Startups call for a Tk10,000cr state fund to propel their growth

Experts and stakeholders have urged the government to establish a Tk10,000 crore state fund specifically dedicated to venture capital and startups to boost funding to the sector and unleash its potential.

They said a shortage of funds and trust in the startup ecology is holding it back from vigorous growth in the country.

They were speaking in a Focus Group Discussion organised by The Business Standard on 13 January on the occasion of the paper's fourth anniversary.

Discussing the issues plaguing the startup sector, stakeholders said startups can significantly contribute to vitalise the economy with innovative business ideas and use of digital technology.

The emerging startup sector of the country needs a robust funding ecosystem to thrive and participate in the "Smart Bangladesh by 2041" vision, as the poor flow of foreign and private capital is holding it back, they said.

"Having demonstrated its commitment to large-scale infrastructure projects, the government can now set its sights on a different kind of megaproject – one that boosts the innovative economy. A Tk10,000 crore fund, strategically directed towards startups, can be the spark to propel Bangladesh towards a Smart Bangladesh," said Waseem Alim, co-founder and CEO of the pioneering online grocery platform Chaldal.com.

Nazmul Karim, director and country representative in Bangladesh of the Mumbai-based impact investor Aavishkaar Capital, said if the government announces the creation of the fund, it will not need immediate disbursement. Local private and foreign investors will get energised to end the sorry state of startup funding in the country.

Shawkat Hossain, director of the Venture Capital and Private Equity Association of Bangladesh, said in the contemporary economy, startups play a crucial role by harnessing technology to address economic and social challenges. Their significant potential for scalable solutions and innovative job creation positions them as vital contributors in the modern economic landscape.

Stakeholders at the discussion said the impact startups can create in the economy and the society is significantly different from the traditional way and innovation remains a big part of the process.

"If we fail to invest in innovation and upgrade our economy, the 7%-8% GDP growth target will be tough to achieve," he added.

The unfavourable state

Disclosed investment in Bangladeshi startups plummeted to a meagre $72 million in 2023, down from $125 million in 2022 and the record high of $432 million in 2021.

Almost invisible on the global startup investment map, Bangladeshi startups received nearly $1 billion in funding over the last decade and not even 10% came from local sources. The scenario does not look favourable for the government's 2041 vision to help create one crore jobs by letting startups grow, including the creation of 50 unicorns.

Despite having around 2,500 registered and a handful of successful startups covering a variety of sectors, Bangladesh significantly trails behind its peer economies in cultivating both the startup culture and investment.

For instance, startup investment was 0.62% of the GDP in India, 0.09% in Pakistan in 2022, but was only 0.03% in Bangladesh.

India has had nearly one lakh startups registered with the authorities of which more than 100 became unicorns as their valuation surpassed the billion dollar mark.

Except for a handful of noticeable investments by foreign investors like the $250 million Softbank investment in Bkash, Bangladeshi startups here received a few small ticket early-stage investments. Since the Ukraine war, growth hungry startups were desperately looking for bigger funds to stay afloat and keep scaling up.

Meanwhile, direct employment in startups dropped to around 35,000 from 50,000 in two years as many large startups reduced their headcounts to survive the global funding winter, according to industry people.

Foreign investors' fears  

Nazmul Karim of Aavishkaar Capital pointed out that while venture capital is lacking, other forms of foreign capital are not adequately flowing into Bangladesh.

Shawkat Hossain of venture capital association said despite the market potential, foreign investors are hesitant to engage within the Bangladeshi jurisdiction due to concerns about both entry and exit barriers. Additionally, he mentioned that the legal framework in Bangladesh lags significantly behind modern standards.

"Foreign investors are interested in investing through parent companies domiciled abroad to avoid complications in Bangladesh," he added.

For example, globally, half of the seed or pre-seed investments are done through Simple Agreement for Future Equity (SAFE), instead of forcing a nascent firm to issue shares against the given capital immediately. Employee Stock Ownership Plan, Employee Stock Options are also win-win tools for the firms, investors and their employees.

But, firms registered in Bangladesh cannot use the tools as local laws do not allow them, said Rashel Mia, investment manager at the state-owned venture capital firm Startup Bangladesh Ltd.

Foreign fund managers, nowadays, are cautious of the Bangladesh market due to the bizarre exchange rate mechanism and the prevalent culture of market interference, said Waseem Alim of Chaldal.

Fund managers who invest their investors' money have to envision the exit routes before putting funds anywhere as they have to give back the money to their investors in a stipulated time of 7-12 years, said Rashel Mia.

The capital markets across the world are letting startups go public regardless of their profits or losses as it is risk-taking investors' call to invest there or not. On the other hand, market regulations in Bangladesh are yet to make it a reality, despite the fact that the country already has several successful startups deserving immediate stock market listing.

Nazmul Karim said foreign fund managers require initial public offerings (IPOs) of startups for exits. He added that the country also needs buyout funds to provide previous investors with exit opportunities.

The way the central bank restricts the deal value when foreign investors exit from non-listed firms is also making Bangladesh unattractive to foreign fund managers. The country has not generated sufficient successful startup exit stories to appeal to these investors.

Local investors' lack appetite

At the discussion, the speakers said a blind spot persists among the local businessmen, corporates, and financial institutions when it comes to the dynamic world of startup investments. Accustomed to traditional low-risk ventures, they tend to overlook the potential for exponential growth and disruptive innovation offered by promising startups.

It is crucial to encourage them to recognise that risking a small portion of their wealth could yield substantial returns from successful startups, even if a majority of their invested ventures fail ultimately.

There are 37 alternative investment fund managers registered with the securities regulator and nine of them got approval for 17 funds. However, a lacklustre response from their investors made the needed capital accumulation a reality for a handful like IDLC Venture Capital Fund.

Syed Javed Noor, deputy managing director of IDLC Finance, who leads the venture capital fund, said it had been a tough job to convince investors to pour their capital into the venture capital fund. But, now, it has been possible thanks to IDLC's reputation as the top non-bank financial institution in the country.

"Here we need incentives for the risk-taking investors to create the startup investment culture," he said.

For example, enough zero coupon bonds are being issued by corporate entities nowadays as the government made the income from such bonds tax-waived, and tax incentives can help encourage local investors to allocate some of their investments in venture capital.

A lack of commitment and compliances by some startup entrepreneurs despite starting with lucrative ideas also hurt investors' confidence here, said the fund managers.

Waseem Alim said banks are not interested in going beyond their traditional business model and are not doing their minimum even to improve the local venture capital ecosystem.

Shawkat Hossain said a few startup entrepreneurs and fund managers would not be able to bring the change.

Speakers say promoting success stories in startup investments and providing incentives for investors are seen as pivotal steps in encouraging investors to view startups as viable and lucrative investments.

Call for an expedition

Adnan Imtiaz Halim, co-founder and CEO of the largest service marketplace Sheba Platforms, said Bangladesh is expected to see its sweetest economic spot in 2030-40 due to the growing purchasing power of the people.

It can be expedited through bold pushes by the government as the country has progressed a lot in terms of technology adoption, he said.

"Investors are risk takers, they will pour their capital into potential ventures here a decade later," he said, adding, "If the government activates the enablers faster, the investment flow that Bangladesh eyes will take place much quicker."

For example, he said, India started its cashless payment journey with a 40 year plan and the bold incentives by the government made it happen in only six years. Now India enjoys the benefits of the digital economy and startups are already recognised to be a sheer part of the $5 trillion economy it eyes.

Syed Javed Noor said that the expected "technology miracle is bound to happen if capital and talents are encouraged together."