Potential For Venture Capitalists In Bangladesh

LightCastle Analytics Wing
May 30, 2014
Potential For Venture Capitalists In Bangladesh

An increase in entrepreneurship is potentially the most positive trend in Bangladesh over the past decade. Entrepreneurship is crucial in the creation of small and medium enterprises, which increases economic activity, increases employment and overall transforms the economy. Moreover, it provides scope for innovation, as entrepreneurship is the best platform for creative individuals to implement their ideas. There are more and more people opting out of a conventional life with a concrete source of payment, and choosing the risky life of an entrepreneur. However, any business requires a feasible business model in order to strive in a competitive ecosystem, and sufficient capital is always the most important requirement in achieving that goal.
Venture Capital (VCs) financed businesses  have  higher risk profile but with the potential for high returns. The capital that is provided by Venture Capitalists is referred to as “Seed capital/ Series-A/Series-B”, since it helps in starting or growing the business. It is important to note the definition of “start-up” is not the same for all VCs. For some, it might be the very inception of a business, while for others; it may be the beginning of a new operation. If a venture capital firm finds a business proposal to be profitable, it can invest in that idea. However, time value of money is certainly considered by VCs. They will not invest unless the expected rate of return is greater than that of alternative sources of investment or the market interest rate. This investment comes in two forms:

  • The firm can either be a shareholder of the firm, and claim ownership over the company. This may or may not encompass the right of making decisions for the business.
  • The firm can also give convertible loans. These are debt securities that can later be converted to equity. Since stock valuation is quite difficult in the initial stages of a company, it makes sense to start off with a loan, and eventually convert that into stock.

Alternative sources of funds available to an entrepreneur are either difficult to attain, or are insufficient to support a competitive business model. Personal equity is generally insufficient, since personal savings are not substantial enough to start a company from scratch. Potential entrepreneurs tend to be young, and are even more unlikely to have cash stacked in their pillowcases. Friends and family members might be unwilling to invest as well. Mr. Affan Chowdhury, director of Richmond Hotel and Suites, claims that the decision to become an entrepreneur is generally not supported by social peers. Inevitably, they are also unlikely to be supportive in terms of investment. Lastly, banks loans are certainly not an option. Thanks to low credit ratings, banks are unwilling to give loans to new entrepreneurs. Even if a loan is provided, a high rate of interest is attached to it, which makes the loan extremely expensive- something a start-up business cannot afford. Therefore, the existence and support of venture capitalists can pioneer the start-up scene in Bangladesh.
Fortunately, the rise of entrepreneurship is complemented by the growth of the Venture Capital industry. For instance, BD Venture Limited and US-based DEFTA Partners signed a memorandum of understanding to co-finance business ventures in Bangladesh. There are currently several venture capital firms such as BD Venture Limited, Venture Investment Partners Bangladesh Limited (VIPB) which provide seed capital to entrepreneurs. BD Venture Limited is currently part owned by established Financial Institutions  such as Mutual Trust Bank limited, Lanka Bangla Finance Limited, MIDAS Financing limited etc. BD Ventures generally holds 10-49% of the shares of the companies it invests in. VIPB mainly promotes SME, especially those in rural areas. So far, it has invested in over 500 companies, most of which were SMEs.
There are a number of problems regarding VCs in Bangladesh. There is currently no regulations that secure the investment of Venture Capital firms. New businesses generally do not have property, equipment, or collateral to secure the investment. Thereby, the high risk of investment deters the establishment and active participation of Venture Capitalists. The structure of the financial system and quality of auditors are also mentioned as potential problems. Lastly, there is still an existing communication gap between Venture Capitalists and entrepreneurs which needs to be effectively bridged.
The business ecosystem of Bangladesh is transforming. The Prime Minister of Japan claims that “Bangladesh will be the next Japan in two decades riding on the back of the venture investment”. With the rise of entrepreneurship and Venture Capitalists, our dream of sustainable growth is gradually turning into a reality.

WRITTEN BY: LightCastle Analytics Wing

At LightCastle, we take a systemic and data-driven approach to create opportunities for growth and impact. We are an international management consulting firm which creates systemic and data-driven opportunities for growth and impact in emerging markets. By collaborating with development partners and leveraging the power of the private sector, we strive to boost economies, inspire businesses, and change lives at scale.

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