas products for a global market, but there will be many more in the near future.

MBR: How do you see the pandemic as a catalyst causing the rise of tech enabled businesses?

Nirjhor Rahman: The pandemic fundamentally altered consumer behavior in the country and accelerated what would have happened perhaps in five years into two. Online purchases have ballooned. Students are more used to taking classes online, and teachers and institutions are open to adopting edutech software. Remote working arrangements and team structures have become accepted. All of this creates new problems and new opportunities for founders to solve. Additionally, the willingness of angels and investors to conduct meetings online and making decisions through online communication has accelerated the pace of startup investing in the country. This is especially true for Non-Resident Bangladeshis and many international investors who would have waited to visit the country first before the pandemic.