MAHEDI HASAN OMI, Assistant Manager, IDLC Asset Management Ltd.

Bangladesh has emerged as the hidden goldmine of Southeast Asia over the past decade averaging an impressive growth rate of ~6.5%¹. This growth has been primarily driven by traditional drivers (agriculture, RMG, and remittance) coupled with pragmatic economic policies and lasting improvements. According to Asian Development Bank, GDP stood at $329.8 Bn in 2020 with a relatively low inflation rate of 5.7%. The country observing widespread digital adoption as its population of ~170 Mn is gradually becoming tech-savvy, driven primarily by large mobile subscribers (161 Mn) and high internet penetration (62%). Akin to most other developing markets, the smartphone prices in Bangladesh are dropping relatively faster than memory or wireless data costs. Generally, consumers are highly price-sensitive in paying for most of the products or services they tend to avail. According to Asian Development Bank, Bangladesh is forecasted to grow at ~6.8%² in 2021 driven by moderate inflation of ~5.8%, adequate foreign reserves, and a low level of public debt. One of the most unique features of Bangladesh is undoubtedly the country’s population density. Rapid urbanization and industrialization will lead to intricate evolutions over time. The country needs to manage its density delicately while including several outlines such as decentralization, local governance, the safety nets for the vulnerable, infrastructure, and urban planning. Bangladesh has all the features of a great macro-economic story but are we compellingly utilizing our story?

Covid-19 and its impact on the startup ecosystem
Global pandemic COVID-19 has accelerated technology adoption across different segments in Bangladesh. Some sectors have seen rapid adoption and the rest are incorporating technology fast to make their core activities much more efficient. Notable sectors that have witnessed a boom are healthcare, education, logistics, food tech, e-commerce, and financial services. The rapid adoption of technology in these sectors has been a blessing for the startups operating in these sectors. Startups such as Bkash, Chaldal, Pathao, Truck lagbe, and Pravaa have been essential in solving real problems through their offerings. If we closely observe the Southeast Asian giants like Indonesia and India, we will see a rather vibrant startup ecosystem uplifting their economy like there is no tomorrow. In just 4 months since the start of 2021, India has produced 6 new unicorns (private companies with a valuation of over $1 Bn) compared to 2020 where they posted 7 new unicorns throughout the year. This is not an overnight success story. India has carefully nurtured their startup ecosystem to the point that they are reaping the benefits now. And this is not the end. Sure, India has a great macro-story but so does Bangladesh. While software is eating the world, there is no point in limiting entrepreneurial mindset to local boundaries. The goal should be to “Build using local talent, from Bangladesh, for the World”. Regional peers like India and Indonesia have been doing that consistently over the years resulting in success stories like Gojek, Tokopedia, Meesho, CRED, and so on.

Institutional capital catalyzes startup growth.
Venture capital has a long-term commitment with the startups they invest in, typically greater than 5 years. The primary idea is to invest in a startup’s growth until it reaches a sufficient size and credibility so that it can be sold to a corporation or institutional public-equity markets can step in and provide liquidity. The startups however need to be aggressive in winning a large market, typically in billions of dollars, while solving a real problem for its users through its product or service which is significantly better than its peers. Objectively speaking, the venture capitalist buys a stake in an entrepreneur’s idea, nurtures it over a period of time, and then exits with the help of secondary sales or initial public offering (IPO). Venture capital’s (VC) niche exists because of the structure and rules of capital markets³. In Bangladesh, someone with an idea or a new technology often has no other institution to turn to. Policies limit the interest banks can charge on loans, hence the risks inherent in start-ups usually justify higher rates than allowed by law. This essentially leads banks to specifically finance a new business to the extent that there are hard assets against which to secure the debt. And in today’s information-based economy, many start-ups have few hard assets. Institutional capital makes more sense in these spaces for the above reasons because of their systematic approach to investing and expertise in scaling startups towards exits.

Current Scenario of Venture Capital in Bangladesh
2020 was an unpredictable year particularly due to global pandemic COVID-19. Bangladesh was no exception to this. Unsurprisingly, startups have stepped with their technology-enabled solution during the pandemic and have solved multivariate problems. Whether it is Chaldal, delivering groceries on-demand, or foodpanda, delivering food from restaurants instantly, it is evident that the problems these companies were solving are in fact real. Even working from home has been made easy by global technology solutions like zoom and slack. Even in the recent past, working from home and taking meetings virtually were not acceptable at large. If we look at other developing economies, our takeaway would be that these trends usually take shape over time and the users get accustomed to using similar technology-enabled services. At least from an adoption point of view, we most likely have leapfrogged a couple of years into the future, the new normal For the entrepreneurial ecosystem to grow at an accelerated rate, corporate innovation, and partnerships with startups are the next logical development.

Bangladesh’s startup ecosystem has shown great promise over the past decade. Disruptive companies such as Bkash, Chaldal, Pathao, Shohoj, and Bdjobs are some prominent names who ventured into this space earlier in the decade. Following their hard-earned success, a strongly laid foundation, new ideas have ventured forth in the later half of the past decade. As per disclosed information, Bangladeshi startups have raised a total of $325 Mn⁴ till date over 88 disclosed deals. The investments came from (~$303 Mn) global investors while the rest (~$21 Mn) has been raised from local investors. Considering there have been ~160 deals till date, we still don’t know about 50% of the deal specifics. Among disclosed deals, it is clear that investors are being careful while investing in Bangladesh since the pandemic hit globally.

To provide a perspective into each funding rounds let us see how founders start their journey. Typically, the founder(s) bootstrap the startup or takes initial investment from friends and family to work on the concept. An angel investor is ideally an industry expert who invests in emerging ideas around his domain. These individuals or groups of individuals invest in a small round, early into the company designed to get a new company off the ground. Investors in an angel round might include individual angel investors, angel investor groups, friends, and family. Next comes a PreSeed round, which is a pre-institutional seed round that either has no institutional investors or is a very low amount, often below $200K.
Seed rounds are among the first rounds of funding a company will receive, generally while the company is young and working to gain traction. This is the takeoff funding to further prove the concept and develop the product. Round sizes range between $200K–$2M, though larger seed rounds have become more common in recent years. A seed round typically comes after an angel round (if applicable) and before a company’s Series A round. Series A rounds provide capital for hiring, expansion, and growth. Hence this is essentially growth capital. Series B adds more working capital to multiply the results of the series A investment. Series C provides capital to scale and even acquire other companies on the way to an exit in further rounds such as Series D, E, and so on. These later-stage funding rounds, also fall under private equity since they involve mergers and acquisitions.
We often come across venture funding rounds not being specific referring to an investment that comes from a venture capital firm and describes Series A, Series B, and later rounds. This funding type, venture series unknown, is used for any funding round that is clearly a venture round but where the series has not been specified.
According to Lightcastle Partners’ startup dashboard, based on disclosed funding data, it is seen that most fundraising activities in Bangladesh have been around the early stages. This means pre-seed (56 deals) and seed (71 deals) took the majority of the fundraising instances historically. Considering the ecosystem was still in its early stages, it was expected early-stage capital would pour in. Thankfully over the years, there have been big instances in the fundraising process among which Bkash’s $56 Mn venture round led by Ant Financial, Shopup’s $22.5 Mn Series A led by Sequoia, and Flourish ventures are noteworthy. As the ecosystem continues to grow it is expected that the startups will overcome two major hurdles in fundraising, i.e., raising big later stage rounds and raising from foreign investors.
If a startup cannot raise subsequent fundraising rounds, it is usually because there might not be enough market opportunity seen by investors to scale beyond a specific size (which reflects in the valuation). More importantly, founders need to simultaneously build the company as well as the fundraising funnel (bolstering the balance sheet) to attract foreign capital. Foreign capital ensures the ecosystem gets global validation, achieves global valuation multiples, and offers early-stage investors a chance to exit in subsequent rounds. These exit opportunities in turn help replenish the investment cycle and tons of learning along the way. Bangladesh is slowly trying to achieve that but very few instances of exits have been seen in recent times. Paperly, Daraz, and HungryNaki have all seen their early investors exit (numbers undisclosed) when foreign investors bought them out. Moving forward, it is the local investors and angel groups that must work together to ensure that the startups are nurtured in a way that attracts foreign investors to invest in globally recognized technology solutions.

Evolution and phases of Bangladesh’s startup ecosystem The start-up ecosystem in Bangladesh can be categorized into two separate phases. From the year 2010-2015 where the concept of entrepreneurial, incubation facilities was on the rise with quite a lot of academia-industry gap. Several initiatives were taken by the government and aspiring entrepreneurs to bridge this gap and establish entrepreneurial spirit. We saw aspiring founders venturing into the uncertain space of startups to establish their dream companies. Bkash is a prime example of how a startup, through technology creates a new solution that disrupts an existing industry. Following Bkash’s success in establishing a trusted digital payment wallet solution, we have seen many active players such as Nagad, Surecash, and many more joining the industry. While the ecosystem grew at a slow pace during the previous phase, it entered phase two in 2016 with the challenge of investments.
The ecosystem is seeing an increasing number of startup-ups but not enough funding available locally. Fundraising in Bangladesh has always been relatively tough for the aspiring founders in the early stages even with considerable traction and proof of concepts. Thankfully, this is where the ecosystem got attention from foreign investors and the acceleration took place in specific sectors such as ridesharing, e-commerce, delivery solutions, consumer services, and payments. Most recently, ShopUp raised a record $22.5 Mn from global giants Sequoia and Flourish ventures. Such a large round provides confidence to the target startup and different stakeholders within the ecosystem The startup ecosystem is slowly moving from being nascent to a more indigenous in nature. The sector is now facilitating more than 20+ incubators and accelerators, 20+ formal funders and investors, and several co-working spaces across the country. However, these solutions were not institutionalized.
For the ecosystem to strengthen further, start-ups had to scale up and hence, access to funding channels was essential. Players in the Bangladeshi entrepreneurship ecosystem are now staging international conferences and programs providing exposure to aspiring entrepreneurs; they have the opportunity to network and learn from entrepreneurs, mentors, and investors from across the globe. The government of Bangladesh initiated its own public startup support wing, Startup Bangladesh with a 100 crore BDT (U$ 11.5Mn) fund to catalyze investments. To supercharge the startup ecosystem, they have conducted multiple competitions and boot camps as well. Startup Bangladesh has been actively investing in the ecosystem with 100+ startups receiving seed funds over U$ 1.5Mn+ over the past few years. In addition to this, the National ICT Budget for the fiscal year 2020-21 stood at U$ 0.53Bn which reflects the Government’s mission to improve ‘Doing Business’ ranking from 168 to top 100.

Since the economy traditionally relied on debt-based financing, emerging VC fund managers needed to have a deep understanding of the dynamic startup ecosystem and VC as an asset class before managing a fund. With the rapid development of the startup ecosystem, they developed confidence and eagerness to establish these funds. Then again, the regulatory guidelines had lots to improve and that usually takes a few years.
Alternative investment regulations need to provide better incentives to fund managers in order to draw them into establishing a venture capital fund. Fund managers need to pay a 35% tax rate on the management fees and The Government has expressed its plans in imposing new policies and pushing special economic zones in accordance with Bangladesh’s formal graduation to middle-income status in 2024. Some of the incentives for foreign investment would include tax exemption for up to 15 years for foreign investors, no import duties for export-oriented sectors, retained earnings treated as new investments, foreign ownership companies can also secure working capital/long term financing from local financial institutions.

Regulatory guidelines in Venture Capital (VC)
VC funds domiciled in Bangladesh are regulated under “Bangladesh Securities and Exchange Commission (Alternative Investment) Rules, 2015”. Historically Bangladesh couldn’t incentivize local institutions and fund managers enough to establish a locally domiciled venture capital fund. With the rapid development of the startup ecosystem, this gradually changed in mid2019 as BD Venture Limited registered a BDT 50 Cr fund. This was followed by Maslin VC Fund I in late2019 and most recently IDLC Venture Capital fund I in 2020. These funds have been actively investing in earlystage startups since their inception. on the carry they receive. Alternative Investment Fund Managers must pay a 35% tax rate on the management fees and carry they receive, which turns away most new fund managers from entering the industry. For comparison, Asset Managers of Mutual Funds pay only 15% tax on their management fee (the tax rate has been 15% from 2013, and previously was 0% for a period of 22 years). In addition to this, any Trust fund registered in the country is subject to a 2% Stamp duty. Surprisingly enough this requirement has been a part of an 1882 regulation and has been exempted for Mutual funds, but it remains for Alternative Investment funds.
Alternative investment funds locally domiciled have a post-IPO lock-in of 1 year as opposed to 3 years lock-in for foreign alternative investment funds. Furthermore, the fund manager shall be entitled to an annual fund management fee of up to 3% (three percent) of the NAV of the fund for managing a venture capital fund.
Subscription by the sponsor is not less than 10% of the fund provided that the sponsor will subscribe at least 20% of its total subscription to the fund before registration of the fund. Minimum investment by the fund manager must be at least 2% of the fund size provided that, if the fund manager also acts as a sponsor of a fund, this investment shall be made in addition to its investment as the sponsor of the fund. Along with its connected persons, the fund manager must not hold more than 25% of the units of a fund at any point in time. The sponsor must maintain a continuous investment of not less than 2.5% of the fund size. The fund is subject to declaring, to the unitholders, cash dividends only and will be locked in for 3 years from the date of issuance of units.

The Rocketship forward
Undoubtedly, the way forward is mutual cooperation among different stakeholders within the ecosystem. This essentially implies that; firstly entrepreneurs need to come up with innovative solutions to solve real problems with large market addressable markets. The idea here would be to disrupt and win a specific market segment aggressively over a period of time while generating enough value for the users in order to retain them; secondly, local angel investors and institutional investors need to understand deeply how to actually differentiate between startups and SMEs, how does a startup operate in order to achieve its goal (win the market, not profitability), proper investment due diligence and how can they possibly create value so that the startup grows at least 10x over the next couple of years; finally, working with the government to help them understand which policies need attention to unlock foreign venture fund.

<sub>1. World Bank country database
2. Asian Development Bank forecast 2021
3. Harvard Business Review
4. Lightcastle database</sub>