The State and Future Of Venture Capital In Bangladesh With Shawkat Hossain, Managing Director, BD Venture Limited
BD Venture Limited founding Managing Director Shawkat Hossain on the real reasons behind a lack of VC investments in Bangladesh, the state of funding in Dhaka and what determines funding dynamics, the myth of low valuation, the challenges for Venture capitalists in Dhaka, and what’s holding back Dhaka’s digital entrepreneurship ecosystem.
This was a much longer, so we had to break it down into two parts. This is the second and final part. You can find the first part here.
Future Startup
Lack of VC investment remains one of the obstacles towards the growth of the ecosystem in Dhaka. Why do you think VC investments are in short supply in Bangladesh?
Shawkat Hossain
The main reason for that lies in the number of active VC firms in the country. There hasn’t been a significant number of investments recently because there simply aren’t enough active local players.
At present, 11 organizations have the license as VC firms. But if you look at the industry, very few of them are actually active. That’s one.
There are other reasons as well. VC’s usually invest in the later stage of a company. For companies to go from one stage to another, you need to have a vibrant angel investment ecosystem that can support startups in the early stage which eventually makes it easier for VC to take part in the later stage funding. That’s not happening enough. Now, why not enough angel as well VC investments are not happening, it is a good question to explore.
Future Startup
Many startups complain that local VC firms often appear with stringent term-sheets and valuation of businesses. As a result of such conservative measurement, when a significant percentage of equity of a company gets diluted at the very first round of an investment and the entrepreneur is left with, say, a scant share, s/he is bound to be demotivated. The skin in the game for the founders reduces making the entire venture a risky affair. The outcome of such a deal does not bode well for either party. Many people tend to suggest that if you want to build big businesses, valuation should follow accordingly. What’s your opinion about it?
Shawkat Hossain
I don’t think this sort of complaints is unique to Bangladesh market. Even in mature markets, VC investors keep a conservative attitude during valuation. So, an expectation gap always looms around between the entrepreneur and the investor. I don’t think this is an intrinsically a bad thing.
This is a business and as a party, in the game, VCs will always try to get more for themselves. That should be the logical way of it.
In the context of Bangladesh, another reason for the expectation gap is a lack of business acumen on the part of the entrepreneurs. The future projections of income and expenditure they come up with often don’t match with the reality.
If we are to get the expected return on our investment, the supporting performance predictions definitely need to be authentic and realistic. Otherwise, how can we hope to keep our own performance up to the mark as VC firms? We also raise funds from investors and have to maintain accountability, do we not?
What I hope is that as the market matures, the gap reduces. In this business, both VC and entrepreneurs are interdependent partners. If entrepreneurs don’t succeed, VCs have no business. While there is a competitive dynamics in this relationship, it is purely because of business. The goal for both parties is same – making the business a success.
Future Startup
What challenges do you face as a venture capitalist? Or what are the major challenges for VCs in Dhaka?
Shawkat Hossain
Investment readiness of the potential companies is a concern.
For instance, recently we have been contemplating to invest in an enterprise that has an excellent performance record. They have also successfully integrated state-of-the-art technology in their business. But the problem was that they do not have proper account books.
As a result, we can’t readily invest in the business and have to wait till they pitch again with proper records. This is not a unique problem.
We have also discussed the problems with valuation earlier. Since the market is still in an embryonic stage, the expectation gap between the investors and the entrepreneurs persists.
Add to that, there is an absence of effective instruments as well. For example, we could make investments more conveniently and accurately if we could transact convertible bonds. In that way, it’d be easier to meet interests of both parties. But due to the lack of regulatory frameworks, it is not possible. Once we have these flexibilities, it should not be a problem.
What I hope is that as the market matures, the gap reduces. In this business, both VC and entrepreneurs are interdependent partners. If entrepreneurs don’t succeed, VCs have no business. While there is a competitive dynamics in this relationship, it is purely because of business. The goal for both parties is same – making the business a success.
Future Startup
What are the reasons you generally decline investment proposals?
Shawkat Hossain
Investment readiness which I was just describing is one. Many a company get rejected due to their weak market research. Take, for example, the ride-hailing/sharing market. After the success of Pathao, ride-sharing companies are springing up in hundreds, regardless of the scope of the market.
Contrarily, we have recently been pitched by a company that aims to expedite the process of locating an address in Dhaka. To do that, they have been physically visiting localities inside the capital and cataloging addresses. This type of serious efforts really pays off in the long run. We need more original businesses. There are too many ‘me-too’ businesses right now in the market.
Apart from the technical aspects, we need to be mindful of maintaining integrity as well. VC investment is especially dependent upon trust between the related stakeholders.
As an entrepreneur, if you do not feel honestly committed to your business, you should better not opt for venture capital. Since the industry is still nascent, it is particularly essential for participants to cultivate an environment of credibility. It’s not only about a single breach of trust; it’s about reliance among the industry insiders in order to build a strong, conducive ecosystem.
Future Startup
A recent white paper from Banglalink suggests that some of the key challenges for Bangladesh’s digital ecosystem have been a dearth of IT professionals, difficulty to raise seed investments and to investing in foreign markets. What is your opinion can be done to tackle these challenges?
Shawkat Hossain
First off, I do not think that startups need to think about international or regional markets from the beginning because the local market is pretty huge. If you consider the education sector, the market comprises of at least 20 million students. Although many students (in effect, their parents) have less spending capacity, the sheer number of pupils can ensure the sustainability of a business.
Secondly, there’s no denying that lack of IT professionals is a huge obstacle to technological advancement. In this respect, I think universities are failing to meet the industry demands. They are still following the old-fashioned curricula whereas the present skill-needs of the industry are totally different.
If the academia doesn’t pay heed to the real business world, we could have a serious crisis up ahead. Similarly, there should be well thought-out plans from the industry as well. A concerted effort can provide a solution to this stagnation.
As for the seed investment situation in Bangladesh, I think information gap is a more critical problem than the lack of enough angel investors. We have no formal network of angel investors here. The absence of such an organized community actually deters a potential early-stage company to meet a desirous investor.
Apart from the technical aspects, we need to be mindful of maintaining integrity as well. VC investment is especially dependent upon trust between the related stakeholders. As an entrepreneur, if you do not feel honestly committed to your business, you should better not opt for venture capital. Since the industry is still nascent, it is particularly essential for participants to cultivate an environment of credibility. It’s not only about a single breach of trust; it’s about reliance among the industry insiders in order to build a strong, conducive ecosystem.
Source:
https://futurestartup.com/2018/06/06/the-future-of-venture-capital-in-bangladesh-with-shawkat-hossain/
