Mahedi Hasan Omi Venture Partner Rally Cap Ventures

Bangladesh offers a huge potential for startups to develop and flourish. With a population of 165 million, 40 million people fall in the middle-class strata of the country. The percentage of middle-class population is one of the largest in Asia. Bangladesh has one of the youngest populations in the entire world with a median age of 27 years. Considering all this, there is a vast opportunity to greatly develop across the world. However, the country lacks basic necessities for that growth, which is majorly seen as a challenge, but could be turned into an opportunity. Be it education, health, transport, security or infrastructure, Bangladesh is a construction deficit country. There is an abundance of resources along with everything a productive system could ask for, but where is the problem? We can identify that from the angle of a startup. A startup primarily identifies a problem and creates a solution for it which disrupts the entire system, changing the course of how that problem can be solved. This problem does not have to do anything with the amount of resources but everything to do with managing those resources efficiently. Currently, the problem for a startup is not having USD 1 mln in funds but how efficiently they can use the resources that they have at their disposal to generate value and more money. Bangladesh has immense potential, the right resources and other elements that make up the right equation for a successful economic model but the problem lies with managing it. Moreover, there is a need to build on the intellectual capacity for this system to thrive.

Startup Ecosystem in 2021

Startup ecosystem in Bangladesh has boomed in last few years, as startups are being encouraged to come up with their innovative products or services. The numbers of Startups are increasing with the passage of time, as deployment of the National ICT Policy in 2009 to become Digital Bangladesh by 2021 has paved the way for the startups to grow. The government has introduced polices and projects from ICT Ministry such as IDEA project and Startup Bangladesh Limited with funds.

Global pandemic, COVID-19, has accelerated technology adoption across different segments in Bangladesh. Some sectors have seen rapid adoption and 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 Praava have been essential in solving real problems through their offerings.

As Bangladesh recovers from Covid-19 lockdown, its economy is growing at a rapid pace. The startups ecosystem in 2021 has seen significant growth even amidst the Covid-19 recovery. The events range from having marquee global investors enter Bangladesh, to having Bangladesh’s first ever unicorn, BKash. Bangladeshi startups have risen USD 166 mln funding in 2021.

The South Asian ecosystem itself has had a significant year. In India, 8 startups have listed publicly creating unicorns and exit opportunities for their investors. Zomato, Nykaa and Paytm are the headliners in this case. More companies are planning to have more IPOs throughout 2022 leading to the possibility of more unicorns. This is not an overnight success story. India is reaping the benefits of its well-planned startup ecosystem. And, sure India has a great macro story and so does Bangladesh.

Pakistan on the other hand has received significant attention from global investors, as investment in e-commerce logistics and fintech is growing up. Pakistani startups have raised USD 350 mln in funding through 81 deals which is 5x of the raised amount in 2020.

Compared to our South Asian counterparts, Bangladesh’s ecosystem is still far behind. 2021 was a significant year for the Bangladesh ecosystem. It has seen big global VCs and investors enter the market. The ecosystem has also found its first unicorn startup. Unicorns are the startups which have a valuation over USD 1 bln.

The ecosystem has accelerated in terms of fundraising. In 2021, Bangladesh saw around 61 successful funding deals. In 2021, around USD 166 mln were raised in total, 98.26% of which came from foreign investors. Local investors have invested around USD 3 mln, most of which were angel investments.

Breakdown by Stage

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 until it reaches to a sufficient size and captures a profitable market and its sustainability is assured so that it can be sold to a corporation or institutional public equity markets can step in and provide liquidity. 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). Basically, there are 3 types of funding of venture capital. The first one is early stage financing, second one is expansion financing and last one is acquisition or buyout financing. The early stage financing is the investment which is provided at the very early stage. This type of investment is required to start the business activities and operations. Early stage investments are actually spent to develop the product and to create a viable customer base. Pre-seed investment is similar to early stage investment as it refers to the period where the startups are first getting their operations off the ground. The seed investment is the official equity funding stage which is the first investment that is raised by the companies. Seed funding helps the company to develop its product.

Pre-seed and seed stage investments are required to develop products and find market fit. Series A funds are used to optimize user base and product offerings. It goes beyond developing the product. Series B+ focuses to help businesses to increase market reach and scale further. Series C funding is meant for already successful businesses which are looking to develop new products, expand into new markets or acquire other businesses Around USD 15 mln were invested in seed and preseed stage startups, USD 23 mln in Series A, USD 116 mln were made in Series B and USD 10 mln in Series C funding. Compared to earlier years, the venture backed startups have seen significant changes with the entrance of global players.

The Entrance of Global VCs and Investors

The startup ecosystem in Bangladesh is booming with the increased number of startups but the funding is not sufficient 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, agro-tech, consumer services and payment solutions. Venture capital’s (VC) niche exists because of the structure and rules of capital markets in Bangladesh. The startup ecosystem is slowly moving from being nascent to a more indigenous in nature. The sector is now being facilitated by more than 20+ incubators and accelerators, 20+ formal funders and investors and several co-working spaces across the country. According to Future Startup, till September, 2021 37+ Bangladeshi startups have raised more than USD 120 mln whereas in 2020 the amount was only USD 40 mln. The number will be much higher as all the investments are not disclosed in the statistical data. The overall angel and seed-stage funding has improved significantly. According to Lightcastle Partners in 2021, 54 companies have raised USD 166 mln of total fund which includes USD163 mln of global funding. The portion of global funding is increasing significantly which shows the potentiality of the startups towards growth. According to Lightcastle Partners, fintech sector has raised the prominent part of the total funding and also logistic and mobility sector has also received a good portion of fund.

2021 saw international renowned investors and VC entering in the market of Bangladesh. The most significant round was Softbank’s investment in BKash. SoftBank committed to take 20% stake in payments giant BKash, helping its valuation to reach USD 2 bln, hence, making it Bangladesh’s first unicorn.

Another significant investment story is ShopUp receiving USD 75 mln investment from Peter Thiel’s fund along with commitments from Sequoia. Not only that, Shopup has also raised USD 34 mln early in 2022 from Tiger Global.

Logistics company Paperfly has received Series A funding from Ecom Express amounting USD 11 mln.

Chaldal, Frontier Nutrition, Praava Health, Truck Lagbe, DataBird, Go Zayaan, Maya, Shikho are some more startups who have been funded by global investors.

We can expect more global VCs to enter, as Bangladesh is comparatively untapped compared to its South Asian counterparts.

 Prospective Investment Sectors

The ecosystem is industry agnostic on paper. However, we have seen that certain industries have had both regional and local demand at large. For most emerging market economies, the wheels of growth lie in e-commerce, logistics and payments segments. Regional comparable have seen similar trends in investments at similar growth phases. Investments in ShopUp and BKash essentially signals for the future. E-commerce enabler platforms, end to end logistics solutions and payment solutions for the demand driven population of Bangladesh are needed to be built keeping scalable business models in mind. These three sectors complement each other as the economy starts to grow.

Appreciatively, 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. However, the government of Bangladesh also initiated its own public startup support wing, Startup Bangladesh with BDT 500 cr (USD 58 mln) 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 USD 1.5 mln+ over the past few years. In 2021, Startup Bangladesh has taken the initiative of investing BDT 100 cr among 50 startups.

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 a lot to improve and that took a few years.

VC backed businesses essentially build solutions for large addressable problems with a view to scale at large generally incorporating technology within the process. Startups such as ShopUp, Truck Lagbe, BKash have built solutions for addressing large fundamental problems in e-commerce, logistics and payments respectively. This enabled them to provide a significantly better solution for a large target market as they iterated on their solutions as they scale. It was just a matter of time for the foreign investors to see the potential of these businesses and invest in the vision.

There are more problems which can be solved within these industries. Payment gateways have been the center focus in fintech. However, there are more segments such as wealth management, insurance, micro financing and others. The logistics segment can be benefited from B2B focused solutions, inventory management solutions, last mile delivery solutions. Investing in these segments could catapult us further ahead.

Bangladesh still has large markets in healthcare, garments and education. Healthcare has a huge potential. Startups which target the garments industry have a huge market which they can address. Startups focusing on these industries could lead to hyper growth over the coming years. Building solutions for emerging markets are hard to execute, in general. But having a large enough market which is ripe for disruption, traditional and highly fragmented keeps investors motivated as they see significant traction.

Policy Catalysis

Needless to say, Bangladesh has one of the best macroeconomic stories at present. Yet our regional comparables have been getting better attention than us in many cases. Its table stakes to build and execute in large markets for a startup but positive regulatory changes can have a lasting impact on bringing confidence to investors as they feel encouraged to invest in certain sectors.

With the rapid development of the startup ecosystem, the scenario has changed gradually when BD Venture Limited registered a BDT 50 cr fund, and this continued with the Maslin VC fund, IDLC Venture Capital Fund. Since the inception, these funds have been actively investing in the early stage startups.

Fund managers need to pay a 35% tax rate on the management fees and 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 fees (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, this requirement has been a part of an 1882 regulation and has been exempted for mutual funds, but it remains for alternative investment funds.

Bangladesh’s startup ecosystem has shown great promise over the past decade. According to LightCastle Partners, majority of the fundraising activities have been around early stage as the numbers of pre-seed investments are highest. As the ecosystem continues to grow, it is expected that the startups will overcome two major hurdles in fundraising, one of them is raising later stage funding and another is to raise from foreign investors. By passing the year, the startups have grown with a potential growth rate and they are able to grab the attention of foreign investors. And, thus the number of global funding has increased significantly.

Looking at Pakistan’s stellar fintech rise in 2020, policy changes certainly helped them to accelerate the growth thereby encouraging foreign investments. Coupled with policies, helping companies to establish holding companies in other jurisdictions helped Pakistan secure a ton of investor confidence. Crypto startups have boomed in India over the past few years, catalyzed by policy and regulatory changes.

Bangladesh had tried to formulate a policy to provide collateral free capital to startups in 2021. While the policy is yet to be implemented, this shows how policy makers are considering certain financial policies to accommodate a the needs of the startups. The Startup Bangladesh Fund by the ICT Ministry is also active with a USD 65 mln fund. As we can see, policy makers are prepared and keen on helping the ecosystem grow.

There are certain spaces where policies need to be focused on. Foreign Direct Investment has grown 4 times over the past decade. The government also provides tax incentives for these investors. However, the entrance of foreign VCs or funds directed towards startups are still limited compared to our neighboring countries.

Way Forward, Upwards

Bangladesh has come a long way in the past decade, especially the start-up ecosystem. It can go even further with the right set of policies and a friendly ecosystem. We have to acknowledge that startups in different stages have different challenges to tackle. The ecosystem and its stakeholders have to come in at different stages to help and nurture these startups. This includes incubators, VCs and angel networks. The proper infrastructure, process and guidelines could encourage local investments as well as foreign investments more.

It is evident that our policies need to encourage more foreign investments in the startup ecosystem. Tiger Global, SoftBank, and Sequoia have all entered the Bangladesh market. More global investors and VCs could follow, if our regulation and policies encourage them to do so.

The ecosystem can move forward and upward by focusing on two aspects, mentorship and investments. Mentorship is an aspect which is essential for our early stage startups to grow and scale. Each startup has its unique problems. Thus, its mentorship needs to be catered to that specific problem. Sometimes, industry focused mentorship can help startups scale. In this domain, our incubators and accelerator programs need to step in. There are multiple incubators currently operating. However, industry specific and problem targeted incubators are still scarce in our ecosystem. Another solution could be thorough partnerships and networking. Linking our ecosystem with prominent programs across the globe could help create access to better mentorship and resources for our startups.

The second domain is in investments. Early stage startups struggle to raise funds through the proper channel. However, over the past few years, we can see that seed and pre-seed stage investments have increased in numbers and amount. The number of angel investments have also increased. This shows that the ecosystem has become more angel investment friendly. Angel networks can play a big role in developing the infrastructure and culture required to accelerate this. The VC scene is also changing in Bangladesh. It is expected that more VCs will emerge. This could create access to smart capital for startups which are looking to scale.

As the ecosystem’s growth accelerates, it is exciting to imagine what the next decade holds for the ecosystem. The writer of the content is working as a Venture Partner in Rally Cap Ventures and he can be reached at Myemergingvc@gmail.com.