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Bangladesh is being considered as the hub of youth and entrepreneurial opportunities with a steady economic growth over the last decade signaling a double digit growth rate in near future. The nascent Startup ecosystem could play a critical role in creating high value companies to add significant value to the growth and the mobilization of high growth capital is one of the factors that could make the difference. The ecosystem is developing to draw attention of different actors including Venture Capitalists to come in to play and convert their growth capital into the portion of value creating great companies in Bangladesh.
Though, there are notable trends in the number and culture of both angel and Venture Capital investors in Bangladesh, the mobility of the capital and the best flexible investment practice to the new companies are being distracted due to the limitation of Paid up Capital Regime while registering and the Nonexistence of Convertible Note as a convenient start-up investment tool. Even if there is an adequate supply of growth capital in the economy, it is not of optimal and effective use unless it ensures smooth fluidity of the funds into the young companies. The impact, Bangladesh is sacrificing the potency of high growths at the levels, high growth funds to high growth companies to high growth economy.
Though, there are notable trends in the number and culture of both angel and Venture Capital investors in Bangladesh, the mobility of the capital and the best flexible investment practice to the new companies are being distracted due to the limitation of Paid up Capital Regime while registering and the Nonexistence of Convertible Note as a convenient start-up investment tool.
The Registrar of Joint Stock Companies and Firms-RJSCF is still in the Paid up Capital Regime for company registrations, whereas most of the jurisdictions in the world followed a shift from Paid up Capital Regime to Subscribed Capital Regime to attract early stage private investments into the companies.
The existing system only imposes an obligatory pro rata paid up capital requirement to the equity holders without respecting the other values on the table. In fact, it does not recognize the vertical contributions of all the cofounders in a company i.e. one cofounder may provide no money but intellectual properties, one may provide the management, one may provide the fund determining a mutually agreed equity structure. The Investors cannot buy shares on premium to structure the equity valuing other’s contributions as well as cannot plan a flexible paid in terms of their choices. It appears like an injection without the needle to the investors or a body without the veins to the entrepreneurs for injecting the funds into the companies in real practices. The solution is to allow the use of the needles to the investors availing the veins in the companies.
The existing system only imposes an obligatory pro rata paid up capital requirement to the equity holders without respecting the other values on the table. In fact, it does not recognize the vertical contributions of all the cofounders in a company i.e. one cofounder may provide no money but intellectual properties, one may provide the management, one may provide the fund determining a mutually agreed equity structure.
A reform is on high demand and the policy bodies are to initiate discussions to transform the Paid up Capital Regime into the Subscribed Capital Regime enabling the companies’ registered capital to be based on the capital amount subscribed by their investors, but not on the paid up capital any more.
It is the convenient investment tool vastly used in countries for investing in the early stage companies. While closing a deal, it helps both the entrepreneur and investor to avoid the unnecessary company valuation pain at the pre revenue stage of a company when it is practically difficult to forecast a reliable revenue data of the company. It works like a loan for a specific term with an option to convert during the next valuation event (scope of having third party valuation) into equity normally on a discount or on a valuation cap specified. In presence of such arrangement, the sources of seed fund (family, friends & fools as well as the angel investors) would get a convenient and more professional mode of attachment in the ventures and thus it would channelize the untapped seed capital into the startup ecosystem. (NB. The contribution of the family, friends, and fools [FFF] at the seed level is billions of dollars more than that of Venture Capital firms in USA).
Nonexistence of Convertible Note is the convenient investment tool vastly used in countries for investing in the early stage companies. While closing a deal, it helps both the entrepreneur and investor to avoid the unnecessary company valuation pain at the pre revenue stage of a company when it is practically difficult to forecast a reliable revenue data of the company. It works like a loan for a specific term with an option to convert during the next valuation event (scope of having third party valuation) into equity normally on a discount or on a valuation cap specified.
As it is less time consuming than other tools of investment, the provision of convertible note would reduce the nuance of decision making and prompt up the deal closings and foster a more productive and healthy startup environment in Bangladesh. The investment tool should be allowed to be issued by the startups exempted (as per exemption criteria) from Bangladesh Security and Exchange Commission-BSEC registration, filling up just the information form and keeping the note in RJSCF. This exempted convertible note policy enactment would work as an alternative remedy to the limitation of existing Paid up Capital Regime, when it is possible to revaluate a company after 2 years of existence.
Once Bangladesh opens up these two closed windows, the business environment would be flawless and friendly enough to attract both the domestic and foreign investments and it would ensure the necessary nutrients for building the healthy young companies in the economy.
