Start-ups emerging: Venture capital still shy

[Rashadul Islam]

Wikipedia describes venture capital as a type of private equity, a form of financing that is provided by firms or funds to small, early-stage and emerging firms that are deemed to have high growth potential, or which have demonstrated high growth. Although new in Bangladesh, it is expanding quickly after getting the regulatory framework as 'Alternative Investment' (AI). With it, the startup ecosystem of Bangladesh is getting a shape. A number of vibrant startups such as chaldal, pathao, sheba, hungry naki, doctorola, etc., have emerged.

2017 was a great year for the startup ecosystem of Bangladesh. Some notable investments came through Pathao, Sheba.xyz, Sindabad, Kiksha, Doctorola, etc. The government is also developing different infrastructures, providing support and creating awareness. Bangladesh continues its momentum of being one of the most vibrant landscapes for startups with the expansion of mobile and internet. Pathao received US$ 2.0 million from Gojeck, a ride-sharing company of Indonesia. One of the e-commerce companies received US$ 5.0 million dollars from a private equity firm. Doctorola received Tk 20 million. Sheba received an undisclosed amount from abroad.

Four companies were registered as alternative investment fund managers which made the total number of AI fund managers to 10. New funds are waiting to be registered with the Bangladesh Securities and Exchange Commission (BSEC) and launched in the market. The overall funding remained slow in 2017. The industry has seen an exit of a homegrown venture capitalist (EON Food) from investment. Promoter of EON Food purchased share from venture capitalist (VC), BD Venture Ltd. The government allowed tax exemption on the fund in the Finance Bill.

Venture capital is attracting attention of the policymakers. BUILD, a think-tank, arranged a policy dialogue where it presented a policy paper to the Bangladesh Bank on issues to be resolved to create conducive environment for venture capital. A roundtable discussion was held at Digital World on venture capital ecosystem of Bangladesh where Aminul Islam, chairman of Bangladesh Investment Development Authority (BIDA), and Abul Kalam Azad, coordinator, Sustainable Development Goals (SDGs) were present. The Venture Capital and Private Equity Association (VCPEAB) organised a roundtable discussion on venture capital where Abdul Mannan MP, state minister for finance and planning, the Chief Economist of Bangladesh Bank and Member, National Board of Revenue (NBR) were present.

MAJOR HURDLES OF 2017: The main challenge of 2017 was getting investors for the VC funds. Financial institutions, especially banks, have sufficient liquidity but they are reluctant to invest in these funds as it is perceived as a risky investment.  Both institutions and individual investors are in 'testing the water' phase instead of putting their money in any VC fund.  The number of potential and equally serious startups is also slim; investment is not as easy to get as it needs to be. The ecosystem is at its nascent stage. There is a lack of mentors, 'Angel investors' (angel investors invest in small startups or entrepreneurs. Often, angel investors are among an entrepreneur's family and friends and early stage investors to take the startups to the next level. GrameenPhone Accelerator programme has graduated 11 startups in two batches. But a couple of locally developed incubators and accelerator programmes is needed to have a mature ecosystem.

EXPECTATION FOR 2018: The government has given emphasis on creating Digital Bangladesh. It has an ambitious target of earning US$ 5.0 billion export by the year 2021. To achieve that, finance is to be ensured for the startups to flourish and grow.  Venture capital is the most suitable form of financing for start-ups. A few changes in policy should be made to create a conducive environment. Mass awareness has to be created among investors and entrepreneurs regarding venture capital. The government needs to give fiscal support to buy software from local companies. Internet has to be cheaper and made available across the country.

CHALLENGES OF 2018: There is a pattern in startup hubs in mature economies. Academia, VC and entrepreneur collaborate together to make things happen. Universities are knowledge centres; they do research on new aspects which entrepreneurs turn into commercial ventures and VCs come forward to finance. In our country, this collaboration is yet to be developed. Many young entrepreneurs are starting ventures without understanding what they want to do. They seldom do basic homework before launching a business. They sometime copy successful enterprises without calculating demand and supply and competition prevailing in the market. They may fail due to poor planning resulting in waste of money, time and energy.

Start-ups have now become a craze. The government is also trying to do many things which the private sector can and should do. This creates distortion in the market. The government should concentrate on policy support and create infrastructure. Data is scarce in Bangladesh. The government can provide quality and relevant data to entrepreneurs.

2018 is year for general election.  This is always a chaotic time. It affects business. Startups will not be safe either. Venture capitalists will also have to bear the heat. Naturally, investors will be cautious in investing. Their portfolio companies may face loss. Fund raising will not be easy as it requires peace of mind. However, IT-related business can avoid disruption as an entrepreneur can accomplish his/her job quietly from home. Many software developers serve international market; local disruption will affect them very little. Normally, start-ups struggle to survive. They don't have fallback cushion. Prolonged disruption can put a dent on many startups severely and even force them to close their business operation.  A peaceful election and stable political environment will enhance confidence of investors.

Hi-tech parks should be set up in different regions. Startups can use these facilities and benefit from the state-of-the-art technology.

The writer is the Managing Director of BD Venture Ltd and General Secretary, Venture Capital & Private Equity Association of Bangladesh.

shawkat_h@yahoo.com

Source:https://thefinancialexpress.com.bd/views/views/start-ups-emerging-venture-capital-still-shy-1517848223