Google’s two founders began their company with $100,000 from Andy Bechtolsheim, co-founder of Sun Microsystems. In August 1998, he saw that Sergey Brin and Larry Page, the two PhD students, and their innovative “start-up company" had potential. Andy Bechtolsheim was Google’s ‘angel investor’ -- a metaphor for a celestial being which comes to help a person in time of need.
Less than a year after receiving the angel investment, in August 1999 Sergey and Larry, received $25 million from venture capital firms Kleiner, Perkins, Caufield & Byers, and Sequoia Capital. And in August 2004, Google listed on the NASDAQ stock exchange at a valuation of $25 billion. The founders and many employees became instant millionaires.
The two PhD students were able to use their ingenuity and hard work to build a company that all of us use because they got the funding from the angel investor and the venture capitalists. And this story has been repeated many times in the history of Facebook, Uber, Dropbox, LinkedIn and the first generation of tech companies including Apple and Oracle.
This American experience has been studied, exported, copied, and emulated successfully in the UK, Israel, India, etc. Estonia surprised technology and finance professionals in 2003 when their homegrown Skype gained popularity. In 2005, eBay bought Skype for $2.5bn and began a start-up revolution in Estonia: Within two decades three other companies got billion-dollar valuation.
“I am pleased with Mustangs,” said a Silicon Valley based serial start-up founder and investor, by which he meant he is glad when his investment of $1-3m makes him 10-30x return as the initial one merges with or gets acquired by another successful company.
Promoting social benefit
I am not writing this article to extol unicorn companies. And moving away from the pure commercial return for investors, funding start-ups has now become an important way for Development Finance Institutions (DFIs) to promote entrepreneurship, employment, the UN sustainable development goals (SDGs) and specific goals such as, women’s financial independence, climate solutions, and socio-economic improvement of marginal groups.
This is referred to as “impact investment” -- the act of purposefully making investments that help achieve certain social and environmental benefits while generating financial returns. Various foundations, like the MacArthur Foundation, Gates Family Foundation, Russell Family Foundation are impact investors.
In nearly all traditional financial systems it is harder for women to access capital. Therefore, Gender Lense Investing (GLI) channels funds specifically into companies and organizations which have a positive impact on gender: Women in leadership, or women led firms in the supply chain, or products/services that provide skills and independence to women. The challenges of fundraising business women led the two female founders of Witchsy to create an imaginary third male founder in order to converse with male investors in 2017.
Therefore, mission driven investment or social venture capital have now been around for a decade. There are incubators and accelerator programs that provide support for social entrepreneurs who are starting or growing their business. An accelerator can provide a range of support such as: Help the entrepreneur sharpen her business proposition; guidance on how to quantify social impact; provide mentorship, networking opportunities, and access to capital.
Funding start-ups has now become an important way for Development Finance Institutions to promote entrepreneurship, employment, the UN SDGs and specific goals such as, women’s financial independence, climate solutions, and socio-economic improvement of marginal groups
Money maketh company
The name of the game is “unique ideas which become scalable value proposition” -- whether this is “for-profit” or “non-profit” or a combo of each (with correct accounting and disclosure) is a matter of the founder’s vision. And the absolute necessity is: Capital. I’m partial to equity capital but have no problem if you can structure debt in the right way for start-ups.
The very first person who had no land, no noble title nor huge might of fighters and only harboured an “exceptional and unique” idea for a product or service faced the fundamental problem of: “How do I get anyone with wealth to support me?”
The same age old situation is faced by many men and women in Bangladesh right now. Thankfully we have had a fantastic era of micro-credit since Dr Yunus established Grameen Bank, and many micro-credit programs flourished globally. After a difficult 15 years, we can once again celebrate the good of micro-credit in Bangladesh and continue to see institutional support for it.
However, the magnitude of funds needed for these types of start-ups and impact entities, macro-growth needs to come from one of the largest sources of global private capital: The global private markets were at $13 trillion as of June 30, 2023. Half of this colossal amount consists of private equity which includes buy-out funds, venture capital funds; the other half is private debt, and real estate. Half of this colossal amount goes to North American companies/entities, and Europe and Asia Pacific get relatively similar shares, and the remaining goes to the rest of the world. I would need to write a separate paper on how 2023 and recent 2024 have been difficult years for private fundraising compared to the hay days of 2021 and even 2022.
Honing on my topic of start-ups, as of Q3 2024 globally venture capital start-up investment has been around $216bn, which is in line with the global startup investment of $285bn in 2023- down from $462bn invested in 2022. The Q3 figure includes all the investment hype into AI -- AI got 25% of the global venture capital fund disbursed as of Q3 2024. Therefore, globally start-up companies, especially those not in Al are finding it harder to get investment.
So, it should not be a surprise that start-up companies whose business model is primarily in Bangladesh, a historically completely neglected start-up arena, are starving and not getting venture capital funding. Good business ideas, in fact great, efficient businesses operated by hard working Bangladeshi men and women, are not able to scale up or launch new product lines. Few of them qualify for bank loans and the present Governor of Bangladesh Bank is wisely handling the financial weaknesses in the banking sector; start-up funding is not his priority.
Good business ideas, in fact great, efficient businesses operated by hard working Bangladeshi men and women, are not able to scale up or launch new product lines
Whose priority should it be?
If our industrialists had the right dash of patriotism, they would be angel investors like Andy Bechtolsheim. A successful business person who created her own firm or substantially grew his family’s company, should be able to identify passionate entrepreneurs who hold the business plan and acumen for the coming era.
Most nations do not have the dynamism of the US which for decades have had a cadre of individuals who are both innovators and entrepreneurs with financial acumen and indomitable passion: the raw ingredients which resulted in the start-up sector and venture capital ecosystem. Therefore, many governments directly fund investment entities, venture capital firms or impact funds to encourage the growth of a start-up ecosystem within their nation.
This type of government intervention can have a downside. The worry is government backed venture capital firms may “choke out/outbid” private investors -- or make investment in sub-optimal start ups. A practical way to minimize such risks is for the government to set-up a “fund of funds” (FoF) and allow professional venture capital firms, foreign or domestic, to make all the investment decisions.
Bangladesh’s budget of nearly Tk8 trillion (about $68bn dollars) is already stretched and we have limited $25bn foreign currency reserve. The aim should be to bring global private capital of $50m to $100m dollars, and set up an FoF.
This “Bangladesh 2.0 FoF” can have certain principles, for example:
(a) The amount of investment by Bangladesh 2.0 FoF will be no more than 25% of the applicant venture capital firm’s own funds
(b) Impact funds focusing on environment or youth employment or GLI will be given first preference
(c) Good governance and strong performance monitoring would be mandatory for the recipient funds and the ultimate start-up companies
Nurturing and building an ecosystem of start-up companies with venture capital and impact funds gives Bangladesh a pathway to create value, and also to attain certain UN SDGs as we graduate from LDC status.
Lubna Kabir has over 25 years of experience leading US and international projects in first line of defense risk management, integrated internal audit, strategy, and financial analysis.
