As investors in some of the world’s nascent digital ecosystems, we are often questioned about what is really happening on the ground in these countries. Unfortunately, the day-to-day media in the West tend to focus on the bad things, whether that is a terrorist attack in Pakistan, a fire at a garments factory in Bangladesh or boats getting stuck in the Suez Canal. What these reports fail to pick up on is the progress and development that is taking place the other 95% of the time. Perhaps one country that gets the least credit it deserves is Bangladesh. This blog post outlines how far the country has come and identifies technology as the key catalyst for its continued development. Sturgeon’s view is that Bangladesh benefits from both strong macro fundamentals and the secular tailwind of technology adoption that will deliver high impact and financial returns for investors over the next decade.
For those of you reading who have no context on Bangladesh, it is a country of 167m people in an area roughly the size of New York state. This makes it the most densely populated country in the world, excluding city-states and small countries with <10m populations. The capital, Dhaka, is a city of 23m people, with a population density seven times greater than New York and 13 times greater than London. It is not a relaxing city – the cacophony of car horns, motorbike beeps, and bicycle bells are constant – but it has the energy of a city that is developing rapidly. This energy is hardly surprising when you consider how young (median age is around 27) and well-connected (50% smartphone penetration and 95% 4G coverage) the country is.
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50 years of success
Since independence in 1971, Bangladesh’s achievements have been, quite simply, outstanding. Today the country is characterised by socio-political stability with an ethnically, linguistically and religiously homogenous population. It has cut the poverty rate from 83% in 1975 to 20.5% in 2019-20; primary school completion rates have increased from less than 30% in 1981 to 98% today; and access to electricity is now close to 100%. Between 2012 and 2021, the year it celebrated 50 years of independence, Bangladesh’s GDP almost tripled. A United Nations report in 2020 praised Bangladesh’s “impressive socio-economic development, increased per capita income, and reduced poverty,” while the World Bank has commended Bangladesh as a ”model for poverty reduction.” The country also stands out for the level of female participation in the workforce. Bijon Islam, Co-founder and CEO of Bangladeshi consultancy Lightcastle Partners explains:
“In Bangladesh 38% of the female working population is actively engaged compared to 20% in India and 22% in Pakistan. There has been a direct correlation between the country's inclusive and sustainable economic growth and female empowerment leading to growing investments in health and education at household level.”
The picture today is not all rosy though. “Bangladesh is facing tailwinds from global shocks post the pandemic. Negative balance of payments and pressure on forex reserves are key concerns,” explained Bijon. Bangladesh imports 97% of its energy supply, which combined with a slowdown in remittances and rising prices for raw materials used in the ready-made garments (RMG) sector has put significant pressure on the country’s foreign currency reserves. The currency has depreciated close to 20% in 2022, and reserves have fallen from a high of $48.1bn in August 2021 to $35.8bn in October 2022. In response the government has restricted imports for all but essential products and is applying for a $4.5bn loan from the IMF. Unlike other emerging markets though, total debt to GDP is low at 31.5% (11.8% external and 19.5% domestic), with foreign-denominated debt mainly coming from concessionary lenders like the IMF, and so does not pose a systemic risk to the economy.
A nation on the cusp
Bangladesh is at an inflection point in its development. Ties to the global economy are deepening, with a more diverse basket of exports and imports built on greater trade links. As a result of its success, Bangladesh will graduate from Least Developing Country (LDC) status in 2026. While the country should be rightly proud of this achievement, it will remove benefits such as subsidised borrowing rates and quota free access to the European Union meaning Bangladesh will have to compete with the likes of India and Vietnam on a more level playing field.
The government has been preparing for this moment, with extensive investment in infrastructure that is starting to come to fruition. Earlier this year the 6km Padma Bridge was completed, connecting the poorer south-western regions of the country with Dhaka and significantly cutting journey times. Intra-country connectivity will be further improved by the launch of the new terminal at Dhaka airport and a fourth domestic airline. In Dhaka itself the first line of the light railway (MRT) will be finished in December, cutting a two and a half hour journey by bus or car across the city to 11 minutes. The additional MRT lines combined with the new expressways and flyovers opening in the next 1-5 years will help to alleviate the congestion that clogs the streets of the capital. While politically contentious, the Russian-constructed 2.4GW nuclear plant will help to address the energy supply challenges when it comes online in 2023-24, supplying 9% of the country’s needs.
Nascent venture ecosystem
So where does the venture ecosystem sit in all this? In one word – nascent. Despite the size of the opportunity, and a burgeoning IT outsourcing community, start-up activity and VC funding is still limited. We asked a few local players to put the country’s ecosystem in some context:
Rahat Ahmed, Managing Partner of Anchorless Bangladesh, an early stage venture investment fund, explains: “Ideologically, I've long thought Bangladesh is closest to South Korea, just in a different era. However, when it comes to venture specifically, Indonesia is likely the closest... not India or even Pakistan. I imagine we're roughly a decade behind right now, but could close that gap faster if we take the best learnings from these countries in addition to activating our diaspora.”
Afshin Moayed, Partner at Razor Capital, a multi-asset venture capital firm with a focus on frontier markets, believes: “In terms of opportunity I would say that Bangladesh resembles Indonesia in terms of a market that is more closed off than Vietnam or Pakistan. India being 10x larger than Bangladesh is a difficult comparison, particularly given the more mature business community and connection to the world of finance. In terms of size, Bangladesh as an economy is larger than Vietnam and has a larger population to cover. The relative stability of Bangladesh, its management of public finance and debt makes it a safer and more stable market than Pakistan in comparison.”
Comparing Bangladesh to Indonesia, Bijon explained: “Indonesia has 2.8 times the GDP of Bangladesh with 1.8 times the population and 1.7 times the GDP per capita. The middle-income population is around 50 million compared to 12 million for Bangladesh. However, the density, the growth initially starting from RMG, the telecom penetration are similar and consumers seem to adopt similar products e.g. bike ride-sharing is immensely popular in both countries. In terms of time I would say Bangladesh is a decade behind but with infrastructure investments and talent management can bridge the gap in a shorter time.”
According to Lightcastle Partners, Bangladeshi start-ups have raised $800m over the last decade, including $505m in 2021 and H1 2022. Indonesia’s start-ups by comparison raised $9.3bn in 2021 alone, up from $608m back in 2017, and the country has minted a total of 13 unicorns to date. Bangladesh, on the other hand, has one.
Those high level numbers for Bangladesh do not tell the whole story either, and have been distorted by two start-ups that have raised 60% of all funding – $306m for bKash, Bangladesh’s only unicorn, and $165m for ShopUp. This reflects the reality that there are still only a small number of truly investable start-ups in the country – from Sturgeon’s own deal pipeline, there are 10-12 out of nearly 100 that we are tracking. The majority of the start-ups that have raised capital have been FinTech’s, Logistics, or Ecommerce, in line with how we have seen venture ecosystems develop in other emerging markets.
Foundations being laid
The availability of funding is improving, not least thanks to the launch of government’s sovereign venture fund, Startup Bangladesh. The $60m fund will invest up to $500k checks in early-stage companies over the next five years, and has made 25 investments in 2022 alone. Rahat believes that it “is a major step for the country to support the foundation of the ecosystem.” International funds are also dipping their toes in the Bangladeshi market, with the likes of Sequoia, Softbank, Valar Ventures, Prosus Ventures, Wavemaker Partners, Golden Gate Ventures, IFC and ADB Ventures making their first investments in the country in the last 18 months. Getting these investors to follow on with larger tickets is crucial. Shahir Chowdhury, Co-founder and CEO of Shikho, an EdTech start-up building a hyper-localised digital learning ecosystem centred on modernising the delivery of the Bangladeshi national curriculum and professional up-skilling courses, highlights this well:
“We've had promising seed investments from global investors into Bangladeshi start-ups working on solutions across several industries including education, health, agriculture, travel and logistics. Ensuring progress and thereby confirming successful follow-on rounds for these ventures will be the most crucial outcome to maintain momentum in growing the local ecosystem.”
Aside from funding, the ecosystem has made important progress in the past two years. Bangladesh is now one the world’s largest mobile money markets, with over 110m registered and 45m active users transacting $100bn over the past year. bKash is the dominant mobile financial service (MFS) provider with 75% market share, and in Q2 2022 registered its first quarterly pre-tax profit for over three years. The recent launch of Binimoy, an interoperable digital transaction platform, will enable users to transfer funds between MFS, banks and payment service providers and can help drive greater adoption and use cases. BCG, in a recent report, expects that “Binimoy…(will) revolutionise the digital transactions space in a move that echoes the impact of India’s Unified Payments Interface (UPI), and Thailand’s PromptPay.”
This habituation to transacting online and the payment rails to do so are an important foundation for the success of other start-ups. Consumer habits are changing thanks to the work of early players such as bKash and ecommerce player Daraz. One of those early start-ups was Bongo, founded in 2013, which today is the leading Bangla language content platform, reaching 200m people on a monthly basis with video-on-demand and live TV across mobile, web and TV.
Bongo’s co-founder Fayaz Taher explained that “Not only are people streaming online on platforms such as Bongo consistently but the consumer class is also spending on online grocery platforms like Chaldal or buying electronic/household items on Pickaboo or Daraz.”
Technology enabling the next decade
There are several areas that Bangladesh needs to focus on to continue the positive momentum of the last few years. Firstly, start-ups need to continue to build trust amongst their customer base. Ridwan Hafiz, the founder of GoZayaan, an online travel agency (OTA) that provides flights, hotels and tours to Bangladesh, Pakistan and Sri Lanka, believes that “brands need to earn the trust of the customers. We have some bad apples that put us a couple of years backwards.” Fayaz agrees that “start-ups must ensure quality, consistency and good customer service” to build that trust. Secondly, and connected to this, there needs to be a larger number of start-ups for investors to back. Despite the fact that there are 1,200 active start-ups in the country according to Lightcastle, only a fraction of these are investable and this limits the opportunity for both domestic and international investors to participate in the market. Thirdly, and one of the reasons behind this post, Bangladesh needs to raise its profile as a destination for international venture capital. The country suffers from being in the shadow of its much larger neighbour India, while falling outside of the South East Asia bucket for investors. According to Bijon “Sri Lanka receives more FDI than Bangladesh with less than 25% of the GDP size.”
Technology can help to catalyse the next 10 years of Bangladesh’s development. In the words of Rahat, the role of start-ups is “hypercritical because start-ups are able to take risks that most traditional businesses won't.” The first generation of entrepreneurs who built the country to where it is today through traditional industries are handing over to the next generation who must bring in greater innovation and efficiencies to remain globally relevant and competitive. We are starting to see this at the base level of Ecommerce, FinTech, and Logistics, and there will be more that can be achieved in B2B Software, HealthTech, AgTech, and EdTech.
While many developed markets may well have peaked and are now managing their decline, Bangladesh is a dynamic country on an upward trajectory and should be on the radar of any investor interested in finding outsized, uncorrelated investment opportunities. It is a 10-year play that will take patience and diligence on the part of both founders and investors, but with the combination of strong macro fundamentals and the secular tailwind of technology adoption the returns can be proportionately large. Sturgeon is actively investing in the country today, at the earliest stage of its development, and we will continue to do so as part of our long-term commitment to this and other emerging markets over the next 10-20 years.
If you would like to discuss or learn more about any of the points discussed in this post, please reach out to the team!
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The idea seems to be that there is rapidly developing countries with tremendous untapped markets. The development will create a skilled sizable labor source with a developed infrastructure that will enable them to participate in the world. The point is to recreate all the services that exist in more developed countries there. I was wondering if companies (banking apps social media etc ) would be able to take over many of these market, or would they have to broken down by country due to cultural etc forces?