Funding the Next Generation of Social Entrepreneurs (Social Business Youth Summit 2021)

Today I was part of a panel at the 7th session of Social Business Youth Summit that took place in Dhaka, Bangladesh. Curated by YY Goshti, co-hosted by YY Ventures and Impact Hub Dhaka and supported by Yunus Centre and the Netherlands Enterprise Agency, the summit is an annual gathering of young leaders which focuses on creating sustainable solutions to pressing social issues. This year the summit has a focus on the post COVID-19 world with the theme, No Going Back. I was specifically part of a panel on Funding the Next Generation of Social Entrepreneurs, alongside close colleagues from the ecosystem including Bijon Islam from LightCastle Partners.

The questions put forth were quite important and pertinent, and I wanted to jot down my responses here for the benefit of those who were not in the room. Please feel free to give your views and perspectives in the comments.

Question 1: How has the pandemic influenced your (organization’s) views on entrepreneurship ecosystems in general?

As many of you would know, we are the first and largest organized angel investment network in Bangladesh. We aim to be the first professional investment check into early-stage companies in the country, after the founders themselves and more informal friends & family capital.

In a weird way, 2020, our second full year of operations, was good for us. The size of the paid membership into the network tripled, which as of this month stands at 170 individuals and institutions around the world. We also trebled the size of our portfolio in 2020, and as of Q1 2021, have fourteen companies in our portfolio and pipeline at various stages between commitment, signing and disbursement, mostly the latter two. Collectively, this portfolio represents almost US$1.2M of capital being facilitated through our screening, due diligence, introductions, structuring, advisory and documentation services. Interestingly, seven out of the fourteen have a female founder or are female-led. Most of this work has happened in the last eighteen months. You can read about some of the companies in previous press releases such as DoktorKoi and Nitex. We will be sharing more soon.

Why did this happen? In some ways, we have benefitted from founders being more eager to raise funds and being flexible on terms in 2020. At the same time, the business culture and environment changed. We used to assume that Bangladesh had a very traditional “face-to-face” culture. Now, meetings are being held online, and decisions being made faster because of that. We have pivoted from physical events to online ones, which allowed us to accelerate our cycle of showcasing new companies and deals from quarterly to fortnightly and even weekly. Going digital has also allowed us to reach the Bangladeshi diaspora in markets like North America and the UK and international angels and investment platforms. It’s been interesting seeing the genuine interest in Bangladesh ecosystem coming from all over the world — something we did not think too much about back in 2018 or 2019, when we were more Bangladesh- and Dhaka-centric.

Going forward into 2021, we want to continue building out a digital platform, but also combine them with physical events. We want to facilitate more follow-on capital and co-investment from experienced international investors. We want to expand and formalize our growing international reach through chapters in key markets, and help organize the flow of capital. And of course, we want to do more deals and shorten the velocity of those deals.

Question 2: What do you look at when assessing the entrepreneurship ecosystem and where are the more structural challenges and opportunities?

In our line of work, the most pressing ecosystem challenges relate to liquidity, policy and talent.

In terms of liquidity, the situation is improving. As mentioned earlier, US$24M worth of funding has been announced in Q1 2021, almost two-thirds of the entire total from 2020. In addition to international VCs looking at the market, Bangladesh-specific VCs such as IDLC and Anchorless have announced recent deals. IDLC in particular, as the largest Non-Bank Financial Institution in the country, will be a key harbinger for the rest of the financial sector in Bangladesh to begin investing in startups. Startup Bangladesh, the VC arm of the Bangladesh ICT Division, is also becoming active, as well as local corporates.

We still need more opportunities and mechanisms for exits. We desperately need platforms like the Small Cap Board in Dhaka Stock Exchange to work so earlier stage startups can get listed and raise money, in combination with private investors and institutions. This might mean relaxing certain rules related to compliance that might be more appropriate for larger firms, lowering fees and/or allowing a greater number of investors onto the Board.

This is a great segway to policy. Bangladesh is still behind when it comes to global best practices for early stage deals. One is instruments. Most deals in the early stage nowadays are being done through convertible notes and SAFE notes, in order to avoid making valuation the key sticking point, among other advantages. Convertible notes and SAFE notes are not recognized instruments in Bangladesh, though there might de facto ways to structure arrangements that mimic elements of such structures. As a result, most investments are being done through equity, which can often mean lengthy back and forth on valuations. This is one of the reasons companies are re-domiciling to jurisdictions like Singapore, in addition to the fact that there are greater pools of startup-friendly capital.

Another international best practice is bundling smaller investors into special purpose vehicles (SPVs) to come onto the cap table as one single entity. This is advantageous for multiple reasons. One, these investors can designate a lead or nominee to serve as a conduit for communications with the entrepreneur and decision-making, which means the entrepreneur does not have to manage dozens and potentially many more small investors. Second, it helps keep the cap table more organized and “clean,” which later stage investors prefer. Third, this helps lower the minimum ticket size to invest, which is good for investors from a risk management standpoint. But once again, in Bangladesh, the idea and mechanism of a “pass-through” entity that exists solely for the purpose of investing is not yet in place.

The last challenge I will talk about is repatriation post-liquidity event. This is the number one question I get asked by investors both from the diaspora and the international angel community. While it is easy enough to put capital into Bangladeshi companies, it is not a straightforward process to take it out in the event of an exit. Any large transfers of capital requires the permission of the Central Bank, and even established businesses, let alone individual investors, struggle to obtain these waivers. This is once again a reason for re-domiciling companies abroad or avoiding the hassle by starting with international entities and creating local operating subsidiaries. But not every founder has the ability to raise foreign funds from the get-go.

When it comes to talent, the situation is also improving rapidly. Though there are still many founding teams that lack a technical co-founder, have majority part-time founders and founders who are lack at least some level of prior experience in their fields, this is changing. A key development is that we now have Series A and Series B stage startups that are producing talent in the middle management and senior ranks who are coming out and starting companies on their own. We must also think about the institutions in Bangladesh — not just the major ones like Dhaka University or Bangladesh University of Engineering and Technology — but emerging ones such as Islamic University of Technology and Khulna University of Engineering and Technology. There’s also North South University, which has managed to produce founders of some of the leading startups in this current generation and whose accelerator whose Advisory Board I’m proud to be part of.

Many of these institutions are producing engineers and graduates who are being snapped up for work abroad at major tech companies but also within the BPO and software development sector in Bangladesh. Amazon alone has 100’s of Bangladeshis working in Seattle and throughout the US. A lot of them are in a position to become angels, mentors and advisors. Some of them are or will become founders, with the right push.

Question 3: What kind of behavior and skillset typify the next generation of social entrepreneurs?

In the past, I’ve written articles on screening companies, leadership during the pandemic and also on how impact entrepreneurs should and should not raise capital. The latter is the most pertinent for this question.

I would summarize and say that though impact is important, companies and founders have to seize the business opportunity, identify the right market segments (those ones that will pay), create sustainable and scaleable revenue models (ideally those that do not need subsidization), make sure unit economics work, etc. Scaleability is key. Investors have many opportunity costs to investing in a Bangladeshi company. Therefore, companies need to show they are capable of exponential growth, which usually means double digit percentage growth on a weekly basis. Monthly and yearly do not necessarily cut it. This kind of growth comes from a relentless focus on finding, attracting and retaining paid customers.

The good news is that those are not done overnight, and most investors know that and that’s the chance they take when they invest.

Question 4: What Kind of Advice Do You Have for Entrepreneurs?

I was quite inspired by the founder of one of our portfolio companies, who told me the other day that during his fundraising he had to take himself out of his normal shell and be fearless in reaching out to others and asking for their time — even if it’s just thirty minutes, in order to tell his story, the story of Bangladeshi startups and also to learn about their work. Through this, he was able to get into an American accelerator program — the first time they ever took a company from Bangladesh — which in turn has led to things such a recent seven figure deal. I’m a similar kind of person. I’m naturally shy and reticent. But the good thing is that as more and more people become curious about Bangladesh, the more they are willing to listen, if only for the data. That entry point is enough.

All of us, both as ecosystem builders and entrepreneurs, are ambassadors for what’s happening right now in Bangladesh. And there’s a whole universe out there of startup founders with similar models, technical experts, angel investors, VCs, startup writers, investment platforms and others who are looking to find out more. Let’s spread the word and bring them into the fold in 2021.

Special thanks to my good friend Shazeeb M Khairul Islam for inviting me and for the great work he’s doing in leading YY Goshti and YY Ventures’ group of organizations, and to Bas Blaauw, First Secretary, Embassy of the Netherlands in Bangladesh, for the questions.