Ecosystem Deep Dive #22: Bangladesh - Asia's goldmine

Suffering from severe under-coverage in international media, Bangladesh's economy has quietly become one of the most impressive growth stories of this decade.

Timothy Motte

Apr 5, 2022

Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!

Untapped & underestimated

Bangladesh suffers from a damaged international image; not only do most people associate it with poverty and natural disasters, but many fail to grasp the sheer demographic powerhouse the country represents. A country approximately the size of Michigan, Bangladesh counts a population of 164 million, making it the 8th most populated country in the world.

Formerly known as East Pakistan, the country gained independence in 1971, following a period of violent internal conflict fought against the ruling Pakistani military. Since then, the country has embarked on a blazingly rapid growth path. Average GDP per capita growth has been 5.8% from 1994 to 2021, the country is set to graduate from its LDC (Least Developed Country) status by 2024, and its Human Capital Index is now higher than the South Asian average. This sustained GDP growth is due to a multitude of factors, with the local garment industry and remittances sent by Bangladeshis abroad playing a large part. Interestingly, Bangladesh has either caught up or overtaken India on a number of socio-economic indicators, although India’s start-up ecosystem is miles ahead of Bangladesh’s.

Furthermore, Bangladesh has been a global pioneer in poverty alleviation and women empowerment initiatives, exemplified by Muhammad Yunus’ Grameen Bank and BRAC, one of the world’s largest NGO’s.

Similar to many other Southeast Asian countries, Bangladesh has seen a meteoric rise in the adoption of digital technology, which is rapidly permeating all aspects of life. Bangladesh has the second largest global pool of online workers in the world, and the country’s demographic makeup will seemingly only accelerate this trend.

“Bangladesh has a tech adaptable young population, with 50% of them under 35 years old. The country hosts 164 million people ( 8th largest in the world) with high density (1200 people/Sq Km). The middle class is growing at 10 % per annum and will reach 34 million by 2025. The country enjoys 98% mobile phone connection, 62 % internet penetration, and 102 million+ people on internet. The pandemic has also accelerated the use of ICT technology, including digital commerce, education, healthcare, agriculture” - LightCastle Partners

Birth of the Bangladeshi start-up ecosystem

Compared to other countries such as Estonia or Romania, who’s ecosystem was kickstarted by the very first generation of tech entrepreneurs in the 90’s, Bangladesh’s start-up ecosystem is only slightly over a decade old. The ecosystem’s first true catalyst came in the form of bKash, a mobile financial service funded by multiple international organizations and foundations.

Building off that, a number of successful Bangladeshi start-ups have emerged. Being a country with high population density, most of the very successful start-ups in Bangladesh today are either fintechs or operating in “low-hanging fruit” areas such as ride-hailing, food-delivery, or e-commerce. Similar trends exist in countries such as Egypt, Indonesia and Pakistan.

Today some of the most renown names in the ecosystem include (a non-exhaustive list):

ShopUp: Bangladesh’s largest full-stack B2B commerce platform for small businesses (basically digitizing SME’s). They’ve raised the biggest round ever for a Bangladeshi start-up, raking in a $75M Series B, led by Peter Thiel’s Valar Ventures.
Pathao: A super-app platform with services in ride-sharing, logistics, e-commerce, food delivery, payments, BNPL.
Nagad: A direct competitor to bKash, Nagad has the particularity of being attached to the Ministry of Post and Telecommunications, as the company acts as the financial arm of the Bangladesh Post Office.
Chaldal: An online platform for grocery and delivery based in Dhaka, Bangladesh. The company has raised more than $24M to date.
Bongo: The first and biggest streaming video-on-demand service in Bangladesh.

As the ecosystem develops and matures, start-up diversity is increasing as entrepreneurs attack new problems and serve new segments of the population. For example, the edtech sector has been seeing exciting developments, powered by Shikho’s $4M seed round and 10 Minute School raising $2M from Sequoia India.

Today, the ecosystem is mostly clustered in the country’s large urban centers such as Dhaka, Chattogram and Sylhet (although Dhaka largely dominates). One of the current ecosystem’s challenges is how to bring start-up innovation to other, more underserved regions and how to increase collaboration between different actors.

In terms of local start-up incubators, local actors include Grameephone, Banglalink, R-Ventures and NSU Start-Ups Next.

Funding

An overwhelming majority of the country’s start-up funding is foreign (98% in 2021), and takes the form of either VC (Valar Ventures), corporate (Indonesia’s Gojek) or philanthropic (Bill&Melinda Gates Foundation).

A local investor scene is developing, led by initiatives such as Bangladesh Angels, IDLC VC Fund I and Anchorless Bangladesh. The main difficulty with kickstarting a local investment scene resides in the unfamiliarity local institutional investors have towards the start-up asset class. This lack of local LP’s makes the development of locally-powered VC’s complicated.

“We need local financial institutions to expose a tiny portion of their enormous balance sheets to the startup sector through venture debt and venture equity.” - Nirjhor Rahman - CEO Bangladesh Angels Network

As with many other emerging market ecosystem, 2021 was a breakthrough year for Bangladeshi VC funding, as the country’s start-up raised $166M (not including bKash’s $250M round) quadrupling 2020 numbers. Some of the largest fundraises in 2021 went to ShopUp, PaperFly, Chaldal, Frontier Nutrition and Praava Health.

Unsurprisingly, fintech leads the charge followed by ride-sharing and logistics start-ups. However, pandemic-induced digital adoption is making digital innovation viable in new sectors, such as healthcare and education.

The government’s role

Much of the Bangladeshi government’s supports for its national start-ups is engulfed in the wider Digital Bangladesh 2021 strategy, a roadmap aimed at digitizing its public services as well as using technology for poverty alleviation and anti-corruption measures.

A couple years ago, the government passed the seminal Alternative Investment Act, thereby creating the legal framework for local VC’s to form and operate. However, critics point out the 35% tax rate on the management fees and carry local VC’s receive, disincentivizing many new fund managers to enter the industry.

In a move to bolster exit opportunities for early-stage investors, the BSEC (Bangladesh’s version of the SEC) has allowed small-cap companies to list on the stock exchange, a similar move recently carried out by Moroccan financial authorities.

Recently, the most notable government initiative in the start-up realm has been the creation of Start-Up Bangladesh Limited, a government-backed VC with a mandate to invest into the best Bangladeshi start-ups. This is a bit different than a traditional “fund of funds” launched in countries such as Tunisia, whereby the government funds the creation of new, independent local VC’s instead of acting as a VC itself. In its first series of investment, Start-Up Bangladesh deployed $1.75M in some of the best local start-ups such as Pathao and Chaldal.

Ecosystem strengths

The main strengths of Bangladesh’s start-up ecosystems lies in its demographic makeup. Indeed, the country benefit from a so-called “density dividend”, whereby the very high population density enables for quick scaling and adoption of new digital solutions (a situation comparable to Cairo for example). Bangladesh actually has the highest GDP per square mile in Asia, and counts around 107 million mobile internet users. The rapid growth of the middle class, combined with the dire need for digitalization in antiquated sectors such as financial services, logistics and education provide a breeding ground for innovative start-ups.

Digital connectivity combined with a young population fostering global ambitions also contributes to the constant growth of the country’s digital talent pool.

“We have an enormous pool of young people who are proficient in English, tech-savvy and hungry for opportunities, as shown by our massive freelancing population. They include developers, content writers, graphic designers, data entry specialists, image labelers/ annotators and more.” - Nirjhor Rahman - CEO Bangladesh Angels Network

The country’s IT diaspora (I make the “IT” distinction because other parts of the Bangladeshi diasporas include migrant workers in the GCC) also enjoys a good international reputation and could be crucial in growing the local start-up ecosystem, following an India-type pattern.

Ecosystem weaknesses

Bangladesh faces very similar problems to other emerging market ecosystems, starting with outdated and overly complex business procedures. Today, it is standard for the best Bangladeshi start-ups to raise money using a foreign entity, as Bangladesh’s business environment is not up to date on matters such as business registration, stock options, IP protection, investor taxation and so-forth.

The country’s business legislation fails to include start-up friendly investment tools such as the American SAFE, which free up early-stage investment by occulting the need for company valuations. All of these factors contribute to the acutely meager levels of local start-up investment.

The country’s also faces a severe branding problem. Indeed, international media tends to focus on “stereotypical” views of Bangladesh, with a heavy emphasis on the garment industry and natural disasters. This is a massive burden for local founders, who end up having to pitch both their company and their country when trying to raise funds. Bangladesh also has a tricky geographic positioning, placing it outside of a lot of investment mandates:

“When it comes to traditional investment mandates, that’s unfortunately a bit of a glitch: MENA looks at Pakistan as their next door neighbor, with India having its own robust investment environment. Southeast Asia usually stops at Myanmar since Bangladesh is considered South Asian. This has left the country out of many mandates ” - Rahat Ahmed, founder of Anchorless Bangladesh

Bangladesh Angels meeting (image source)

Conclusion

Similar to Egypt and Pakistan, Bangladesh is blessed with very favorable demographic conditions, including high population density, digitally-native youth, and a true need for digital disruption. It is now up to local authorities and local investors to step up and enable the flourishing of a sector that has already made its mark on almost all aspects of Bangladesh’s economy.