Financial Markets As I Know

Understandings on the financial market for startup businesses in Bangladesh & the current
dynamics and challenges of raising startup capital from Bangladesh.

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 Table of Contents

Contents Page

Introduction 4

Financial Sector in Bangladesh 4

Startup 5

Funds rising of startups 5

Venture Capital 6

Angel Investor 6

Challenges raising startup capital in Bangladesh 7

Conclusion 8-9

Reference 10

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Introduction:

In Bangladesh, the financial system is bank-based. Securities market has started developing, but
market of Non-Bank Financial Institutions (NBFIs) is a recent development. In such a scenario,
banks have been the single most important sources for both short-term and long-term funds for
the entrepreneurs.  However, banks generally handle known and proven clients, and commonly
ask for collaterals, guarantees from a company's directors, consider past performance, etc., to
assess credit worthiness. Approaches of banks and NBFIs do not match with the
capital/financing requirements and the growth of startups. For addressing the need and
capitalizing on the true potential of these enterprises, it is mainly about understanding, owning
and financing potentially innovative business ideas.

Financial Sector in Bangladesh

The financial sector in Bangladesh comprises the money and capital markets, insurance and
pensions, and microfinance. In addition to the Bangladesh Bank—the central bank of Bangladesh
— There are 6 state owned commercial banks (SOCBs), 3 specialized banks, 42 domestic private
commercial banks (PCBs), 9 foreign commercial banks, and 34 nonbank financial institutions
(NBFIs) as of 2018.

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Startup

A startup is any business venture that is starting from scratch and endeavoring to manufacture
something of significant worth. It is also a newly formed and fast-growing business structure
which is in the initial stage of its development and made to take care of an issue by conveying a
new product or service under conditions of extreme uncertainty that intends or aims to fulfill the
needs or a gap in a relevant marketplace. For example, when two friends, Travis Kalanick and
Garrett Camp, could not find taxi during rush hours, they came up with the concept of Uber.
Now it is one is the largest taxi company without owning a single car by them, where people can
share ride to go to a preferred destination (Stone, 2017).

Funds rising of startups

Raising capital is one of the biggest challenges that any startup can face. Fortunately, today,
there are numerous options to avail funding, both through public and private equity. In order to
distinguish how much the buyer is eager or willing to pay, a thorough valuation process is
conducted. However, the valuation process is not the same for private and public companies. A
public company needs to hire an underwriter, ordinarily an investment bank, for the valuation
process and to handle the sale. However, on the contrary, a private organization does not possess
the wider appeal to general investors. As such, they pitch themselves to accredited investors such
as angel investors or venture capitalists. But it does not hamper the ownership as it stays in the
hand of a few chosen shareholders. The rundown of proprietors commonly incorporates the
founders of the company, along with initial investors such as angel investors or venture
capitalists. Unlike public companies, private companies do not have the same requirements for
accounting standards, which makes reporting far easier, but in such a case, investors should have
the capacity to assess the firm’s value before investing in the intended firm.

These visionaries or entrepreneurs initially start their startups by raising capital through
bootstrapping or seed capital. This initial capital comes as funds from personal savings rather
than outside investors. Once they have established a business model for test operation, these
startups are then usually financed by angel investors, venture capitalists or through
crowdfunding.

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Venture Capital
Venture capital is financing institutions are primarily registered with the Registrar of Joint Stock
Companies (RJSC) as limited companies under the Companies Act 1994. Venture Capital
companies are needed to obtain individual registration from the Bangladesh Securities And
Exchange Commission (BSEC) for establishing the fund as per the Bangladesh Securities And
Exchange Commission (Alternative Investment) Rules, 2015. All venture capital companies are
enjoying government declared tax advantages. These rules are Compulsory for venture capital
companies from June 22, 2015. At present total 12 companies got registration for alternative
investment fund under the BSEC rules.

Some Venture Capital companies in Bangladesh

❖ Bangladesh Venture Capital Limited
❖ BD Venture Limited
❖ SEAF Bangladesh Ventures
❖ Maslin Capital Ltd
❖ Venture Investment Partners Bangladesh Ltd
❖ Faster Capital Bangladesh

Angel Investor

An angel investor is an individual who provides capital for a business start-up, usually in
exchange for convertible debt or ownership equity. Angel investors usually give support to start-
ups at the initial moments and when most investors are not prepared to back them.

The Angel market is growing rapidly in Bangladesh with presence of players such as
-Bangladesh Angels, Pegasus Tech Venture, SBK Tech Ventures, and Bangladesh Venture
Capital among others.

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Challenges raising startup capital in Bangladesh Running a new business is always full of
challenges.

Corporate legal structure:

Most startups are either a single owner or a company. If equity investment is not in line with this
legal structure, such undertaking must be registered as a limited company (private or public) with
the Registrar of Joint Stock Companies and Companies (RJSCF) to favor equity either as
ordinary or preferential shares. Entrepreneurs do not show very positive interest to discrete as
limited company with Registrar of Joint Stock Companies and Firms (RJSCF). They expect easy
loans and reimbursements instead of profit sharing with investors who monitor their business.

Lack of Operational & Financial Credibility:

The startups have aptitude to conceal operational efficiency. They also want to hide the operating
result shown in the financial statements from a true and fair view. They do not like to be clear to
lenders or investors and to regulators to eliminate investment and income tax repayments. At the
primary level or at the start - up or growth stage, when financial and technical support from
Venture Capitalists is essential, entrepreneurs must be in control of presenting the company's
financial statements for continuous growth in order to obtain support from venture capitalists.

Lack of entrepreneurial leadership:

Most donor companies in our country tend to involve a company that sees other companies in a
profitable business, despite their low business knowledge. It is sometimes investigated that
sponsors expressed their willingness to do business in the industry. Where investors make
investment or feel comfort to invest. Sponsorship and entrepreneurship differ completely.
Enterprise is an innovative approach to a new product and market. Sponsorship and
entrepreneurship are completely different from each other. The sponsors are strong and
sufficiently technical in entrepreneurial leadership. In most cases, the company can be shut down
or not succeed and the venture capitalists will not invest in equity.

Lack of source of fund of venture capitalists:

The creation of fund of venture capitalists is a big objection. Borrowing fund from banks and
financial institutions will not be fit for

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  higher cost of fund
 repayment mismatch because of immediate regular payment of installments of loan
contribute from banks
 Tremendous risk associated with SMEs and equity investments.
Private equity management against fees could be good fund building.

Non-compliance with laws and regulations by investee:

Investors may not be interested in investing in non - compliant organizations that document their
lack of integrity and sometimes risk it. The equity investors take full risk and reward of the
organization in order to keep their investment safe, they must comply with all applicable laws
and regulations. They also need to exercise a safe strategy.

Lack of Government focus:

Venture Capital has been familiar with the most enthusiastic sectors to confirm access to finance
and different government support. Government should have chosen these sectors to involve
corporate capitalists in finance.

Extreme political unrest:

Political disturbances are making the business environment more difficult and risky. This is
reaching an extreme stage that causes a serious obstacle. Start-up companies are not targeting
profits. Investors will not generally dare invest. The political stability exists to ensure a better
business environment in the country. Due to this political unrest, many FDIs shift to other
countries.

Lack of focus, get-rich-quick scheme driven marketing, me-too Products

In a country like Bangladesh, too many me-too competitors fail to survive after an initial idea
clicks in the market. In the case of startups, it is a common issue. Many startups of
Bangladesh failed due to substandard customer service, lack of focus, get-rich-quick scheme
driven marketing and poor product offerings.

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Conclusion
Bangladesh, with a target to become the next Asian tiger needs to maintain a stable GDP growth
with a healthy employment rate. Around 60 thousand students graduate each year and roughly
19% of them make it to a job. Additionally, the plummeting growth of Ready-made Garments
(RMG) sector is signaling major job loss for blue-collar workers. Expanding private sector
especially the SME/Startup business segment can be one of the most effective solutions for
keeping the economy thriving.
Startups in Bangladesh, despite of being the most potent engine for growth, face challenges in
three levels. Firstly, the absence of proper mentorships and access to funds make it difficult for
early stage startups to escalate. Through proper implementation of accelerator and incubator
programs and circumvention of capital needs through investors’ network, this challenge can be
addressed. Secondly, due to market malpractices (e.g. lobbying, using speed money, bad
payment terms), the financial cost rises manifold resulting in closing down of ventures at an
early stage.  Lastly, the older generation has a negative outlook towards entrepreneurship and
assumes that one only does business if one fails to get a respectable job.
Although the economy has been performing well compared to its regional peers, in terms of
innovation Bangladesh got the lowest rank which indicates the lack of investment in areas such
as – research and development, infrastructure, knowledge creation and diffusion among others.
The entire business environment needs to transform in a way that it facilitates the growth of
startups. Although our startup ecosystem has come a long way since its inception, it has a long
path ahead to finally come of age.

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Reference:

munaf, M. C. (2019, May 4). Opinion: 6 reasons why tech startups in Bangladesh continue to
struggle. Https://Www.Techinasia.Com/Talk/Opinion-Reason-Bangladesh-Tech-Startup-
Struggle. https://www.techinasia.com/talk/opinion-reason-bangladesh-tech-startup-
struggle

Ullah, Ahmed, Parvez, G. M. W. S. S. (2019). VALUATION OF STARTUP FIRMS: A CASE STUDY

ON PATHAO. VALUATION OF STARTUP FIRMS: A CASE STUDY ON PATHAO, 18–23.
https://www.researchgate.net/publication/330577654_VALUATION_OF_STARTUP_FIRMS_A
_CASE_STUDY_ON_PATHAO#read

Habib, S. M. A. (2019, April 8). Venture capital: Bangladesh perspective.

Https://Thefinancialexpress.Com.Bd. https://thefinancialexpress.com.bd/views/venture-
capital-bangladesh-perspective-1523197842

Alam Tanny, K. S. A. . a. n. d. . S. A. T. (2018, March 1). Challenges of the startup ecosystem.

Https://Www.Thedailystar.Net/. https://www.thedailystar.net/education-
employment/challenges-the-startup-ecosystem-1366561

LIGHTCASTLE ANALYTICS WING. (2020, January 2). Bangladesh’s Startup Ecosystem:

Coming of Age. Https://Www.Lightcastlebd.Com.
https://www.lightcastlebd.com/insights/2020/01/02/bangladeshs-startup-ecosystem-
coming-of-age