Nestled between India and China, Bangladesh has remained relatively obscure to the startup investment rush in Asia that is until recently. Riding on solid fundamentals the ecosystem is coming of age – with more than USD 275 million+ in foreign direct investment made in Startups over the last 7 years while creating more than 1.5 million+ in direct/indirect employment. The nation’s startup scenario is transforming rapidly and has come a long way, with miles to go. To enable the nation to innovate faster, create new jobs, develop technical skills, and realize the vision of Digital Bangladesh, the ICT Division, under the steadfast leadership of Honorable State Minister Mr. Zunaid Ahmad Palak has taken pioneering initiatives to ignite the startup ecosystem of Bangladesh.
With that in hindsight, Startup Bangladesh Limited– the first and only venture capital company owned by the Government of Bangladesh was formed in March 2020 with a committed fund of 500 crores ($65 million). Startup Bangladesh Limited recently launched its inaugural investment initiative “ShotoBorshe Shoto Asha” and declared to invest BDT 100 crore in 50 startups in 2021 as part of its efforts to mark the birth centenary of Bangabandhu Sheikh Mujibur Rahman and the Golden Jubilee of Bangladesh. The company announced its first series of investments worth BDT 15 crore ($1.75 million) to seven startups on 31st March 2021.
Post the announcement, Startup Bangladesh Limited very recently organized “Ask Us Anything: Getting Investment” – a webinar on 20th April 2021, to address the queries received from numerous startups and entrepreneurs across the country and provide further clarity on the overall investment and due diligence process.
Speaking on the occasion, Ms. Tina F. Jabeen; Managing DIrector & CEO, Startup Bangladesh Limited appreciated all the startups for the overwhelming responses and queries received so far and thanked everyone for joining. In response to many of the queries received during the session, she shared that Startup Bangladesh Limited is a natural progression of the previous startup and entrepreneurship related project under ICT Division. Under the Startup Bangladesh Campaign of ICT Division, IDEA Project and Startup Bangladesh Ltd. are two separate initiatives where IDEA primarily provides startup grants while on the other hand, Startup Bangladesh Limited is a Venture Capital and it will make equity investments in seed, early and growth stage startups with the option to co-invest, run as fund-of-funds, asset manager and provide other support to local startups and stakeholders. She assured that Startup Bangladesh Limited is committed to support startups not only through one time grant or investment rather support startups in their journey on different stages. She further added that this flagship venture capital fund is a monumental effort by the Government of Bangladesh and supported by our visionary leader Honorable Prime Minister Sheikh Hasina.
Mr Fayez Ahmed, Investment Manager of Startup Bangladesh Limited shared the major industry focus of the fund currently; including but not limited to – Fintech/Financial Services, Health-tech/ Healthcare, Enterprise Solutions/ Software, Entertainment & Lifestyle, E-commerce/Retail, Frontier Technology, Core Technologies/AI/Deep Tech, EdTech/Education, Food and Agri-tech/Agriculture, IoT, Logistics/Mobility, Emerging Technology Related Services.
Addressing further queries, he added that the fund is not only for commercially-focused business driven startups but also for social impact startups and enterprises.
During the presentation, Mr. Fayez Ahmed illustrated how the investment process works and talked everyone through the overall process in detail. To summarise,
- Startup Bangladesh Limited curates the startup information and develop the pipeline from the startup ecosystem. Various platforms contribute in the deal sourcing community that supports in collecting the data alongside its investment portfolio team and other stakeholders from the ecosystem (i.e. iDEA, Bangladesh Startup Consortium, BD Angels, Grameenphone Accelerator, Anchorless Bangladesh, IDLC Venture Fund, R Ventures, Better Stories, Biniyog Briddhi, LightCastle Partners, UNCDF, UNDP, ESCAP amongst others). Hence, there is no application methodology and the pipeline is curated from the ecosystem.
- Initial screening is completed by the portfolio and investment teams based on the criteria and available information. After the primary screening, the shortlisted startups are presented to the Investment Selection Team for further recommendations.
- The Investment Selection Committee provides a recommendation for the eligible startups and the Board of Directors gives the final approval for an investment. Once approved, expression of interest is shared with the startups and due diligence process commences.
- Subject to sound and satisfactory completion of the due diligence process, the investment terms and agreement are signed, and then the investment is given in two or more tranches.
At the end of the presentation, Mr Fayez Ahmed led a panel discussion session with two very important stakeholder and strategic partners of Startup Bangladesh Limited. Ms. Anita Ghazi Rahman, Founder, and CEO, The Legal Circle and Mr. Bijon Islam, Co-founder & CEO, LightCastle Partners join the panel discussion to share more indepth knowledge on the due diligence process.
During the moderated discussion, Ms. Anita Ghazi Rahman took the audience through the legal due diligence process; depicting the below steps:
1. A consolidated due diligence checklist is shared with the investee/approved startup. When the startup gets the checklist, they should collect and prepare all the papers and upload them in the data room. If some documents are not provided or missing, the investment process might get delayed.
2. Once all the documents are received, due diligence of startups (Legal, Financial & Tax) will begin. Upon completion, a due diligence report is shared with Startup Bangladesh Limited with summary. All the regulatory and compliance items are written to ensure those are completed, no file is pending, or flag if any Tax/VAT claim or other item are open.
3. Negotiation of terms of investment sheets are prepared and sent according to the type and stage of the startups.
4. Once the due diligence seems appropriate, the Terms Sheet is closed.
5. Upon satisfactory completion of all the due diligence process, the negotiation and closing of the transaction documents are done. Transaction documents mainly refer to the investment agreements and shareholders agreements. If the company is in the growth stage, it might need to execute few other documents. In this step, the negotiation is elongated depending on the stage of the startup. Two or more negotiations can be required.
6. If all the conditions are fulfilled, the investee and Startup Bangladesh Limited will sign the agreement and the investment will be progressed. dis
7. Generally, while signing the investment agreement, the amount for tranche-1 is disbursed. Some milestones or performance matrix are prepared and pre-agreed by both parties subject to which the next tranches of investment are made.
Responding to a question about the key legal requirements for a startup while planning to receive for an investment, Ms Anita Ghazi Rahman shared that a startup needs to be registered as a company. She also mentioned that documents such as TIN, Trade Licence, VAT/Tax documents, special licence (for logistics/mobility startups etc.) are required to satisfy the due diligence process. She emphasized that startups should also maintain the minimum compliances such as at least 4 board meetings in a year, AGM at the year end, audit of loss-profit/financial statements, status of any stakeholder’s exit, etc. She additionally advised every startup to keep an extra budget and hire a legal expert to deal with all the issues so that they can be more investment ready for any interested investors.
While talking about the business due diligence, Mr. Bijon Islam talked about the business valuation, and the factors that the VC firm considers while selecting the startups for the investments.
He illustrated the 5 factors model of RomeenSheth that provides some insights on what increases the chances of getting early-stage funding.
He added that on a broader level, from an investment firm/ investor’s point of view five factors are primarily considered while looking into a startup for funding: -,
- Problem: If the problem is well defined.
- Solution: If the solution is strong enough.
- Market: If the market size sufficient/ if the market is ready
- Business: If the business model is robust enough/well explained
- Team: If they have the right team/workforce
Along with these five factors, impact assessment of the startup is also done to verify if it has a substantial impact on the market/community. When startups are looking for early-stage funding, they must pay attention to these factors.
For the growth stage startups, along with these key factors, few other elements like track record, existing funding history, future plans, contribution margin, degree of improvement, reduction of total costing, and customer acquisition cost, customer lifetime value etc. are taken into account. Startup Bangladesh Limited has a sectoral focus on Impact-Enterprises. If the impact of the startup is well-explained and impact measurement tools and indicators are well-defined, it will definitely increase the chance of getting funded.
He further discussed the business valuation model for a company. According to him, some indicators are considered for the business valuation such as how much money the startup going to need to run the business for 12-18 months, how the founding team is, the valuation in the financial projection (DCF), the last round valuation, previous KPIs, current KPIs, the estimation in the rise of KPIs, proper justification and explanations of KPIs, the degree of dilution of the entrepreneur, etc. He finally added that there is no linear process but these indicators play a crucial role in current business valuation.
The session was ended with a thank you note.
To learn more about Startup Bangladesh Limited please visit startupbangladesh.vc and follow the social media pages of the company.