The Investor Of Tomorrow
Back in 2012 when nobody was talking about venture capital fund in Bangladesh, Shawkat Hossain, now renowned Managing Director of BD Venture, took time to look on the horizon. It was a very unlikely move. We even did not have private equity funding rules back then but he nevertheless took the risk and joined BD Venture. It was a pretty risky move. But it was not entirely uncertain. Today we live in a new world and things are fundamentally different than what it was before and it will be increasingly so. Consequently, future hangs on the decisions misfits and forward looking individuals make. With BD Venture a new future was born and BD Venture became the first Venture Capital firm in the country.
Shawkat Hossain has an astounding body of work. He started off his career in a Garment factory and then moved to NGO and worked at Brac for awhile. When Brac decided to start Brac Bank with a concentration in SME banking, a very risky idea back then, he was picked to lead SME division for the newly born bank. Shawkat entered Banking. He worked as the Head of SME when Brac Bank started its operation back in 2001. Then he moved to Afghanistan to set up a branch of Brac Bank. He was one of the few people who was instrumental in starting a Brac Bank branch in Afghanistan. After coming back from Afghanistan he joined Prime Bank as the Head of SME division. All of these experiences and seemingly disconnected dots fell into place when Shawkat started to think about a venture capital firm.
Today we live in a new world and things are fundamentally different than what it was before and it will be increasingly so. Consequently, future hangs on the decisions misfits and forward looking individuals make.
“Banking is a pretty interesting industry, says Shawkat, “but it has its own limitation when it comes to funding any solution that are a little futuristic and bold.” Safety of fund is a very important element of how banks work. On the other hand, Venture Capital funding is fundamentally different than how banks work. BD Venture started off as an alternative funding mechanism for growth stage companies that often don’t get loans from Banks.
The initiative was risky one and we did not have equity funding rules back then. BD Venture started as a limited company and “the strategy was to fund companies out of our capital” says Shawkat. This is a pretty uncommon move from a venture capital funding perspective. Most venture capital firms raise funds and then invest from that fund. For BD Venture it was different. “We thought that private sector always leads the way, says Shawkat, and that was what we were doing back in 2012 when we decided to launch BD Venture”. Now that we have equity funding rules, BD Venture has already applied for license and if it gets the license it would start raising fund for future funding.
Initially it seemed very much complementary to banking and Shawkat perceived that his experience in banking industry would help him to get venture funding right but it was not true. Not only that, he had to unlearn some of his banking lessons to get venture funding right! Once BD Venture started operation, like all other startups challenge started with finding right people. It was difficult to find people with right skills set since venture capital was an entirely new industry and it requires completely different set of skills than what banking industry requires. “In banking you fund a company based on their past performance and you take collateral and all”, says Shawkat, “but in venture capital you fund a company based on the future growth potential and you don’t take collateral but share profit and loss and take equity. This is an entirely different ball game”. As a result challenges came from all fronts. Finding right kind of people and understanding the business and also convincing the market about this new funding instrument were few major obstacles BD Venture had to outperform.
Initially it seemed very much complementary to banking and Shawkat perceived that his experience in banking industry would help him to get venture funding right but it was not true, not only that he had to unlearn some of his banking lessons to get venture funding right!
Today BD Venture is a team of six people and the firm has invested in three companies: a food processing company, a renewable energy company, and very latest one is a technology company. “Startup funding is a tricky thing”, says Shawkat, “because you don’t know many things that hang on the future. Hence, the ability to see beyond the line and understand people and future is an indispensable skill.”
Bangladesh is a very different market for Venture capital funding. Entrepreneurs are not ready or not aware of the mechanism. People are either more comfortable with loans since it does not involve with equity or people feel safe with loan. When you, as an entrepreneur, decide to take venture fund it involves lots of decisions and factors. It is not only about money itself. It is about money, people who will become owner of your company and join the board and how they would contribute to your company and shape it over the time.
At the same time, the number of companies that are eligible to get venture funding is not that big. There are very few companies with real potential to grow big and ability to grow big is one of the major criteria for getting venture funding.
‘Startup funding is a tricky thing”, says Shawkat, “because you don’t know many things that hang on the future. Hence, the ability to see beyond the line and understand people and future is an indispensable skill.’
BD Venture now focuses in few sectors like technology, energy, agro-processing, food processing, light engineering, health, and education. For now the firm is only investing in companies that are operating in above mentioned sectors and have extraordinary growth potential. “Growth is one of the key elements we look for in a company when we decide to invest”, says Shawkat, “if a company can’t grow at least 5X in few years we are not interested”. Because of this single criterion, traditional businesses disqualify for venture capital fund. It is very difficult for a traditional brick and mortar store to go big but for a technology company it is easy. Top of that, there has to be a big market for the product or the service otherwise after a certain period of time the growth would stop.
Being said that, team behind the company is the most critical factor most investors consider. “Yes, we do value good idea, great growth potential and all, but then and again if a team is not committed enough and hard working enough, says Shawkat, the company is never going to take off. We try to understand the team and how committed the team is”.
However, the critical thing is: there is no way to find out whether a team is going to turn out okay or not. You are bound to make educated bet. “It is almost impossible to tell which team is strong and which is not, which founder is committed and which is not, says Shawkat, “ but we try hard to put a standard process in place to understand the founders, their skills, integrity, commitment, and passion. It is important because most companies fail because of founders.”
Team is the most important asset of a company. It is people who make and break a company. “People are 80% of a company, says Shawkat, and idea is in between 20-30%”. Founders need to be extremely passionate and dedicated to the idea and company and should have domain knowledge and skills for the particular business he/she is starting. “We look for founders with domain knowledge and dedication, says Shawkat, and at the same time the founders need to be honest and of good character”.
‘We do value good idea, great growth potential and all, but then and again if a team is not committed enough and hard working enough, says Shawkat, the company is never going to take off. We try to understand the team and how committed the team is.’
Given the fundamentals, we are in a better shape as a country. However, there are few sectors that look more potential than others. Technology is going to be a lot different and there will be lots of success stories in this space and then comes the agriculture sector, especially agro and food processing sector and manufacturing industry as well. Garment industry is hugely successful but there are opportunities to take in building linkage industry for garment sector.
“At BD Venture we see a better future for Bangladesh, says Shawkat, IT is going to be big and will be disrupting almost every sector. We are here to facilitate entrepreneurial ecosystem and support entrepreneurs to build big businesses.”
Rule of the game
“To do things like investing, you need to have methods, and processes in place, says Shawkat, it is not wise to be guided by your philosophy or emotions or feelings alone”. BD Venture has developed its own investment principles and makes every investment decision accordingly. But yes, principles have to be grounded in reality. “When we consider a company to fund, says Shawkat, we look on the horizon. We usually bet on the future. A bright future is what it all requires.”
The essential difference between traditional financial institutions and a venture capital firm is that traditional financing model looks at the past documents and performance but venture capital funding looks at the future. “When someone pitches an idea, says Shawkat, we try to see the vision of the entrepreneur, and how he/she plans to achieve that vision.”
Now that you have shown your vision and passion to achieve that vision but that’s not enough, if you need money you have to convince why you need money and by using that money how the business is going to change over the time. “We ask for business plan and some projections”, says Shawkat, all these projections have to be based on reality and you have to convince us that money is actually going to change your future in a very significant way.”
‘To do things like investing, you need to have methods, and processes in place, says Shawkat, it is not wise to be guided by your philosophy or emotions or feelings alone.’
Build The Future
Once I’m done with questions related to investment and money and BD Venture, I asked what advice he would give to a young person who just started his own company. His reply would sound antagonistic to many ‘want to be but never really become entrepreneurs’. “I think advice is broken, says Shawkat, I can’t tell you what to do, and what not to do and I don’t know how to succeed. It is your responsibility to figure it out. But yes, I can tell you, if you come to me with a specific problem, what you may do differently”.
‘I think advice is broken, says Shawkat, I can’t tell you what to do, and what not to do and I don’t know how to succeed. It is your responsibility to figure it out. But yes, I can tell you, if you come to me with a specific problem, what you may do differently.’
This is such an honest opinion in a culture where everyone is now a personal development coach and every day we look for those 5 tips that would entirely change our life. No amount of advice would save you if you don’t work. Most of the time, you are the one who has the answers for your problems. Starting a company is hard. It is not about attending events, making a business card, and then putting your name as CEO of something that does not exist. “Starting a business and making it happen is incredibly hard, says Shawkat, you get to work hard and get your hands dirty”.
Note: Interview by Ruhul Kader, Transcription by Ibrahim Mahbub