Why do investors prefer start-ups in India, Pakistan over Bangladesh?

Bangladeshi start-ups raised $165 million in 2021, whereas Indian counterparts raised $38 billion and Pakistani ones raised more than $350 million

Bangladesh has been consistently outperforming neighbouring India and Pakistan on various economic indicators, and its start-up scene — propelled by the government’s Digital Bangladesh vision — is growing at a breakneck speed.   

And yet when it comes to raising funds from venture capitalists (VCs), the Bangladeshi start-up sector is dwarfed by those in neighbouring countries. 

Bangladesh received over $750 million in foreign investment for start-ups in the last decade, raising the highest $165 million in 2021.

In that same year, Indian start-ups raised $42 billion, according to a report by Orios Venture Partners. And in Pakistan, whose start-up sector is still at a rudimentary stage, the companies raised more than $350 million, according to Pakistani consultancy firm Invest2Innovate.  

According to industry experts and insiders, the narrative of Bangladesh in the global arena has been a major barrier to raising funds as most global investors do not know that Bangladesh has more to offer than just cheap labour and goods.

“Our storytelling needs to be better,” says Rahat Ahmed, the founder of Anchorless Bangladesh — a New York-based early-stage venture investment fund focused on advancing the Bangladeshi start-up ecosystem through access to global resources.

“As a country, we don’t often understand the criteria foreign investors look for in private investments, including deal structure and founder mentality.  However, it's definitely starting to get better,” he told Dhaka Tribune.

Apart from the lack of creating a compelling story for big ticket investors, including foreign angels and VCs who can literally invest their capital anywhere, there are several other bottlenecks. 

“Some of the lingering challenges include a lack of liquidity, including follow-on funds, a growing need for more product development and management expertise other than creating a compelling story and proposition,” Nirjhor Rahman, the CEO of Bangladesh Angels explains.

He pointed out that in neighbouring markets such as India and Pakistan, there is a flourishing industry of domestic venture capital, particularly in the early stages within the fundraising value chain, often affiliated with local corporations and family offices.  

However, despite Bangladeshi corporations and financial institutions turning towards start-ups for potential investment, they are still cutting relatively small — $250,000-500,000 — cheques.

“If we can create more domestic liquidity, more and more start-ups in Bangladesh can start scaling and get to Series A, B and C, and more foreign investors will start looking at Bangladeshi start-ups, because their minimum cheques are much larger and range in the millions of dollars,” Rahman said.

Rahat Ahmed also believes the lack of consistent and appropriately structured local funding is one of the single biggest weaknesses that has limited the development of the ecosystem.

“In comparison, our regional peers in India, Indonesia and Pakistan have benefitted from local corporations and angels playing a critical role in the early development and future funding of start-ups. Not only does Bangladesh need more such investors, but we also need them to invest in a manner so that founders can raise future rounds of funding abroad to scale their businesses,” he explained.

Bangladeshi tech start-ups have also been slacking in terms of fundraising compared to their neighbours because of certain policy bottlenecks, which unless resolved, will not attract foreign investors at a greater scale and with more significant sums. 

“First, we need to recognize that foreign investors will prefer indirect investments via holding entities in Singapore, or US, versus investing directly into a legal entity in Bangladesh. From that perspective, we need to allow Bangladeshi start-ups to legally create offshore entities to receive investments, with the goal of bringing them back to Bangladesh for operations,” Nirjhor Rahman said.  

“We also need to allow for cross-shareholding, where local investors should be able to own shares in those foreign holding entities alongside foreign investors, even if they invest money locally,” he added.  

Rahman also noted that there is still a lot of ambiguity and lack of case studies regarding successful repatriation of capital — be it dividends or share sales — in privately-held Bangladeshi companies. 

“Without that, foreigners will feel uneasy because they are not fully sure how their money will be returned,” he added. 

Local start-ups that pitch for foreign investment also face barriers that have been holding Bangladesh from keeping up with neighbours.

“When we are trying to look for foreign investors, the “sloth” regulatory process becomes a big issue that acts against the interest of investors,” a top official of MyCash told Dhaka Tribune. 

“Suppose we are planning to launch our product by June, but our papers aren't ready yet because the whole process is very slow. If we say we could not launch in time, our investors will naturally shy away from investing anything,” he added. 

Nazmul Arefin, the CEO of parenting services start-up ToguMogu, on the other hand, says that there is a lack of data, and such resources are very crucial in attracting foreign investors through an empirical projection that is realistic.

“When an investor looks for insights such as the size of a certain market, we hardly have any data to back our claim of its potential for growth. We cannot prove to them why our start-up has the potential to become a unicorn like bKash as we do not have enough data on unconventional or latent markets,” he said.

Bangladesh also needs to pick up pace on adapting the trend of reverse brain drain like India and Pakistan, which helped out their start-up ecosystems immensely. 

Bangladeshi alumni of global tech companies who have made an impact in the West or in the local scenario need to reconnect with the local community to help them flourish through mentorship and investment, industry insiders say.

This has been the case for start-up GreenGrocery.

Green Grocery received angel investments by a group of young investors, led by M Asif Rahman, founder of ARCom and WPDeveloper. 

Noor-E-Saba, co-founder and director of Marketing and Customer Service at GreenGrocery, said that unlike other similar start-ups that had faced several barriers in landing investments from foreign sources, it has been able to raise funds without much hassle as it was being backed by a veteran.