Investment Manager of Aavishkaar Frontier Fund, Nazmul Karim, CFA, has a diverse career in finance with 9 years of experience in corporate finance, investment banking, and fund management industry in Bangladesh. He graduated from Dhaka University with a finance major and earned the CFA Charter in 2011.
Aavishkaar is one of the active institutional investors in Dhaka’s fledgling startup ecosystem. It has already invested in a startup, CloudWell, and plans to do more in the coming years. In this interview, Nazmul ruminates on Aavishkaar’s plans for Bangladesh, how Aavishkaar works with its portfolio companies, qualities of an entrepreneur he looks for when he decides to invest in a startup, startup pitch, and valuation, and state of the startup ecosystem in Bangladesh.
Future Startup: Tell us about the kind of startups you invest in? Do you have a list of sectors you are interested in investing or you are sector agnostic?
Nazmul Karim: If you go through the 2016 Aavishkaar Impact Report, you'll find that we do not really have ourselves beholden to a particular sector with regards to investments. We are sector agnostic; but as an impact investor, we invariably end up making repeat investments in certain sectors: education, agri-businesses, technology for development (including financial inclusion), healthcare, renewable energy, water and sanitation, waste management etc.
This sectoral preference is not altogether unintentional. Through our investment, we aim to ameliorate the living conditions of the people languishing under the poverty line --the bottom of the pyramid population (we define it by someone in a family earning less than $8/day on PPP basis).
An assessment of our portfolio will exhibit that significant portion of beneficiaries of our investee companies (min 50%) belong to the bottom of the pyramid population, who are served in innovative ways through product/services, financial inclusion or livelihood opportunities. That's the defining principle of Aavishkaar.
We are not essentially seeking to partner with companies with breakthrough technologies, a new type of products and novel services. We also positively consider new ways of doing things: solving an existing problem differently using an innovative process in a more sustainable way.
You have invested in one company in Bangladesh. How do you work with your investee companies?
At Aavishkaar, we not only provide investment, we also offer access to mentorship, peer-learning, and introduction to use-cases that worked well elsewhere in a similar context.
For instance, we’ve introduced CloudWell to an Indonesian company which was at the exact same juncture a few years back as CloudWell is now. And, unsurprisingly, that case study has proved immensely beneficial for CloudWell in respect of understanding how they may evolve.
Secondly, we connect our portfolio companies to experts from different parts of the world, who are willing to offer their services at an affordable cost/on a pro-bono basis.
We also help portfolio companies implement a financial system, install better internal controls, and help them remain in internationally acceptable corporate governance regime. We also facilitate market access and help develop global business networks.
Aavishkaar-Intellecap group, socially responsible financial services group, has several verticals. Apart from early stage investments in socially responsible businesses, we also provide consulting and investment banking services. We have a microfinance operation, business incubation operation, and a platform that seeks to bring investors, entrepreneurs, development partners and other stakeholders together.
The underlying mantra is to facilitate high impact scalable businesses in early stages with a myriad of interventions that are critical to achieving the desired end: significant efficiencies and developmental impact to rural and underserved communities.
[blockquote source="Nazmul Karim"]We are not essentially seeking to partner with companies with breakthrough technologies, a new type of products and novel services. We also positively consider new ways of doing things: solving an existing problem differently using an innovative process in a more sustainable way.[/blockquote]
It has been 5 months since you joined Aavishkaar. What’s your take on what is going on in the Bangladesh startup investment space? And also what separates Aavishkaar from other VCs?
If you look at the market capitalization of large companies in the world, such as--Google and Facebook, you will be surprised to see the number of people working there. It's a tiny number, right? Google has a market cap of $500bl and their employee count is lower than 15,000. The same is true for Facebook.
I've seen and read about many tech-driven companies that scaled quite rapidly without involving a lot of human resources.
But that's not the ideal way forward here in Bangladesh. A significantly large portion of the population is still poor or living below the poverty line. Bangladesh has grown significantly over the last couple of years but we have still a long way to go.
There’s a lot of exuberance surrounding hi-tech companies. I don’t deny the importance of these companies in the economy, however, we need to patronize companies that can serve the broader segment of the population.
What I find fascinating about Aavishkaar's approach is it believes that a business can reap both commercial returns and also create sustainable impact; since an innovative and scalable way to utilize/serve the significant number of the population under poverty line will certainly translate into both significant social and financial return.
What are the characteristics or qualities you look for in an entrepreneur when you decide to invest in?
We value commitment above everything. Secondly, we probe whether the entrepreneur(s) understand(s) the business with granularity and recognize(s) the challenges s/he might face.
We want to partner with well-rounded teams with a commitment towards solving an important social problem in an innovative way and to do that the entrepreneurs must have enough skin in the game.
When a startup pitches an idea to you, what are the qualities do you look for in an idea or a pitch?
Primarily, we want to understand whether a particular business can scale rapidly and whether there is a void in the market that the entrepreneurs can fill in an innovative manner. Competition-wise, we also check if the market has entry barriers for new businesses which will protect the business till a certain scale is achieved.
Moreover, one of our main objectives, when we invest, is that how the company can leverage the funding to create its own competitive advantage.
We expect that portfolio companies would, in a period of generally 5 to 6 years, scale to an extent that we ourselves can have a feasible exit. This timeline is of paramount importance.
[blockquote source="Nazmul Karim"]We value commitment above everything. Secondly, we probe whether the entrepreneur(s) understand(s) the business with granularity and recognize(s) the challenges s/he might face.[/blockquote]
When you do the valuation of a company, what are things you consider?
There are established valuation frameworks that are ubiquitously used; however, the assumptions and parameters vary practitioner to practitioner. But, ultimately, it always comes down to negotiation.
To make my point clearer: we try to understand where the business currently is and where it might reach in a steady state-typically 5-6 years down the line. We thereafter try to assign values based on cash flows and market/transaction multiples. Then, we come up with consensus range.
What suggestions would you give to early-stage entrepreneurs looking for funding?
Anyone who wants to raise fund must get a few things done i.e. assessing your exact capital requirement, understanding the market, acknowledging the challenges and fine-tuning your approaches. Focus on creating a business that will outlast you rather than focusing on trivial things like valuations, press coverage, social media glory and so on.
You get to meet a lot of investment managers and entrepreneurs from different parts of the world through your Aavishkaar network. Can you give us sort of a comparative picture of the ecosystems in Bangladesh and other parts of the Asia?
The Asian startup scene is experiencing an amazing changeover now. In Indonesia, for instance, the startup ecosystem is remarkably vibrant. There are a lot of opportunities there for new businesses.
Compared to the what’s transpiring in parts of southeast Asia, we lag far behind. Granted there are more people who are willing to embark on entrepreneurship, yet most people are risk averse and would like to stick to taking jobs rather creating a few. I think the quality of human capital is a serious issue in Bangladesh; talents are rare and expensive.
What are the propellants behind the growth of startup ecosystem in countries like Indonesia and India? And what can we learn from their experiences?
The business ecosystem of any country should be such that it promotes fair competition and innovation, facilitates access to capital, nurtures and incentivizes entrepreneurship.
In Bangladesh, large established companies can easily replicate without repercussions products that have been designed originally by their early stage peers. It happens all too often because there is no effective patent mechanism in play here. This is one of the greatest drawbacks for startups.
Another problem is a lack of proper regulation. Say, for example, I'm a supplier who has entered into a contract with a super shop to collect food products from farmers all around the country and supply it to them. Although the contract obligates the supershop pay me up in due times, they don't and get away with it. And I can do nothing about it because the laws have limited enforceability.
These are a few deterring factors that make our ecosystem rather inefficient. It has to evolve a lot. You would be surprised to know that I've met with many investors in countries like China, Malaysia, and Singapore who expressed avid interest in Bangladesh market. So, you ask yourself, why hasn't that interest translated into investments yet?
It is because there are not enough feasible investments opportunities in Bangladesh due to hosts of reasons, i.e. political turmoil, lack of conducive regulations, bureaucracy--to name a few. Also, we need to offer viable exit routes for investors and ensure that our systems and processes become more investment friendly.
I would like to point out a crucial issue. Our government and concerned bodies are always keen to attract more foreign investments. But I would urge them to turn their attention to the local players who are facing enormous challenges. We need to change the system. If we are able to do so, investments will pour in automatically.
[blockquote source="Nazmul Karim"]Anyone who wants to raise fund must get a few things done i.e. assessing your exact capital requirement, understanding the market, acknowledging the challenges and fine-tuning your approaches. Focus on creating a business that will outlast you rather than focusing on trivial things like valuations, press coverage, social media glory and so on.[/blockquote]
What are the plans for Aavishkar in 2017?
We’re trying to build a strong pipeline here. 2017 is a very important year for Aavishkaar in Bangladesh: we want to support early stage companies by creating a better ecosystem and plan to offer few of them direct investments.
Interview by Ruhul Kader, Transcription by Rahatil Ashekan