Why is foreign VC investment running out for Bangladesh's startups?

Chaldal is one of the most promising start-ups in Bangladesh, having raised $32.8 million in investment since its inception in 2014.

But as wary global venture capital investors tighten their purse strings, Bangladesh's start-ups are struggling to raise fresh funding, and even promising start-ups like Chaldal are not safe from the fund crunch.

Buoyed by a spike in orders during the pandemic, Chaldal had expanded rapidly from Dhaka to other Tier 1 cities of Chattogram, Sylhet, Khulna and Tier 2 cities of Jashore, Gazipur, Rajshahi, Tangail and Narayanganj.

Chaldal uses the "dark" store model, picking up orders from its own warehouse rather than retail stores. So, expansion into each new town or city meant setting up an extensive network of warehouses adequately stocked with inventory.

In 2022, the company had plans to roll out operations in 11 cities including Khulna, Barishal, Mymensingh, Rangpur and Cumilla.

But it stopped halfway, and then closed its Sylhet, Rajshahi and Gazipur operations earlier this year.

Chaldal's CEO Waseem Alim said the funding crunch resulted in the decision to forego expansion plans.

"This is the right time for expansion, but cash is like oxygen and you can't run fast when you are short of it," he said.

Chaldal has raised funds over eight rounds, with more than $18 million coming during the pandemic.

In September 2021, it closed its series C round, when big investors typically come on board attracted by the successful business model, strong customer base and revenue stream the start-up has established. Chaldal's series C round saw lukewarm interest, with just $17.2 million raised, while series B round had seen $4.5 million.

And Chaldal's fate seems to be the norm for the entire ecosystem now. 

Take ShopUp, for instance, which has raised more than $201 million from renowned investors like Valar Ventures, Prosus, Sequoia Capital, Flourish Ventures, Tiger Global, and many more.

In fact it raised $30 million this year, contributing to almost 64% of funds raised by Bangladeshi startups this year. But here's the catch: that $30 million was raised completely through debt financing, not venture capital funding. 

With only a month left for Q3 to end, Bangladesh's start-ups have raised $47 million so far, compared to $125 million last year ($114 million having been raised by the end of Q3 2022).

Shifting priorities

For venture capital firms to be interested in start-ups now, a quick path to scalability and burning through less cash in the process is paramount, said an industry insider who preferred to remain anonymous to speak candidly on the matter.

He went on to say that Bangladesh's start-up ecosystem has three main problems at the moment: The total addressable market is small, i.e., the problems being addressed are not large enough; the solutions being provided are also not far reaching enough; and poor leadership.

So success and scalability have become difficult to maintain.

Syed Javed Noor, deputy managing director at IDLC Finance, which operates a Tk45 crore venture capital fund, said the funding crunch was inevitable.

"That's because the start-ups and their VC investors have been chasing valuation and the top line instead of the bottom line," he explained.

Going forward, he said, it is the start-ups which can remain cash neutral that will survive and attract investments.

Chaldal's Waseem noted that one problem with Bangladesh's start-up ecosystem is that local investors do not value services, instead they value assets. 

"Think of bKash for example, the company has created huge value for the country. If bKash did not exist, that would be a huge loss in terms of service and convenience. But how much assets, in the traditional sense, does bKash have? The value of the company is the software architecture," he added.  

A bad year for start-ups

2023 has not been kind to start-ups in general. 

Global venture funding in the second quarter of 2023 fell 18% to $65 billion, according to Crunchbase — a 49% drop compared to the second quarter of last year, when startup investors spent $127 billion.

The first half of 2023 is down by similar proportions, with global funding having reached $144 billion — a 51% decline from the $293 billion invested in the first half of 2022. 

In Asia, funding to startups in the first half of this year dropped 50% from the previous year, i.e., from more than $73 billion in the first half of 2022 to only $36.3 billion for this year. 

Deal volume also slowed, dropping 40% from 5,402 deals in H1 2022 to only 3,237 for this year's first half, Crunchbase data shows.

But smaller ecosystems, like that of Bangladesh, have been hit harder more disproportionately than others, says Wasim. 

One big reason behind the drop in venture capital investments is that cheap capital has run out. Between 2009-2010 and 2022 was when the world had access to an unbroken stretch of liquidity and cheap capital, boosted by the US Federal Reserve setting low interest rates. 

Low rates led to capital flowing into more exotic investments, such as venture capital funds, which then grew in size and number. The influx of cash to investors resulted in a burst of funds for startups.

Investors set up their portfolios with higher allocation towards private equity and venture capital investments. And for these investors, the top-line was the goal.

While funding shrunk briefly during the pandemic, led by a boom in technology adoption, it grew again in 2021. 

In 2022 though, supply chain disruptions caused by the Russia-Ukraine war and high demand caused the market to correct itself. 

As the US Fed kept raising interest rates, to as far as a 22-year-high, access to cheap capital took a hit. Less risky assets, such as treasury bills, now provide higher returns, so riskier investments dried up.

"Questions such as 'Can this business scale up fast enough and reach profitability quick enough' were no longer on the backburner," said an industry insider.

So should start-ups focus on profits now? 

Rahat Ahmed, founding partner and CEO of Anchorless Bangladesh, an early stage venture fund focused on investing actively in Bangladesh, says there is nothing to worry about just yet. 

Asked whether poor performance of start-ups would affect foreign investment, Rahat said, "Not really. Investors know the type of risk they take when they invest in this asset class and in a very early stage market. In addition, the amount of capital they usually invest is a small portion of their portfolio.

"Let's be perfectly clear that having negative net profit is not an indication of the health or quality of a startup. It can be, but it is not by default," he said, citing Amazon's example, which was founded in 1994, got its Series A funding in 1996, but did not have a net profitable year until 2003.

The importance of profits for a start-up, he said, depends on what stage or size the company is at and who its investors are. 

Ahmed also noted that there is no average time period within which start ups need to reach the Series A or B stages since it depends on the country or industry the company is based in. 

"Theoretically, though, if a startup cannot figure out how to scale in three years, it is likely that it is time to shut the company down and move on. There is no shame in that because not everything is supposed to work. And whatever the founder learned from the previous start-up not working can be done better in their next venture," he explained.

For instance, Uber co-founders Garrett Camp and Travis Kalanick had failures before they came up with Uber, he added.

Waseem Alim said the problem lies in the fact that we are too dependent on foreign investments, and that is because Bangladeshi investors and banks do not understand the value of start-ups.

"The government needs to help in this regard if we wa nt to create a vibrant ecosystem," he added.