Bangladeshi startups are suffering a steep fall in funding compared to last year. For example, by the third quarter of 2022, they raised $125 million in total, but in 2023, only $47 million has been raised so far.
Out of the $47 million, $30 million was raised not as venture capital but as debt finance. This represents 64% of funds raised this year, that too by a single startup (ShopUp).
Traditionally, startups were valued for scalability, not profitability, in the first few years of their operation. For example, Amazon started operating in 1994 and received Series A funding in 1996 but did not earn a net profit until 2003. However, investors now look for startups that will scale as well as become profitable quickly. According to M Asif Rahman, founder of WPDeveloper, startups need to be profitable to sustain long-term.
So, what changed before and after 2022?
From 2009 to 2022, the central bank of the USA (the Federal Reserve, or the Fed) maintained a low interest rate, making investing more attractive than lending. So, large amounts of investments were available for companies to grab, and cash started flowing into alternative investments like venture capital. This was a good time for fundraising by startups.
Although investments shriveled temporarily during the coronavirus pandemic, the situation started improving for startups as life returned to normalcy. Then, when the Russia-Ukraine war broke out, global supply chains were disrupted, and inflation broke loose. The Fed has raised interest rates 11 times since early 2022 to battle inflation. It is currently at its highest in 22 years (at 5.5%).
Generally, central banks increase interest rates to control inflation. When interest rate rises, lending becomes attractive as lenders can earn more than before. So, investors sell off the equity they own in various companies and start lending their money instead of investing it. This leads to a scarcity of funding and a fall in companies’ stock prices. Investors may also opt for less risky or fixed-income investments in these situations, like treasury bills or bonds.
On the other hand, because companies face a higher cost of borrowing on top of a higher cost of operations due to inflation, their profit margins contract. This leads to negative sentiments among investors, resulting in a fall in investments. Overall, this is how rising interest rates dampen investments.
In addition to global issues, the Bangladeshi startup ecosystem is plagued by its own problems. These include poor leadership, a lack of entrepreneurial skills, the unwillingness of startups to step out of their comfort zones or explore global opportunities, and a lack of problem-solving. As per M Asif Rahman, founder of WPDeveloper, Bangladeshi startups tend to glamorize and celebrate successful fundraising. However, the funds raised are used inefficiently by some startups or used to cover losses by others.
According to Waseem Alim, CEO of Chaldal, local investors prefer investing in companies with a large amount assets, which tech-based startups do not have.
What should startups do now?
Startups should be proactive and focus on things they can change, like increasing their competitiveness. Founders may upskill themselves to become better entrepreneurs. They may take a long, hard look at their business plans and, if needed, revise them to cut losses or adapt to the changing business landscape. For example, if a startup cannot find a way to scale within three years, it should probably shut down- according to Rahat Ahmed, CEO and founding partner of the VC firm Anchorless Bangladesh.
Overall, the emphasis of startups should be on addressing their internal shortcomings to attract available investments.