ITES, which stands for Information Technology Enabled Services, encompasses the outsourcing of various business operations related to internet and information technologies. It typically encompasses both back-office and front-office tasks, e-commerce and marketing activities, supply chain management, graphic design tasks, web design, and content management. The ITES/BPO sector can be broadly categorized based on the skill level required for these services. In the context of Bangladesh, a significant proportion of ITES providers operate within the semi-skilled segment, offering services ranging from basic data entry and processing to rule-based data manipulation. This strategic focus leverages the cost-effectiveness of the local workforce. Consequently, the majority of the ITES/BPO industry’s revenue and export earnings are generated from fundamental and rule-based data processing tasks.
Bangladesh’s startup industry, often overshadowed by its more prominent neighbors in South Asia, is emerging as a maturing hotspot with remarkable potential. Despite facing challenges like limited attention from MENA funds and geographical isolation from ASEAN, this South Asian nation is charting its own path to entrepreneurial success. From a macro perspective, Bangladesh’s unique strengths come to the forefront. With a population of 169 million people, it stands as one of the most densely populated countries globally. This demographic advantage translates into a vast consumer base, making it an attractive market for startups seeking to scale their operations.
Moreover, the nation’s robust economic growth, with a GDP per capita higher than that of India, has created a conducive environment for entrepreneurship and innovation. Even when confronted with the adversity of the COVID-19 pandemic, Bangladesh displayed remarkable resilience, further bolstering investor confidence in the country’s economic prospects.
Delving deeper into the ecosystem from a meso perspective, the startup scene in Bangladesh is vibrant and diverse. Over 1,200 active startups are making tangible impacts on the daily lives of Bangladeshis through the introduction of innovative products and services. Investment flows into the country have been steadily increasing, with a total of USD 112 million invested in 2022, reflecting growing local and international interest. Notable deals, such as the USD 65 million investment in ShopUp, exemplify this trend. Social startups in Bangladesh are also attracting impact funds, albeit a minuscule proportion (0.6%) of overall investments. However, impact investing is gaining momentum in the country and can act as a tool to de-risk private sector investment.
A significant milestone in the country’s startup journey was the emergence of bKash as Bangladesh’s first unicorn in 2021. The largest mobile financial services provider secured a substantial USD 250 million investment from Softbank, resulting in a valuation of around USD 2 billion. This achievement not only highlighted the growth potential of Bangladeshi startups but also indicated the nation’s readiness to compete on a global scale.
At the micro level, Bangladesh’s startup landscape is diverse, covering sectors like fintech, e-commerce, ed-tech, health-tech, and agri-tech. Startups in the country are not only catering to domestic demands but also addressing unique challenges faced by the population, such as improving access to financial services and enhancing healthcare quality.
Bangladesh’s startup industry, although often overlooked, is a dynamic and promising arena for investors and entrepreneurs alike. With its large population, sustained economic growth, and a growing ecosystem of innovative startups, the country is poised to play a pivotal role in driving economic development and fostering innovation in the years to come. As Bangladesh progresses towards becoming a middle-income nation, its startup industry is set to be a key driver of its future success.
Key Factors Driving the ICT & Startup Sector
The startup industry in Bangladesh is being propelled by several key drivers that contribute to its growth and vibrancy. These drivers operate at various levels, from macroeconomic factors to specific industry dynamics, and collectively shape the entrepreneurial landscape in the country. Here are the key drivers:
Large Consumer Base: Bangladesh’s population of 169 million people provides a significant consumer base for startups. This sizable market offers ample opportunities for companies to scale their operations and reach a wide audience.
Economic Growth and Stability: The nation’s robust economic growth, with a GDP per capita higher than that of India, creates a stable environment for entrepreneurship. A growing middle class and increasing disposable incomes contribute to greater consumer spending, benefiting startups.
Resilience During Adversity: Bangladesh has demonstrated remarkable resilience, particularly in the face of challenges like the COVID-19 pandemic. The ability to weather such setbacks has instilled confidence in the country’s economic and business prospects.
Investment Inflows: Increasing investments from both local and international sources have been a driving force in the startup ecosystem. These investments provide startups with the necessary capital to innovate and expand their operations.
Diverse Startup Ecosystem: The diversity of startups in Bangladesh, spanning sectors such as fintech, e-commerce, ed-tech, healthtech, and agri-tech, reflects the evolving needs and preferences of the local market. This diversity ensures that a wide range of entrepreneurial opportunities is explored.
Government Initiatives: The government of Bangladesh has introduced various policies and initiatives to support entrepreneurship and startups. These include tax incentives, regulatory reforms, and the establishment of startup incubators and accelerators.
Unicorn Success: The emergence of bKash as Bangladesh’s first unicorn marked a significant milestone in the country’s startup journey. This achievement not only attracted global attention but also showcased the potential for high-value startups in Bangladesh.
Local Innovation: Startups in Bangladesh are addressing unique challenges faced by the population, such as improving access to financial services, healthcare, and education. This focus on solving local problems contributes to the industry’s growth.
Market Demand for Technology: The increasing adoption of digital technology and the internet in Bangladesh has created new opportunities for tech-driven startups, especially in areas like e-commerce, fintech, and mobile apps.
Market Dynamics
The dynamics of the startup industry in Bangladesh in 2022 showcased a blend of local and global investments that underscored the sector’s increasing maturity. A total of 40 Bangladeshi startups received funding during this period, with a remarkable 92% of the total funding originating from foreign investors, highlighting the growing international interest in the country’s startup ecosystem. Venture Capital played a pivotal role, constituting a substantial 79% of the total investments in 2022. This influx of venture capital funding indicates a high level of confidence in the prospects of Bangladeshi startups.
As the ecosystem evolves, there is a discernible shift in the composition of investments. Late-stage funding rounds are gaining prominence, accounting for an increasing portion of the total capital raised. However, early-stage funding remains the majority in terms of the number of deals. Notably, 59% of the total investments were channeled into Series-B+ rounds, with a significant focus on startups like ShopUp and Chaldal, primarily backed by Venture Capital Funds.
On the other hand, early-stage fundings, including pre-seed and seed rounds, constituted 58% of the total number of deals in 2022. These early-stage investments were led by a combination of Venture Capital Funds and Angel Investors, reflecting their active role in nurturing the growth of emerging startups.
In terms of the sectors that attracted investment, the Financial Services sector emerged as the leader, primarily driven by ShopUp’s impressive funding round, which secured a substantial USD 65 million injection. Other notable sectors included Logistics and mobility, Education, E-commerce, and Tourism, all of which experienced significant investment inflows in 2022. This diversification across sectors underscores the broad spectrum of opportunities available within the Bangladeshi startup landscape.
Export Potential
The ICT sector is showing high export potential with export earnings from Telecommunications, computer, and information services amounting to 754 million USD in the FY 2021-22, representing a 73% increase from the previous year. The growth is expected to continue as the development of supporting infrastructure and related services creates a more conducive environment for the sector. The low cost of operation and availability of unutilized technical resources make Bangladesh an attractive destination for foreign companies to outsource their activities to the country.
Government Support & Policy Incentives
Currently, there is a 10% cash incentive for overall export in the IT/ITES sector. Bangladesh Hi-Tech Park Authority (BHTPA) is the regulator for developing Hi-Tech Park, Software Technology Park, and IT Training and incubation Centers throughout the country. Currently, there are 12 HTPs declared with the aim of incentivizing local and foreign investors, offering the following benefits:
10 years exemption of Income Tax for investors
Duty exemption on importing Capital Machinery
Exemption of Income Tax on Dividend, Share Transfers, Royalty
Exemption of VAT on goods produced by investors
Bonded Warehousing Station
Future Trends and Opportunities
LightCastle Business Confidence Index (BCI) utilizes the Harmonized Expectation Indicator to take the geometric average between expectation and situation to provide a quantitative output of the sentiment on a scale of –100 to +100, where a positive number indicates better expectations than current outcomes.
BCI Score
Startup
+7.41
IT/ITES
+5.09
Challenges:
Inadequate physical and digital infrastructure, including reliable power supply and high-speed internet, can impede the growth of tech startups and IT businesses.
While Bangladesh has a pool of young and talented individuals, there is a shortage of skilled professionals in specialized areas such as software development, data science, and cybersecurity. Retaining top talent can also be challenging due to global competition.
Although improving in terms of clarity and automation, obtaining necessary licenses and permits can be a cumbersome process, slowing down the pace of innovation.
Ensuring the protection of intellectual property rights can be a challenge. Startups may face difficulties in safeguarding their innovations and ideas from unauthorized use or replication.
Periodic political instability and economic uncertainties can create an unpredictable business environment, affecting the confidence of investors and startups.
Opportunities:
Despite a 73% funding slowdown compared to 2021 due to the global economic downturn, startup investments are expected to rebound as the world recovers from the pandemic and local conditions stabilize, likely starting in 2024.
Climate change concerns have taken center stage globally, making climate and sustainability startups increasingly attractive to both local and international investors, presenting significant investment potential.
Operating costs in Dhaka are 16-20% lower than in Bangalore and 30% lower than in Cebu. Jessore, Rajshahi, and Kaliakor have even lower costs of operation.
In the face of a global recession, there is a notable increase in new ventures initiated by Bangladeshi professionals returning from abroad. Additionally, the startup landscape in Bangladesh is witnessing the emergence of startups structured with international holding companies owning the majority, while a Bangladeshi identity operates as the operating company, indicating a diversification in business models.
The Government of Bangladesh’s unwavering commitment to building a “Digital Bangladesh” is driving the startup ecosystem’s ambition to produce at least five unicorns by 2025. This government focus on digitalization creates a supportive environment for startups and fosters their growth, contributing to their investment potential.
