A Drop of Water Against a Tsunami

The Schadenfreude Around Startup Funding Needs Perspective

Multiple people forwarded an article regarding the down market for startup funding in Bangladesh.  From a high of $432M in 2021, the year to date funding has “only” been $47M.  There seems to be, at least in some social media circles, gleeful delight and “I told you so’s” regarding the downturn, with unfounded rumors and hearsay regarding the impending demise of prominent startup companies. The comeuppance is well-deserved, so it goes, because these cavalier founders never bothered to be profitable and spend their fundraised money wisely.  I still remember hosting a Q&A session with a trade association on zoom during the height of the pandemic.  Someone shouted, “How come bkash [Bangladesh’s first and so far only unicorn] is still losing money after spending a billion dollars?” Never mind that bkash never raised anything close to a billion dollars. I think there are a lot of popular misconceptions regarding funding in the startup sector, like the one above.  Some perspective is in order, and I will try to give mine, just as Rahat and others are also giving theirs.

Fact #1: The entire startup sector raised and invested less than $1B in the last 10 years. In comparison, the banking sector is losing $11B in the past year alone via non-performing loans that have little to no chance of recovery. 

Startups capture a lot of the popular imagination, but the amount of money raised by startup companies in the last decade, since the ecosystem began in earnest, is a tiny fraction compared to the amount of money lost every year through the banking sector in Bangladesh. It’s like comparing a drop of water against a tsunami.

I’m not privy to the true health and state of the balance sheets of the largest companies in Bangladesh, but the fact that 8% of bank loans, which overwhelmingly go to corporates and large businesses, is officially classified as non-performing is indicative of a corporate sector that’s overstretched and struggling to eke out profits. And this is just the tip of the iceberg - it’s in stakeholders’ best interest to obfuscate the true extent to which companies, assets and even entire industries are distressed. I’d even say that some household names would probably be bankrupt today if it weren’t for perpetually revolving loans from banks.  That’s exactly what happened to some of them.

These bank loans, with implicit and explicit guarantees from the state, through never-ending bank recapitalizations and other mechanisms, subsidize bloated payrolls, over expansion into unproductive sectors and copycat businesses with too much competition and too little return on capital and crowd out other entrants without access to bank funding. Like with most things in life, the pareto principle probably applies to the largest conglomerates.  Though they may have dozens and potentially hundreds of subsidiaries, in reality only a few primary, legacy businesses make money, and even then, I’d be curious what would happen if parent groups lost the spigot of bank financing.  Of course, that’s unlikely when parent groups are shareholders and hold directorships in banks. This is not a Bangladesh phenomenon. This happens throughout economies with little to no antitrust enforcement. 

The ordinary, middle class taxpayer pays the price in multiple ways - direct and indirect - for non-performing loans, or NPLs. Their precious tax dollars as well as savings in bank deposits are used to subsidize well-connected business people instead of towards productive new infrastructure that could actually benefit all of the country. When these non-performing loans are siphoned off outside the country (and there’s a high chance this is the case in many instances) they are not being reinvested within Bangladesh to grow the economy.  Forever deficits and government money-printing adds to inflation, eroding purchasing power. Strained bank balance sheets make banks reluctant to lend to consumers, entrepreneurs and small businesses, limiting competition, innovation and consumer choice. 

The NPL phenomenon is almost taken as a given, even as Bangladesh has amassed a volume of non-performing bank loans that is only 2nd to Sri Lanka in South Asia. We know what happened there, especially to the middle class. So the tsunami is coming ever closer ashore, yet we are obsessed with a drop of water.

What has that drop of water achieved for the middle class, particularly in urban areas, and in transforming the economy? The average urban Bangladeshi, at least in Dhaka and increasingly elsewhere, wakes up today and orders a pathao bike to go to work, or can use Jatri if he’s commuting via bus. His employer might provide access to Shuttle. While at work, he can order groceries to be delivered to his home via Chaldal.  He can schedule at-home tests and medicine delivery for his elderly parents through amarlab and arogga. He can browse and compare weekend packages for his family and sign up through gozayaan or Sharetrip, or shop online for his spouse on Shajgoj. He might invest some of his spare savings with ifarmer. When his ecommerce orders come, they might be delivered via RedX, Paperfly or eCourier and he can choose cash on delivery or bkash.

We know startups have created jobs and economic value. A contribution that’s taken for granted is how they’ve expanded consumer choice and elevated expectations. Rewind the clock to the beginning of the last decade. Most if not all of the digital services that are now mainstays in the consumer economy did not exist.  Would they have been created by established business groups instead?  Compared to the average startup founder, those groups had every available opportunity, but they didn’t or couldn’t take advantage. 

These startup companies were often started by those who came back to the country and had to scrape and struggle to raise capital, through their own networks, putting their hard-earned reputations and careers on the line.  Many founders I know running the most prominent startups come from middle class backgrounds, and were inspired by challenges in their own or their families’ lives to solve problems through technology.  Almost to a person, they are trying their absolute hardest to create new business models and markets. Most often, their entire net worth and savings are tied to their startups, and they usually do not have access to massive balance sheets of conglomerates or banks backing them.  I know founders who had to sell their cars to put money into their businesses during times of cash crunch. Yet we hold founders' feet to the fire because when they raise money from investors they might invest some of that money to build offices and offer above market rates to attract talent, which often comes from the corporate sector and expects amenities and perks. 

I will never say that innovation is the sole domain of the startup sector. Corporates are just as capable, and often do create innovation that puts Bangladesh on the map. But the non-performing loans, which are overwhelmingly going to well-connected businesses, are actively disincentivizing creative destruction by making it easier to hide and perpetuate mistakes within balance sheets. Startups and their founders never had that luxury.  When they make mistakes, they cannot raise more capital, and their companies die. 

Fact #2: Bangladesh’s startup funding per capita is only a fraction of peers’ economies.  Bangladeshi founders therefore never had the luxury of being able to overspend. 

Despite having a higher per capita income than India or Pakistan, Bangladesh has been unable to raise anything close to what those countries’ startup ecosystems have raised on a per capita basis. For Pakistan, venture funding was $1.60 per person in 2022, while it was $30 in neighboring India and $34 in Indonesia, another country worth comparing to Bangladesh given the fact that both are young, Muslim-majority countries in Southeast Asia.  What’s Bangladesh’s number? About $0.50 per person per year over the five years leading up to 2022.  That’s one-third of Pakistan, and 1.7% of India and 1.4% of Indonesia. Literally a drop in the bucket.

There are many reasons for this funding gap, including more active participation from local corporates and family offices investing into the startup sector in those peer economies. The main point here is that startups in Bangladesh as a whole are far more resource constrained compared to their regional peers, who are often going after the same problems in their own countries through similar business models but with more money and greater backing at their disposal. 

An example: The headline that the average person gets fixated on is that Chaldal raised more than $30M. No doubt, an enormous sum of money by Bangladesh standards. But on an annualized basis, that’s less than $3M per year in the years that Chaldal has existed. This is a drop of water compared to the opportunity, which is the retail market in Bangladesh that’s worth billions of dollars every year. It’s the financial equivalent of trying to drain a lake with a spoon. 

Furthermore, compare Chaldal against just one Indian equivalent - Bigbasket - which has raised $1.5B til date and is backed by Tata, one of the largest Indian conglomerates.  I understand that in a market 10x larger in terms of population, the leading market player might raise 10x more money than its counterpart in Bangladesh. But 45x? Is the Indian retail market on a per capita basis 45x larger and lucrative than Bangladesh’s? Remember, Bangladesh has 9% higher per capita GDP, so presumably the share of retail sales as a percent of GDP in Bangladesh and India would be roughly similar.  The math doesn’t add up, unless we also remember that Chaldal is based in Bangladesh, and the ecosystem is far smaller and therefore much harder to raise money in.  Yet, comparing the revenue runrate and market share that Chaldal has achieved against its peers around the world, Chaldal is actually one of the most capital efficient quick commerce companies globally.  Look around and the entire sector is a blood bath, but Chaldal is getting ever closer to operational profitability, while achieving millions of dollars per month in topline revenues. This is a testament to the team’s operational prowess, no doubt sharpened because they are based in Bangladesh and they couldn’t raise sufficient money relative to the opportunity.  Now imagine if Chaldal had access to the balance sheets and bank financing that major conglomerates have. Agora had those strengths, as well as a first mover advantage in the supermarket segment, but it’s been left to look for white knights in local and international buyers to rescue the business.

Fact #3: 92% of startup funding in Bangladesh in the last decade plus has come from global investors. These investors have very specific criteria for why they are investing in startups in Bangladesh, and this criteria doesn’t fit most other asset classes in the country. 

When a startup company is in trouble, social media denizens decry what would’ve been had that money been invested into “sustainable” companies and investments.   First off, who are these investors and why are they investing in Bangladeshi startups? Overwhelmingly, these are global venture investors who invest in venture-backable startups. They do not invest in real estate. They do not invest in factories and economic zones. They do not invest in the stock market, which in Bangladesh has been anemic. They do not invest in SMBs. They do not invest in charities and non-profits. They invest in venture-backable businesses that could potentially achieve massive return on capital (double digit multiples) through rapid scale via technology, in order to make up for the high risk of investing in this asset class. A few such winners are meant to make up the losses in the rest of the portfolio - the classic power law. They have sold this thesis in turn to their own investors, called limited partners, who may already be exposed to traditional, safer investments in their home markets, usually developed countries, through other platforms. The limited partners are not looking for “sustainable” investments in Bangladesh, if they invest in Bangladesh at all, because they could find far safer investments in their home markets in other assets. So the idea that the startup funding raised in Bangladesh could have been invested in other assets in Bangladesh is false equivalency. Had they not been invested in startups, that money would have never come to Bangladesh. Therefore, startup founders should be lauded for helping to increase the stock of foreign capital invested in the country, when FDI in the overall economy has been stagnant. And if they don’t succeed - their investors are making bets with the full understanding they might not. These investors are not novices - the risk of failure is built into their business model.

Deep breaths.

There’s no shortage of storm clouds on the horizon both in the global venture market and in the Bangladesh economy. Founders we speak to are doing everything possible with the capital they have at their disposal and they will continue to do so until they succeed or run out of money. We shouldn’t take delight in startups’ failure, because it will be the country’s failure, and we would all pay the price, for the myriad reasons I’ve laid out. The same would be the case if the share market fails, or the corporate sector fails or the banking sector fails.

What we need to do now is take a collective deep breath, and have some perspective.