If you know anything about the digital age, it is that invention and Innovation will drive the growth rate of a country. With such high expectations, we often revere the entrepreneurs and laud the venture capitalists that have invested in startups and thus help transform those startups to scale up. And so while the entrepreneurs are treated as the modern day rebels, the venture capitalists have been given the coveted position of the trusted sidekick; sturdy, reliable and essential to the hero’s success, all for a little piece of the action of course.
The venture capital scene in Bangladesh has been experiencing a spike of activities with the recent successes of several startups. The success stories of these startups litter the popular media and further adds to the growing romanticizing of the industry as the trusty sidekick. However, it is essential to separate the realities of the industry from the myths in order to understand how the industry functions and this is especially true for aspiring entrepreneurs.
VC IS WHAT MITOCHONDRIA IS TO THE CELL
Venture Capitalist (VC) firms are the powerhouse behind a company whose job is to see the startup through its early phases all the way to Initial Public Offering (IPO). With promises of high return, these VC firms, invest the much-needed fund and dispense the much sought-after advice that has proved to be indispensable for newcomers. However, investing in these startups is risky business since if the business goes belly up than the VC firms have effectively lost all their investment. As a result, many venture capitalists firms are given the power to influence major decisions for the company they are investing in. Just like mitochondria provides the required energy for the cell, VCs do the same for new businesses.
VCS ARE DIFFERENT FROM ANGEL INVESTORS
Repeat to yourself: Angel investors are not Venture Capitalists. Angel investors, also known as business angels, invest their personal funds in a business. These are rich, influential individuals who have chosen to invest in a high-potential firm for a stake at the company. But don’t let the ‘angel’ tagline confuse you; these investors also want a piece of the profit pie. There are some other notable differences between the two investors.
Angels and VC, invest in different phases of the company. Angels usually invest in early-stage businesses and early market entry whereas VC firms are more likely to invest in firms with a proven track record. Similarly, the two investors differ in investment amounts and responsibilities.
VENTURE CAPITAL IN BANGLADESH
Bangladesh has seen a surge in startups in recent times some of which have experienced phenomenal success. Take the case of ShopUp. This fin-tech platform helps the micro-entrepreneurs to automate online sales while providing greater access to finance all with the help of Facebook. The company announced that it has raised $1.62 million in seed money from Omidyar Network; an investment firm that was founded by Pierre Omidyar, the founder of eBay. There was also some angel investor in this round from the likes of Facebook, Amazon, Grab and so on.
Local investment firms have made enormous contributions to the startup culture of Bangladesh too. Doctorola.com was able to snag a huge investment by BD Venture Ltd., a local venture capital firm. Similarly, Chaldal, a delivery startup, raised $5.5 million series A funding from International Financial Corporation (IFC) with participation from Bangladeshi firms such as IDLC Finance limited and Y Contributor.
Given that the financial system in Bangladesh is mostly bank based, the emergence of Non-Bank Financial Institutions (NBFI) is truly a godsend. While banks are more willing to bet on companies that have a long history of solid track record, NBFI’s are more lenient towards startups. As of January 2018, 11 venture capital firms have registered with the government, providing three forms of capital; private equity fund, venture capital fund, and impact fund. These firms have produced success stories the likes of Popular Pharma, which had been bankrolled by Brummer & Partner Asset Management.
Despite such progress, you can often hear outcry by the local entrepreneurs about the lack of availability of finance. Shawkat Hossain is the Managing Director of BD Venture Limited and he has been vocal about how the lack of VC in Bangladesh has impacted the startup scene. Hossain believes that while 11 firms are registered with the government, a few of them are actively seeking out new investment opportunities and even fewer are actually operational. But the woes of the industry do not end there. Venture capital firms usually invest when the company has reached a mature stage, having been backed by angel investors in the beginning phase. And for some reason, there has been a stark absence of angel investors in the startups of Bangladesh.
Regardless, companies such as the BD Venture Ltd. has striven to provide seed money to SMEs and startups. Venture Investment Partner Bangladesh Limited (VIPB) specializes in providing funds to SMEs in the rural regions of Bangladesh and as of date has funded the rise of 500 SMEs in poor regions.
NEXT IS WHAT
As it turns out, just making the funds available through the VC firms to aspiring entrepreneurs simply won’t cut it. Entrepreneurs often complain about the local firms often have stringent term sheets and valuation of the business and have termed such behavior to be outright conservative and demotivating. However, Shawkat Hossain has news for them. Hossain believes that such a conservative attitude towards investing and valuation of the business is not unique to the Bangladeshi market and is, in fact, a worldwide phenomenon. Furthermore, he has stated there exists an expectation gap between the entrepreneurs and the investors, which can be termed as a lack of business acumen in part of the local business owners.
This lack of acumen can be deftly chalked up to a lack of experience by local firms and has been a major source of challenge for the venture capital firms. Local enterprises might have very promising ideas with a strong leader at its helm, but their lack of business experience can translate as unpreparedness for investment readiness. This simply means having issues such as improper account books, problems with the valuation of the company leading to an expectation gap and lack of effective instrument such as convertible bonds.
Lack of regulations also plagues the industry. Startups usually lack property, equipment’s or any item, which can be used as collateral, which means higher risk for the VC firms. Hence the VC firms might ask for a greater share of the equity in the firms.
While the country is brimming with potential, it is important to recognize that we need to focused attention on certain sectors of the economy in order to fast-track our growth. Having a reliable source of funds is a great way to ensure that entrepreneurs are able to contribute to the countries GDP while furthering the goals of the nation. Venture capitalist firms are an excellent form of investors that can help the local enterprises and encouraging further venture capital firms to begin their operations in Bangladesh will greatly aid our local enterprises.