Startups' tough time to continue in 2023, perhaps even beyond

If Bangladeshi startups felt 2022 was a bad year, then they are bracing for a gloomier period this year.

The leading online grocery platform Chaldal was growing at an annual rate of 60-70% last year. The firm was planning to expand its service area to several cities in the year's second half, alongside expediting its new FinTech venture, Chaldal Pay.

Then the crisis hit.

As the dollar became dearer, global investors also began exercising caution. The tech firms' market value started to plummet, forcing Chaldal on the backfoot.

The platform slowed its expansion plans and focused on sustaining the customer experience, said Chaldal Co-founder and CEO Waseem Alim.

"The second half of the year was flat for us as we had to spend carefully, while the consumers had a hard time because of the high inflation," said the tech entrepreneur.

This was a typical story for most startups, except a few that had secured funds to run their business for a year or two before mid-2022.

Startups that depend on technology to scale up exponentially play a ballgame that fears slowdown or stagnancy.

Venture capital's drying up after years-long robust flows has been a global issue and Bangladeshi firms are feeling the pinch of it, Alim added.

Declining investment flow

According to the LightCastle compilation of disclosed deals, Bangladeshi startups received $103 million in funding in 2022, which peaked at $415 million in 2021, including the $250 million Softbank investment in Bkash.

Alongside the three-fourth drop in investment amount, the number of investment deals dropped to 27 from 33, and most of the bigger ticket investments were found to have been concentrated in the year's first half.

Almost every big-ticket investment last year took place in the first half, while the second half was the story of smaller-ticket early-stage investments, primarily by local funding.

Globally, venture capital investments peaked at over $185 billion in the last quarter of 2021. Following consecutive quarterly declines, it came down to $81 billion in the July-September period last year, according to the Crunchbase compilation.

In continuation of the declining trend, global venture funding dropped to $22 billion in November, a 69% year-on-year and 19% month-on-month decline.

Bangladeshi startup entrepreneurs said funding was more crucial to keep growing when consumers were forced to tighten their belts due to high inflation and economic uncertainties in the second half. At the same time, the steering back of the  venture capital made their job harder.

For instance, Japanese Softbank, one of the top venture capital investors of the world, was looking for its next portfolio company here in Bangladesh after the FinTech giant and the country's lone unicorn Bkash.

Its representatives visited Dhaka in the first half of 2022, met the founders of two top-tier startups and flew back without any investment decision.

It was not surprising, especially when the investor was facing capital erosion in portfolio companies, and its own market capitalisation more than halved in a year since the pandemic boom.

The effects

Truck Lagbe, the trucking market automation leader, was preparing to invest in its technology for transportation related customer services so that third parties can be served for some added revenue.

"We simply halted the plan as soon as the global scenario started to turn upside down," said Truck Lagbe Founder & CEO Anayet Rashid.

He said that venture capital was also available before the Ukraine war, but now it seems dearer even if asked for crucial, rational expansions.

Many potential startups are facing challenging times nowadays due to a lack of funding. Many went dormant and are waiting for closure, said Shameem Ahsan, president of the Venture Capital and Private Equity Association of Bangladesh (VCPEAB).

The number of startups practically shutting would be at least 30-40, estimates Velocity Asia Limited Managing Director Shawkat Hossain, also a director of VCPEAB.

Worse days ahead

Shameem Ahsan, who himself is a technology entrepreneur and also an investor, fears that 2023 is going to be an even tighter year for startups.

"Startups are being advised to spend prudently so that they don't run out of cash in the middle of their journey," he said, adding that compromising growth to a fair extent makes sense at this point as it is better than premature death.

"As cheap dollars creating tech wealth so fast is not the case anymore, and the tighter global money market is being anticipated to last even beyond 2023, we better prepare for a worse year," he added.

Chaldal's Waseem Alim said the harsh environment is pushing firms like his to focus on efficiency for sustainability, which might ultimately prove to be a blessing in disguise.

Easily flowing venture capital often used to be burnt too fast for aggressive growth and more conservative measures might help strengthen a startup's financial base during the tough time.

Shameem Ahsan said startups that can survive the ongoing wave of adversities would emerge bigger than before in the massive market of Bangladesh.

"We must have our next unicorns after the storm," he said.

Chartered Financial Analyst Nazmul Karim, Bangladesh country manager of international alternative investor Aavishkaar Capital, said the funding environment would depend on the global financial market landscape in coming days and it looks a bit bleak.

Anayet Rashid said exchange rate volatility is also crucial to venture capital investors and recipients.

The global financial markets have only passed the first year of a tightening money market cycle.

Emergence of local investors and small ticket funding

Since the beginning of the Taka depreciation against the dollar in the middle of last year, foreign funds went conservative, with very few local investors and a few dedicated foreign funds helming the venture funding for the previous six months.

State-run venture capital Startup Bangladesh, Bangladesh-focused foreign venture fund Anchorless Bangladesh and the angel investment network Bangladesh Angels supported some local startups with small funding rounds.

"Startup Bangladesh's primary goal is to help create an inclusive innovation ecosystem where investors, startups, government, academia and other stakeholders can work together in the development of this industry," said Sami Ahmed, managing director of the Tk500 crore fund by the ICT ministry.

In 2023, the firm aims to support homegrown startups financially and strategically to scale up through the Shotoborshe Shoto Asha campaign.

"We are developing the National Startup Policy to support the startups for better growth and to encourage local investors to get into startup investments," added Sami Ahmed.

Even though it came at much smaller tickets, local funding helped a few startups march ahead.

Nazmul Karim said angel investors for local startups are mostly expatriate Bangladeshis who are successful tech professionals abroad. They are facing an uncertain time due to a tech hiring freeze and downsizing.

In 2022, the US tech industry fired over 90,000 workers.

Shameem Ahsan said state funding played a big role in the startup funding ecosystem in the US, India and other countries. The government here should equip Startup Bangladesh to make it bigger so that a robust local network of investors helps the potential industry continue winning.

Of the nearly 2,500 startups, more than 1,200 are actively operating in the country in a wide range of sectors – including fintech, healthcare, education, transportation, IT, e-commerce and logistics.

Local investors, contributing to over 10% of the total funding in 2019 and 2020, made nearly 8% of the 2022 total venture funding following the 2021 rock bottom of less than 1%.