Is startup fever dying in Bangladesh?

It has been a rollercoaster ride for Bangladeshi startups concerning investments over the past few years. There are highs and lows in most businesses, however, data from Lightcastle Partners reveals a fluctuating trend of investment in startups here which is nothing less than concerning.

Since the 'rise' of the startup ecosystem seemed truly to have begun in 2018, a $119 million fund was injected into deshi startups that year. Let the hard number talk - $51 million in 2020, and then a significant boost in post-Covid 2021 with a soaring $435 million investment, thanks largely to Japan's SoftBank investing $250 million in bKash.

However, this resurgence was short-lived. Funding fell to $125 million in 2022, $71 million in 2023, and hit a six-year low of $35 million in 2024. The over-used excuses of Covid-19 and the Ukraine war could hardly explain the slump by now.

The industry experts point out several factors behind the falling interest of investors in Bangladesh. These include rising interest rates in the United States, shifting the focus of investors from e-commerce, fintech and logistics to AI, rare occurrence of successful exits to weak leadership in startups.

Bangladesh lags behind most other South Asian countries in building a flourishing startup ecosystem. The Global Startup Ecosystem Index 2024 ranked Bangladesh 83rd out of 100 countries, well below India (19th), Pakistan (71st) and Sri Lanka (76th).

India's success comes from its massive consumer base, low internet costs and robust digital infrastructure. Even Pakistan and Sri Lanka, with relatively smaller economies, have been able to attract more consistent investment. They apparently have been successful in creating more investor-friendly environments. 

Bangladesh's struggles are evident in this regional context.

While the number of startups in Bangladesh has grown to over 1,200, most of these startups usually serve a small and fragmented audience in a limited market. High internet costs exacerbate this challenge.

Unlike India, where affordable internet access fueled the rise of e-commerce and edtech, Bangladesh's startups face significant hurdles in reaching potential customers. According to Fahim Ahmed, MD and CEO of Pathao, a "small addressable market largely due to high cost of internet access for consumers" is one of the reasons Bangladesh has a weak startup and tech ecosystem.  

However, as a whole in South Asia, the startups that attracted the most investment were primarily in sectors like e-commerce, e-learning, fintech and logistics.

"It's important to note that these types of startups didn't generate significant profits in this region. For instance, in India, companies like Byju's are now on the brink of bankruptcy. Much of the buzz around such businesses turned out to be overhyped, and the reality often didn't align with the expectations. 

Consequently, investors have started reducing their investments in these sectors," said Fahim Mashroor, MD of bdjobs.com, and former president of the Bangladesh Association of Software and Information Services (BASIS).

"At the same time, AI has generated significant enthusiasm, attracting a large portion of global investment. I believe the funds that previously flowed into sectors like ours have now shifted towards AI. However, these investments are largely concentrated in developed markets and, to some extent, in India. Unfortunately, countries like Bangladesh have not benefited from this surge in AI-related investments," he added.

Policy and regulatory challenges further deter investment. Bangladesh's non-convertible capital accounts make it difficult for foreign investors to repatriate profits, discouraging them from committing significant resources. 

Many startups are forced to register abroad to navigate these restrictions, a move that complicates the local investment landscape. Tax policies also lack incentives for investors, further undermining confidence in the sector.

The lack of successful exits is another major issue. In a developed startup ecosystem, successful events like IPOs or company buyouts show that a business has strong potential and encourage more people to invest. However, Bangladesh has yet to see a major liquidity event. 

While bKash, Pathao and ShopUp have attracted attention, the broader ecosystem remains unproven. 

"Without successful exits, it is challenging to build investor confidence," said Fahim Mashroor. Examples in Bangladesh are indeed rare where investors have managed successful exits.

Against this backdrop, 2024 was also a year of turbulence from Bangladesh's economic point of view. From yet another farcical election and then the ouster of a long-ruling autocracy in a mass uprising where hundreds of people were killed by police forces and Awami League cadres, the country went through a complete overhaul. 

Startups operating in such a volatile climate face added challenges in securing funding and scaling their operations. Most notably several days in July and August, when the fallen autocratic regime enforced nationwide internet blackout, it impacted many startups.

Compounded by the political upheaval and mentioned weaknesses within the startup ecosystem including smaller market size, high-cost internet, lower quality of local market products and poor founders and leadership team, "It is therefore not surprising that an unstable macroeconomic or political environment, as is the case currently, would further constrain investments into the sector," Fahim Ahmed said.

"The local startup ecosystem is still at a nascent stage, with no successful full exits which can improve investor confidence and attract more capital into the sector. To date, no startups have had a major liquidity event (ie a complete sale of the company to a financial or strategic buyer, or an IPO) that has provided a full and profitable exit to the investors. 

In fact, Pathao is one of the rare examples of Bangladeshi startups where one or more shareholders have had profitable partial exits," he added.