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Monday, July 4, 2022

‘WHEN ENTREPRENEURS THINK ABOUT VENTURE CAPITAL, BD VENTURE IS THE FIRST NAME THAT COMES TO THEIR MIND’

Shawkat Hossain MD BD Venture Photo: Arif Mahmud Riad

Shawkat Hossain is a Fellow of Cost & Management Accountant of Institute of Cost & Management Accountants of Bangladesh. He has completed Masters in Development Management from Asian Institute of Management, Manila, Philippines in 1994 as a recipient of ADB Scholarship. He has 35 years of experience in his credit out of that 7 years in Venture Capital, 10 years in banking and 18 years in financial management/ Accounting profession. He worked for different sectors such as manufacturing, NGO, banks including different reputed organizations such as BRAC, BRAC Bank, Prime Bank, ICDDRB etc.


Shawkat Hossain is recognized for the pivotal role he plays in developing the startup ecosystem in Bangladesh through his advocacy, counseling and above all his leadership. He regularly writes on entrepreneurship; venture capital issues and participates in incubator and accelerators programs. His inputs were vital in framing the 2015 Alternative Investment Rule that has enabled private equity investment in Bangladesh.

When he spoke with the Fintech team, he discussed at length about the prospect of venture capital in this country, the venture capital ecosystem, the challenges VCs face in collecting funds and the future plans of BD Venture.

Here is an excerpt of that conversation.

You have over 3 decades of experience in banking, finance and VC sector. Tell us a little bit about your career.

I am a professional cost and management accountant. I passed out from the Institute of Cost & Management Accountants of Bangladesh in 1986. I started my career as an accountant in a garment factory in Chittagong. Then I moved to the NGO sector and began working at the International Center for Diarrheal Disease Research (ICDDR,B) in 1988. After working in several NGOs, I finally joined BRAC as a finance manager in 1996. I was promoted to the position of Head of Finance in 2000. In late 90’s BRAC decided to set up a bank with focus on SME. There weren’t any SME banks in Bangladesh until that time. BRAC was financing micro finance and micro enterprises. So supporting SMEs was the next logical step. I have been transferred to BRAC Bank as the Head of SME in 2002. During my tenure, I was able to open approximately 250 marketing unit offices. There were around 700 individuals in my department which includes 600 sales executives.

In 2005, BRAC decided to open a bank in Afghanistan and I was given the responsibility to get the license for that bank. I made my first visit to Afghanistan in November 2005 to know about the license requirements. After several visits, I finally applied for the license which was issued by the Central Bank. I had to pay many visit in order to get the license, by mid 2006 after obtaining the license. I was posted in Afghanistan as the Chief Operating Officer (COO). We were successful in obtaining license for five branch offices in that country. I returned to Bangladesh in 2007 and joined Bank Alfalah as Head of Finance. Next I moved to Prime Bank as the Head of SME Division. Prime Bank was a corporate bank and they didn’t have any SME operation. I was instrumental in opening the SME Division and designed various products as well. At Prime Bank I spent three years from 2009 to 2012 and managed to set up 17 SME branches while they didn’t have any earlier.

At that time I realized that for SME, venture capital was suitable than loans. Often loans become a huge burden for small entrepreneurs. The interest on loan starts to accrue from the first day but the business does not yield profit from the first day.. I met some enthusiastic people like Mr Aftabul Islam, Mr Mamun Rashid who were thinking about setting up venture capital and then I started my journey as the CEO of BD Venture in 2012. After the rules were stipulated by the government in 2015, we received the license next year to operate as a Alternative Investment fund management company. When we started our journey, venture capital was an uncommon concept in Bangladesh and many were worried about entering that sector or they were apprehensive about it. Gradually many companies entered the fold of venture capital. So by now, you can say that people are becoming aware of venture capital in Bangladesh.

What is the situation of venture capital in Bangladesh?

Venture capital is growing in Bangladesh as 16 companies have got the license to operate. Some asset management companies, some private companies as well as those who were involved with venture capital since long have obtained their licenses. However, in terms of activity, the venture capital sector in Bangladesh is not really conspicuous yet. Some local start ups are being financed by foreign companies, for example Aavishkaar and Osiris. Some local entrepreneurs have received funds from VCs of the USA, Singapore and Hong Kong. This is how people are becoming aware about venture capital.

Bangladesh doesn’t have a VC ecosystem. Is it progressing toward one?

Well, any new system takes time to develop, for example when we started, there were no rules about venture capital in Bangladesh. The rules came into being in 2015. Recently BSEC have proposed an amendment to those rule.  Finance ministry, BSEC, BIDA undertook different activities to frame policy for venture capital. NBR solved double taxation issues while others need to be worked out in the future. Venture capital fund managers need to collect investment for our finds, from various institutions like banks, insurance companies, pension funds, provident funds and from high net worth individuals.

After we collect the funds, we proceed to invest. Investors hesitate to invest in venture capital, which they perceive as risky. Yes, its high risk high return product. But fund managers know how to manage risk. It will take some time to build confidence. We need effective programs to develop the entrepreneurs, there are some in place but we need more, you need companies to give business development, services (BDS) such as legal support, accounting to entrepreneurs. They  find it very difficult to afford the services of such companies The small companies in other countries avail these – sort of services from , BDS since they cannot afford to hire a full-time accountant; they get one who will work once a week. If we cannot gradually develop such a service provider then we won’t be able to develop our entrepreneurs in the long run. If the entrepreneurs are not developed then we won’t be able to finance them.

Banks now fund SMEs, or at least lots of the banks have SME products. But banks cannot really act as VCs as they have a fiduciary responsibility. What model will work best in Bangladesh for VC? Is it appropriate to simply imitate the developing market? 

Each institution plays different role; banks are not supposed to work as venture capital companies. What banks are doing, they are disbursing loans. Venture capital and lending are two separate things; banks can never conduct the venture capital business. The risk pattern is totally different. In fact there is risk in each and every type of business, you have to understand and mitigate it in the end. The business of banks is not risk-free, but they comprehend the risk and they have designed their system accordingly. However banks can play a supportive role by investing in the funds- we are raising. We will collect the funds and then we will finance many entrepreneurs, among them some will be successful while others may be not, so this is how the bank’s risk will be mitigated.

Additionally we will provide a professional service to the entrepreneurs and that will also help bring down the risk for banks. Small Industries Development Bank of India (SIDBI) is a govt. bank that has a fund of around Rs 5,000 crore which they invest directly as well as in venture capital funds. As a result the venture capital funds get the boost they need. However in our country, when we approach various banks, they are skeptical  to provide  us funds. If we had a pool of funds like that in India then it would inspire others to invest in venture capital in our country.. Some banks are thinking about stepping in as a venture capitalist but I think that will not be appropriate for them. Instead of coming directly as a venture capitalist, banks can come into our fold.

Is reliable business intelligence a problem in Bangladesh? How do you tackle that?

Everyone faces this problem of getting reliable business intelligence in Bangladesh. The biggest problem in Bangladesh is the lack of data. It affects us as well as the entrepreneurs. Entrepreneur basically depends on his/her gut feeling or hunch when s/he wants to start a business. Secondly, they follow the successful model of other entrepreneurs to operate their business. However the business that has become successful, it has already carved out a space for itself in the market. Let’s say if someone today wants to follow the bKash business model and launch a similar mobile finance service in the market, that person will not succeed like bKash.

In many cases we have this tendency to blindly follow a successful model and ultimately it becomes detrimental for both who wants to enter the market and the person who has succeeded in the market. We are actually compelled to do this because we do not have any data, when we intend to start a business, we do not have any information on the demand, supply or the competitors in the market so we follow a successful business model blindly for our convenience. If we had the data, then we would realize if the market is saturated or not or whether we should enter the market at that time or not. Without data, we find it extremely difficult to properly analyze any situation.

What is your position in the Bangladeshi market? Give us an overview.

I don’t think it is appropriate to blow our own horn but if you ask any entrepreneur or venture capitalist then you will find the real picture. Entrepreneurs who have studied abroad, they have the access to funds from foreign countries but for other local entrepreneurs, the situation is quite bleak because they do not have many places to go for collecting funds. Therefore they come to BD Venture. And this fact indicates our position in the Bangladeshi market. When they think about venture capital, BD Venture is the first name that comes to their mind.

BD Venture has a very impressive board of directors, comprising of very well known names in the financial sector. Talk a little bit about what brought them together. 

Mr. Aftabul Islam, Mamunur Rashid and other renowned persons were the sponsors. They had proposed various people to become shareholders of BD Venture. They approached renowned institutions. Those who agreed to our proposal joined BD Venture as shareholders.  Few individual shareholders and institution nominated individuals constituted the board of directors. That is how the board comprised of well-known names in the financial sector. The sponsors realized the importance of venture capital in Bangladesh especially in the context of funding entrepreneurs and startup businesses at the right time. The decision they had taken to go ahead was quite risky at that time and they deserve to be commended for the courage they had shown. It was a bold move to back a business when there weren’t any rules or regulations to direct its operation. From my side I would like to congratulate them for taking such an ambitious initiative to back BD Venture.

Are there any regulatory issues that are preventing VC growth in the country? What needs to change to make is easy for VC companies?

There are many regulatory issues and we are continuously lobbying with the concerned authorities. Bangladesh Securities and Exchange Commission (BSEC)had drafted  “Alternative Investment Fund” in 2015. They have already proposed some amendments to those rules. Thankfully, BSEC was kind enough to take our proposal into consideration. Consequently they asked us to give our input and we gave our opinion on certain issues. We have some  issues  with income tax rules that are not conducive for us considering the risks involved with venture capital in Bangladesh.

There should be investment allowance for those who would invest in our funds. Pension and provident funds can invest in our funds, but to make it attractive enough, certain tax benefits must be provided. Insurance companies have huge funds but as long as the regulations are not permitting them, they will not invest in venture capital. Furthermore, there are some regulatory issues with the Bangladesh Bank that need to be solved. I feel that the banks should be given a detailed guideline which will help them understand that if they invest in venture capital then their SME targets will be fulfilled. This guideline will help us collect funds without which ds we won’t be able to invest in he start up entreprises.

What have been your most successful investments?

We have made nine investments till now and one exit so far. The concept of exit in venture capital is quite different and many people are not aware of it. Sometimes people ask us what is our interest, we do not take any interest. We make profit when we sell our share in a particular investment. We sell the share three to five years after the business starts operating. Among our most successful investments, I can tell you about a company called EON Foods that process chicken meats. When we decided to invest it was a green field project. After they received our investment, they bought land, constructed the factory, brought in the machineries and went for production. Then they bought our share with profit. That is one of the success stories.

We have a company called Brain Station 23 Limited in our portfolio that develops software for various European countries. We consider this company as one of our success stories because when we invested, they had about 95 employees. Now the company is doing really well, consistently making profit and the number of employees crossed 200. Their revenue increased three fold within a period of two years. Well there are other companies in our portfolio that have done well but there is a lot of risk in venture capital and you need to give the companies enough time to flourish.

Talk about what’s ahead for BD Venture. Where do you see the company going, say in the next five years?

Talking about our future plans, we are continuously investing. When we started, there were no rules and regulations. Afterwards rules were drafted and then some amendments were made and we are lobbying for some changes with the concerned authority. The ecosystem for venture capital is developing very slowly. When we began our journey, there were many deficiencies on the part of the entrepreneurs. It was very difficult to get a good entrepreneur. But the good news is that entrepreneurs have developed appreciably over the last few years. That is the demand side as entrepreneurs must be ready and have the ability to utilize the capital we will provide them. If you see over the last few years, some good entrepreneurs have made their mark in Bangladesh, for example Pathao, Shohoz and bKash. This is the scenario that will inspire potential entrepreneurs in our country.

Hussain Md Elias graduated from North South University and launched Pathao when he was less than 30 years old. Today, the company is valued over $100 million. This success story will encourage many young people. Many Bangladeshis are returning from abroad after completing their studies. They are instrumental in setting up technologically developed companies in this country. So this is a good sign regarding the entrepreneurship side. In terms of investment, we are seeking out funds and we are gradually moving forward. The more the ecosystem matures the better for us. I hope we will establish ourselves as a robust venture capital company in Bangladesh after five years. Global venture capital companies are now looking at Bangladesh because there are more opportunities in an emerging market. Bangladesh as a new market will attract many foreign venture capital companies and they will be here in the next five years. So naturally we will have to compete with them and I hope we will do well. In the world of venture capital, I hope the name BD venture will shine bright.

fintech

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