Md.

Mohi Uddin
ID: 171-11-5509
Assignment Topic:

Venture Capital Industry in Bangladesh

Introduction: Venture Capital has emerged as a new method of financing. It has been playing
a significant role in the development of Bangladesh. It is a crucial component in the economic
system. It is the engine that drives the economy, being a platform where is capital provided by
firms of professionals who invest alongside management in young, rapidly growing or changing
companies that have the potential for high growth.

Venture Capital: Capital invested in a project in which there is a substantial element of risk,
typically a new or expanding business that is called venture capital. Venture capital is financing
that investors provide to startup companies and small businesses that are believed to have long-
term growth potential. Venture capital generally comes from well-off investors, investment
banks and any other financial institutions. However, it does not always take just a monetary form;
it can be provided in the form of technical or managerial expertise.
Venture capital is also a way in which the private and public sectors can construct an institution
that systematically creates business network for the new firms and industries, so that they can
progress and develop. This institution helps identify promising new firms and provide them with
finance, technical expertise, mentoring, marketing "know-how", and business models. Once
integrated into the business network, these firms are more likely to succeed, as they become
"nodes" in the search networks for designing and building products in their domain. However,
venture capitalists' decisions are often biased, exhibiting for instance overconfidence and illusion
of control, much like entrepreneurial decisions in general.

Venture Capital Financing: Venture capital financing is a type of financing by venture

capital. It is private equity capital provided as seed funding to early-stage, high-potential, growth
companies (startup companies) or more often it is after the seed funding round as a growth
funding round (also referred to as series A round). Venture capital is a form of equity financing
especially designed for funding high risk and high reward projects where banks and other
intermediaries are averse to or even prohibited from lending money. Venture capitalist may
provide the seed capital for unproven ideas, products and technology oriented or start up firms.
The venture capitalists may also invest in a firm that is unable to raise finance through the
conventional means.

Exploration of venture capital: Start-up firms is in high risk due to the great
uncertainty about returns, the lack of substantial tangible assets, the lack of expertise and the
lack of a track record in business operations. Consequently, these start-ups often seek capitalists
to be involved in their activities by offering revenue sharing in the form of equity in order to
obtain necessary funding and to benefit from the capitalists. To fulfill the financial need of start-
up firms Venture Capital financing has emerged in 20th century. One of the first steps toward a
professionally managed venture capital industry was the passage of the Small Business
Investment Act of 1958 in USA. A venture capital firm was formed namely "Small Business
Investment Companies" (SBICs) under Small Business Investment Act of 1958 in USA. During the
1960s and 1970s, venture capital firms focused their investment activity primarily on starting and
expanding companies. In 1960s the common form of private equity fund was emerged and still
in use today. During 1970 to 1980 the number of venture capital firms rapidly increased. The late
1990s were a boom time for venture capital, as firms on Sand Hill Road in Menlo Park and Silicon
Valley benefited from a huge surge of interest in the nascent Internet and other computer
technologies. Initial public offerings of stock for technology and other growth companies were in
abundance, and venture firms were reaping large returns.

Venture Capital in Bangladesh: Bangladesh’s Venture Capital scene is becoming

increasingly interesting. Previously there was no regulation regarding Private Equity and Venture
Capital financing in Bangladesh. Bangladesh Securities and Exchange Commission (BSEC) by a
notification on June 22, 2015 introduced a regulation. The rules called Bangladesh Securities and
Exchange Commission (Alternative Investment) Rules, 2015 (the Rules) became effective from
June 22, 2015. . The country has just got an alternative investment act and increasing number of
local and international Venture Capital firm are showing interest in Bangladesh market. Asian
tiger capital partner one of the first financial institutions in Bangladesh established in 2012
focusing private equity and venture capital. Dhaka has now more than a dozen venture capital
firms and new firms are joining the space at regular intervals.

Rules & regulations of venture capital in Bangladesh: Bangladesh Securities

and Exchange Commission (BSEC) issued the notification No. BSEC/CMRRCD/2015-
343/171/Admin/59 dated 22 June, 2015 introduced as alternative Investment Rules. The private
equity and venture capital firms will have to follow the Alternative Investment Rules to create
and manage the funds for equity financing. The fund managers, which will have to be registered
with the BSEC, will raise capital from eligible investors, who may be institutions, high-net-worth
individuals and foreign fund managers. The funds cannot be raised through public issue or initial
public offering; it can be raised only through private placement and it will not be listed or traded
on the stock exchanges like other mutual funds.

Some Venture Capital Firms/Institutional Investors in Bangladesh:

IPE Capital: One of the most active VCs in Dhaka having investment in Genex, Cogent
Bangladesh, BD Venture, Swisspro, and Smartkompare.

BD Venture Limited: One of the earliest VCs in the country having investment in startups like
Sustainable Power Limited, EON Foods Limited and Doctorola. The firm also announced a new
fund raising drive recently.

Bangladesh Venture Capital: Active in investing and has investment in 2/3 startups.
Razor Capital: Has investment in Jetechao, an event listing platform in Dhaka and few more
startups.

GP Accelerator: Country’s first accelerator program for early stage startups. The program
provides a seed investment of BDT 10 lakh for 10% equity and has already invested in 5 startups
that attended its first batch early this year.

500 Startups: The US based Accelerator has investment in Chaldal and also announced a new
fund for India, Bangladesh and Sri Lanka

Segnel Venture: one of the most active regional VCs having investment in Chaldal and
CoderTrust. Co-founder Hideki Fujita is quite active in Bangladesh startups space, often attends
local events and programs.

Mind Initiative: Investment wing of SSD Tech, Mind Initiative is one of the most active
investors in Dhaka having investment in Chorki and eCourier.

Fenox: Fenox has investment in Priyo.com, Handymama, shohoj.com and recently also started
its formal operations in Dhaka.

Brummer & Partners: Active in Dhaka’s investment scene with their Frontier Fund.
VIPB: Usually invest in loan mode and currently developing products for VC and also got the VC
license under Alternative investment act.

IFC: Has investment in BKash and few more and also provides loan at lower interest rate.
Features of Venture Capital:
“Venture capital combines the qualities of a banker, stock market investor and entrepreneur in
one.” The main features of venture capital can be summarised as follows:

I. High Risk Investment: Venture capital represents financial investment in a highly risky
project with the objective of earning a high rate of return.

ii. Equity Sharing: Venture capital financing is an actual or potential equity sharing firm
wherein the objective of venture capitalist is to make capital gain by selling the shares once the
firm becomes profitable.

iii. Long Term Investment: Venture capital financing is a long term investment. It generally
takes a long period to liquid the investment in securities made by the venture capitalists.

iv. Participation in Management: In addition to providing capital, venture capital funds take
an active interest in the management of the assisted firms. Thus, the approach of venture capital
firms is different from that of a traditional lender or banker. It is also different from that of a
ordinary stock market investor who merely trades in the shares of a company without
participating in their management.

v. Contribution to Society: It is different from the development capital provided by several

central and state level government bodies in that the profit objective is the motive behind the
financing. But venture capital projects generate employment, and balanced regional growth
indirectly due to setting up of successful new business.

vi. Lack of liquidity: A venture capital is not subject to repayment on demand as with an
overdraft or following a loan repayment schedule. The investment is realised only when the
company is sold or achieves a stock market listing. It is lost when the company goes into
liquidation.

Types of Venture Capitalists:

Generally, there are three types of organized or institutional venture capital funds-

i. Private capital firms: The primary institutional source of venture capital is a venture capital
firm venture capitalists take high risks by investing in an early stage company with little or no
history and they expect a higher return for their high-risk equity investments in the venture.

ii. Venture capital subsidiaries of companies: Venture capital subsidiaries of companies

are established by major companies such as commercial bank holding companies and other
financial institutions.
iii. Individual/sole ownership venture: Venture capital funds set up by angel investors,
that is, high network individual investors.

Modes of Finance by Venture Capitalists:

Venture capitalists provide funds for long-term in any of the following modes:

i. Equity/share: Most of the venture capital funds provide financial support to entrepreneurs
in the form of equity by financing 49% of the total equity. This is to ensure that the ownership
and overall control remains with the entrepreneur. Since there is a great uncertainty about the
generation of cash inflows in the initial years, equity financing is the safest mode of financing.

ii. Conditional loans: A conditional loan usually involves either no interest at all or a coupon
payment at nominal rate. In addition, a royalty at agreed rates is payable to the lender on the
sales turnover. As the units picks up in sales levels, the interest rate are increased and royalty
amounts are decreased.
iii. Convertible loans: The convertible loan is subordinate to all other loans, which may be
converted into equity if interest payments are not made within agreed time limit.

Areas of venture Capital Financing:

Different venture groups prefer different types of investments. Some give emphasis on seed
capital and early expansion while others focus on exit financing. Biotechnology, medical services,
communications, electronic components and companies seem to be attracting the most
attention from venture firms and receiving the most financing. Venture capital firms finance both
early and later stage investments to maintain a balance between risk and profitability. In
Bangladesh, Information technology sector has been attracting a lot of venture finance. Besides
media, health and pharmaceuticals, agribusiness and retailing are the other areas that are
favored by a lot of venture companies.

Stages of Venture Capital Financing:

Following are the stages of venture capital financing:
A. Early Stage Financing: This stage includes the following terms:
I. Seed Capital and Research and development Projects: Venture capitalists are more often
interested in providing seed finance i. e. making provision of very small amounts for finance
needed to turn into a business. Research and development activities are required to be
undertaken before a product is to be launched.
II. Start Ups: The most risky aspect of venture capital is the launch of a new business after the
Research and development activities are over. At this stage, the entrepreneur and his products
or services are as yet untried. The finance required usually falls short of his own resources.
III. Second Round Financing: It refers to the stage when product has already been launched in
the market but has not earned enough profits to attract new investors. Additional funds are
needed at this stage to meet the growing needs of business.
B. Later Stage Financing: Those established businesses which require additional financial support
but cannot raise capital through public issue approach venture capital funds for financing
expansion, buyouts and turnarounds or for development capital.
I. Development Capital: It refers to the financing of an enterprise which has overcome the highly
risky stage and has recorded profits but cannot go public, thus needs financial support for the
purchase of new equipment/plant, expansion of marketing and distributing facilities, launching
of product into new regions and so on.
II. Expansion Finance: Venture capitalists perceive low risk in ventures requiring finance for
expansion purposes either by growth implying bigger factory, large warehouse, new factories,
new products or new markets or through purchase of existing businesses.
III. Buy Outs: It refers to the transfer of management control by creating a separate business by
separating it from their existing owners. It may be of two types:

i. Management Buyouts (MBOs): In Management Buyouts (MBOs) venture capital institutions

provide funds to enable the current operating management/investors to acquire an existing
product line/business.
ii. Management Buying (MBIs): Management Buy-ins are funds provided to enable an outside
group of manager(s) to buy an existing company.
IV. Replacement Capital: Venture Capital another aspect of financing is to provide funds for the
purchase of existing shares of owners.
V. Turnarounds: It involves buying the control of a sick company which requires very specialised
skills. It may require rescheduling of all the company’s borrowings, change in management or
even a change in ownership.

Merits of venture Capital Financing:

 Venture capital financing create the opportunity to invest
the potential for large returns on investment. It is the way to expand business volume or business
concern.

Venture capital financing is the way to establish new line

of business by providing capital to the as seed funding to early-stage, high-potential growth
companies.

Venture capital financing can provide a start-up or

young business with a valuable source of guidance and consultation. This can help with a variety
of business decisions, including financial management and human resource management.
Making better decisions in these key areas can be vitally important as your business grows.

In a number of critical areas, including legal, tax and personnel

matters, a Venture Capital firm can provide active support, all the more important at a key stage
in the growth of a young company.

Venture capitalists are typically well connected in the business community. By

using those connections could have tremendous benefits.

Venture capital financing is the way to minimize risk by sharing equity capital
and management responsibility.

Demerits of venture Capital Financing:

Uncertainty is the main demerit of venture Capital Financing. It uses the fund
to the unproven business where profitability is time consuming and uncertain.

: When a business owner accepts venture capital, he is no longer the sole

owner of the business. Due to sharing equity the owner loss his full control over business.

Depending on the size of the Venture Capital firm’s stake in

your company, which could be more than 50%, you could lose management control. Essentially,
you could be giving up ownership of your own business.

: Due to new line of business and lack of expertise business

owner of the business firm that may leak the secrecy of business decisions.

Venture Capital financing is high risky due to start up seed financing and unproven
line of business.
Conclusion: Venture Capital financing is the potential area of financing for new idea, new
technology and new unproven line of business with uncertainty of profit. It is a platform to
explore capability and new line of business probability. By proper guidance and proper
government co-operation can make it the dominant sector of economy of Bangladesh.