Activating Venture Capital in Bangladesh

LightCastle Analytics Wing
January 26, 2020
Activating Venture Capital in Bangladesh

Venture capital is gradually spreading its roots all over the world facilitating startups. Although in Bangladesh these days, we do find a number of such enterprises, the progress is rather slow. In 2019, around US$15 million were invested in several start-ups in the country which is much lower than the previous year’s (2018) US$27 million.

On a positive note, however, in 2018 only US$2 million came from local sources, and the rest from overseas. Whereas, in 2019, US$6 million came from local sources. This shows a 200% growth in local investment.

The ICT ministry provided grants to around 40 ideas and startups. Chaldaal, a grocery e-commerce company, raised US$ 5.5 dollars from IFC and IDLC finance. This is a good sign as more financial institutions may come forward to finance start-ups if it succeeds.

Aavishkaar, an Impact Fund from India invested US$ 4.2 million in Sindabad, a B2B e-commerce. BD Venture invested in 4 start-ups namely Handy Mama, C-work, Gaze, and Beatles. They invested a second round in Esoshikhi, an edu tech, along with other Angel Investors.

The government has allocated Tk 1 billion in the budget for startups. However, the modalities of use of that fund are yet to be clarified. ICT Ministry’s effort to form a venture capital company has recently got the nod of the cabinet.

Bangladesh Securities & Exchange Commission (BSEC) registered two new Alternative Investment Fund Managers (AIFM), namely CAML and Constellation. The total number of AIFM became 17, out of which few will concentrate on private equity or impact fund. Two Alternative Investment Fund Managers, namely BD Venture and Lanka Bangla, launched their venture capital funds of Tk 500 million and 450 million respectively.

Want to learn more about Ecosystem & Investments?

See Our Service

Acceleration and Incubation

Mobile telecom company Robi revamped its Accelerator programme. They widened the horizon by accepting applications from anyone in the Robi payroll. They extended coverage all over Bangladesh. They received 2200+ applications. Out of that, 56 were shortlisted for pitching. Finally, 8 were awarded funds and incubation facilities. These programmes were broadcasted on television to create awareness and inspire people regarding the concept of entrepreneurship.

Grameenphone has reshaped the Accelerator programme as GP Accelerator 2.0 which has two parts: Pre-Accelerator and Accelerator. Pre-Accelerator is 8 week-long programme that provides training and mentorship to validate their idea and help to go to the market. The accelerator is a 4.5-month-long programme for the team to have a Minimum Viable Product (MVP). They get advice from local and foreign mentors, industry experts, and professionals. Grameen Phone received 1100+ applications from which 9 teams have been selected for Accelerator.

Bangladesh Angel Network arranged two events where twelve startups pitched, out of which three got funding from thirteen Angel Investors. Tiger IT in collaboration with MIT arranged a competition for start-ups, and they financed a few business ideas and took the winners to an international platform to present their ideas.

Major Hurdles

Fundraising, as usual, remains the major hurdle for startups as well as for VCs. Investors are reluctant to invest in startups. As a result, the newly licensed venture capital firms are struggling to collect funds. Such unwillingness to invest is caused by fear and lack of awareness regarding the venture capital ecosystem.

The venture capital and private equity association of Bangladesh (VCPEAB) requested the National Board of Revenue to consider venture capital funds as an allowable investment for a tax rebate, which has not happened.

Provident funds and gratuity funds may be allowed to be invested in Alternative Investment Funds. The Internal Resource Division exempted 2% stamp duty, which was to be paid while registering a venture capital fund as a trust.  Stamp duty on all startup funds needs to be waived.

Expectations Regarding Policy-level Reforms

Though it was mentioned in the Alternative Investment Rule that provident and pension funds can be invested in venture capital funds, other Acts and rules such Trust Act and Finance Act need to be changed to smoothen the investment process.

Globally, life insurance provides major funds to Alternative Investment Funds as both are long-term. But the eligible list of investments, under Insurance Act, does not include Alternative Investment Funds.

The government or the Bangladesh Bank can create a fund to act as a ‘fund of funds’ which will provide fund to venture capital funds to invest in startups.

In India, the Small Development Bank of India (SIDBI) acts as a fund of funds for different venture capital funds which are interested to invest in SMEs with a condition to match the fund.

If the government gives its fund to private venture capital funds, the government’s agenda like nurturing start-ups and creating employment can be fulfilled efficiently, and at the same time, venture capital in Bangladesh will get strong support.

Expectation and Challenges

Globally, nations that supported startups experienced a boost in their economy. In the era of the fourth industrial revolution, innovation and technological support are crucial for competing in international markets. Therefore, startups should be on the priority list of all.

Our government prioritizes it, but this should be reflected throughout all the levels of policy planning. Our entrepreneurs struggle in getting trade licenses, intellectual property right,s and other licenses and permits to do business.

Foreign investors are reluctant to invest in a business that doesn’t have all the legal documents. Foreign investors are also not confident about the hassle-free exit of their investments.

Regional hubs such as Singapore, and China have huge funds to invest, but we are not able to attract them to invest in our venture capital funds in Bangladesh. One of the reasons could be a lack of confidence — is Bangladesh a good place for investment?

We need to build a positive image of our country by creating examples of seamless transactions of foreign investment. Our local investors also lack awareness about venture capital investments. Foreign investment will transfer know-how and inspire local investors by setting examples of successful investments. We have to prepare our venture capital ecosystem to facilitate foreign investment in all respects.

Some of our startups have achieved global recognition, for example, Bkash, Pathao, Shohoz, Chaldaal,  Ajker Deal, etc. They received funds internationally. These enterprises are representing Bangladesh to the world as ambassadors. Hopefully, more such examples will arise in near future and play a crucial role in making Bangladesh a global investment destination.

Shawkat Hossain, Managing Partner of Velocity Asia and Director, Financial Inclusion and Investments at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected].

WRITTEN BY: LightCastle Analytics Wing

At LightCastle, we take a data-driven approach to create opportunities for growth and impact. We consult and collaborate with development partners, the public sector, and private organizations to promote inclusive economic growth that positively changes the lives of people at scale. Being a data-driven and transparent organization, we believe in democratizing knowledge and information among the stakeholders of the economy to drive inclusive growth.

For further clarifications, contact here: [email protected]

Want to collaborate with us?

Our experts can help you solve your unique challenges

Join Our Newsletter

Stay up-to-date with our Thought Leadership and Insights