What does Covid-19 mean for Bangladesh Angel Investing?

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By Nirjhor Rahman

It’s been a few weeks since I wrote my last article. Like so many in the startup ecosystem in Bangladesh and beyond, we at Bangladesh Angels Network (BAN) have not been immune to the present crisis with the lockdown in the country and the uncertain state of the economy. We’ve had to put pending deals on hold and postpone our upcoming showcase and are looking to hold one virtually instead. But I’ve been heartened by the resilience and ingenuity displayed by founders in our portfolio and pipeline, as well as the camaraderie among ecosystem builders, including board members of Bangladesh Angels, to work together to conceptualize and advocate for potential rescue packages for the sector. These are truly extraordinary times, and there will be a pain to bear in the short term, but I truly believe that long term foundations are also being built right now, both within companies and the ecosystem.

I’ve been asked, and have been asking around, about what start-up founders can do to pitch investors in times like this. To be very frank, for most angel investors, especially those who run their own companies, priority #1 is and will be their own businesses and their employees. I suspect that it will take at least three to six months before investors will be actively looking to do deals again, but it does not mean that they are not open to hearing pitches and ideas right now, especially from companies and founders who’ve taken advantage of this downtime, as best as they can, to both position their business for survival in the near term and success in the medium and long term. In fact, those are the exact kinds of conversations that I’ve been having with members and prospective members of Bangladesh Angels over the last two weeks.

So what can founders be doing right now, and what actions and qualities should angel investors look for?

Leadership Matters

Certain principles of angel investing will remain constant, no matter what times we live in. In an earlier article, I wrote that 90% of early-stage investing in companies is in the quality and character of the founders. I believe that to be true more than ever. Rajan Anandan, Managing Director for Sequoia Capital, spoke in a recent interview with YourStory about how anyone can lead during good times, but the true mettle of leadership is forged during the crisis, and how leaders navigate themselves and their teams through them.

How does that manifest itself in short term actions? If founders are sitting still, waiting for things to hopefully turn around, or some kind of rescue from some external party, be it investors, the government or others, then they are not exhibiting the traits of decisive leadership. This is a once-in-a-hundred year wave, and founders can choose to wait for it to drown them, or build a raft as best as they can and try to get to safety. In that process, some hard decisions must be made.

In the immediate term, the first and most important priority is to extend the runway of companies. If founders have 3 months, then they should try to get it to 6. Once they get to 6, then try to figure out ways to get to 12, or ideally longer. We have to assume it will take at least a 12–18 month period for things to normalize and get back to where it was pre-COVID. So businesses must be able to survive in the meantime.

The VC community in India have put together an action plan with practical tips. I’ve seen firsthand and heard about founders implementing many of them. Some relevant recommendations include:

  • Re-negotiating payables and lengthening terms
  • Getting money in the bank as soon as possible from customers and reducing dead inventory and receivables, even if it means providing discounts to do so
  • Agreeing on some kind of rental moratorium or discounts with landlords, at least during the lockdown period
  • Getting employee buy-in for wage cuts, alternating days and/or salary deferrals, potentially converting some of those lost wages into an ESOP scheme for the future, at least for the most valuable employees

All of these actions, especially those regarding employees, require tough, frank conversations. The worker layoffs and wage cuts, in particular, are gut-wrenching. But there are ways to implement them with empathy, making sure that the top management bears the brunt of the salary cuts, in order to protect the wages of the least paid, and that there’s at least a provisional timeline, for example. It also helps to implement them sooner rather than later.

Potential investors should not penalize founders who are successfully able to implement these steps with buy-in from stakeholders because it speaks volumes about their leadership abilities, decisiveness and willingness to trade short term pain for long term gain. Having their most important stakeholders willing to take haircuts to keep them afloat also means that the company provides significant value to these stakeholders.

Pivoting & Customer Engagement

There’s been a lot of great ideas to pivot or take advantage of near term opportunities presented by this crisis, though they also create challenges. For those in essential services such as healthcare, it’s a no-brainer. BanglaMeds, for example, has seen their revenue triple in the last month. They are supplying not just essential medicines, but devices. For them, the pivot is more away from “B2B2C” sales via channel partners such as e-commerce sites, which are shut down, and into direct sales, as well as getting listed on platforms like Pathao and Shohoz as they’re rolling out medicine delivery to reach a wider base of consumers. In the online grocery segment, Khaas Food had their best-ever month in March, though logistics and working capital, difficult in the best of times, is becoming harder to manage. Education is another “essential service” despite the lockdown. Esho Shikhi, a BAN portfolio company, has seen their best revenue month in March since the relaunch of their app six months ago as learners are unable to go to coaching centres, meaning they are stuck at home and looking for e-learning options. In logistics, companies like Loop compensated for the drop in demand in one industry with the rise in demand from the food distribution sector, though they did face challenges due to the unavailability of labourers.

For those outside “essential services,” companies are using existing assets and operations and re-orienting them to new businesses. Nitex, which provides a digital platform for emerging brands in European and North American markets to source from Bangladesh, is now sourcing regulation- and medical-compliant personal protective equipment. Folia Materials, which produces and distributes low-cost water filters from the nanoparticle-infused paper in Bangladesh and SE Asia, is using their R&D know-how to develop masks from the same technology.

But it doesn’t make sense to force a pivot, to say groceries, food or healthcare, if a company is not already in an adjacent space. For many founders, the lockdown means engaging with customers and continuing to build relationships with them. Kludio, which runs a plethora of brands from its cloud kitchen, was proactive in implementing and communicating enhanced hygiene and disinfection best practices when the lockdown hit, providing customers with a peace of mind when ordering. PoshaPets, pet services and e-commerce platform had to shut down their at-home services, which was driving the bulk of their revenues pre-COVID, and move the interactions between customers and veterinarians online. But more importantly, as stores have shut down and delivery options dried up in the early days of the lockdown, the founder was delivering products herself to customers to meet their requests. The act speaks volumes both about the brand equity and trusts the company’s built with their power users, who can serve as advocates as things get better, and the leadership quality and passion of the founder.

Building the Foundations

Frankly speaking, most companies will see dramatic declines in their revenues during this lockdown, and the potential economic recovery will most likely not be a V-shaped recovery that happens quickly, but a U-shaped one that happens over time. But I’ll remind investors that COVID is not forever, and neither is the global recession. What matters, then, is the actions that founders take now to optimize their businesses to take advantage of a post-COVID world.

From that standpoint, we in the ecosystem see tremendous opportunities in the change in the behaviour of customers. Most downturns accelerate on-going shifts and preference for automation and digitization, particularly among businesses, in order to boost productivity. What makes this one unique is that it is forcing consumers, including the Bangladeshi middle-class, to rapidly adopt digital services. Work from home and digital meetings, previously unheard of in Bangladesh, is now mainstream. Online grocery deliveries, telemedicine and online education are gaining traction. The job of startup founders is to make sure that these new digital habits are not easily discarded for old analogue ones, through superior user experience and value proposition. They will be helped by the fact that in the aftermath of the lockdown, users will be looking to minimize human contact and maximize hygiene, and look for services that help them do one or both.

But in addition to consumer behaviour, we have to think about behaviour change among startup founders and investors. Investors should no longer reward top-line growth into high valuations if that growth is of poor quality. Mainstream behaviour pre-COVID, such as chasing and subsidizing GMV growth through discounts and high marketing expenses, resulting in high customer acquisition costs, as well as poor unit economics will not and should not pass the muster. Maybe that high GMV also came from a customer base whose average basket size was too low, which was not providing recurring revenue, with long lead times and time to convert to cash and poor retention. Maybe the employee-to-revenue ratio was too high. All of those metrics will and should be scrutinized alongside revenue in the post-COVID world, and founders must be ready to show improvements in them.

Other questions to approach startups pre- and post-COVID would be:

  • Have they mapped out different scenarios, including best and worst cases, and adjusted their roadmap, costs and fundraising plan accordingly?
  • Have they consolidated their multiple projects in line with this new roadmap, only focusing on the essentials that can be monetized and eliminating any “nice-to-have” pet projects?
  • If the startup has multiple verticals or customer segments, is it focusing on the ones that are growing and profitable for that particular startup?
  • If it relied on a single revenue source or even customer, is it working to diversify that?
  • If its supply chain was too narrow and vulnerable, is the startup building redundancies in the supply chain by cultivating new vendors?
  • Have they explored opportunities for partnerships, including the in-kind exchange of services, even mergers, that take advantage of COVID-induced opportunities?
  • If the product was sub-par, are they taking the lockdown period to retool it and add necessary new features?

If the answer is yes to any or all of these questions, then the founders have a good story to tell to investors and indicate that they can come out stronger from the crisis and take advantage of a post-COVID world.

Valuations & Fundraising

What does all this mean for valuations and fundraising? If startups have offers on the table, and if it’s a matter of 10–20–30% difference in valuation between the investor and the company but still a premium from the last fundraise, I would advise to close immediately and try to take down payments to get money in the bank. The longer companies wait, the harsher the investment climate will be. And remember, the objective is to extend the runway.

The typical desire of founders, which is to get a 2–3X multiple on their last fundraising, especially if it happened in the previous 12 months, may no longer hold water. Strong founders and companies may be able to command a premium based on a double-digit percentage increase. Others may have to raise at par from the last valuation or even take down rounds. Much of this depends on their ability to negotiate, the financial health of the business, including its runway, and the strength of the plan and actions the founders have taken to fortify the business.

Does it make sense to approach existing angel investors? Absolutely, though the challenge here is that most angel investors do not make provisions for bridge rounds and further investments into a company, unlike institutional investors. The objective of an angel is to spread small tickets across multiple companies, given the high likelihood of failure, even in the best of times.

The wrong way to engage existing investors is to ask them to top up so the company can continue to keep its current burn in the hopes of a fast recovery. The right way to engage them is to show them the actions the company has taken, the new plan it has and the potential investments on the table, and ask them to exercise their pro-rata rights to invest and keep their stake, as new investors come in. New investors would also be confident about investing when existing investors co-invest at the same terms. Transparency and consistency is also important. Founders who are not diligent about regular updates and communications can’t expect to suddenly ask for money again.

Win, Together

“Remember, we are here to build an institution. Every single action we take, every single decision, has to come from that perspective.”

I remember that quote from one of our members during a board meeting at a BAN portfolio company. It crystallized to me what early-stage and angel investing in companies is about: Not the chasing of valuations or accolades, but the building of transformative institutions that have the chance to remake Bangladesh. Going further and paraphrasing the words of Vinod Khosla, legendary Silicon Valley VC, financial returns are the natural side effect of bringing big ideas to market. Now, more than ever, as the crisis has exposed existing cracks in the economy, we need those big ideas and ambitious entrepreneurs to survive, succeed and work for everyone.

My commitment as the CEO of Bangladesh Angels is to continue to find such entrepreneurs, tell their stories, to grow the community of angels who also believe in that vision and to work with the ecosystem to create meaningful opportunities for both entrepreneurs and investors. We are not competing against each other, but competing against failure. So please get in touch, and let’s find a way to win, together. And in the meantime stay safe and stay healthy.

*The author is the CEO of Bangladesh Angels Network.


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