Venture capital 101

Bangladesh is now home to a growing startup scene. With all the exciting startups in the play, venture capital firms are being lured in. We got in touch with Kyle Kling, Vice President of Business Development at Fenox Venture Capital. Fenox Venture Capital, a global VC firm headquartered in Silicon Valley, invests in consumer Internet, mobile, Cloud, SaaS and enterprise businesses. Kyle answers some basic queries about venture capital in Bangladesh to Next Step.

Why should a startup go for VCs, not banks or other financial institutions?

Well, getting money from banks is great but there are a few problems. Firstly, you have to pay an interest rate. And that can be expensive. Remember, you are a startup, which means you don't have any money – that is why you are asking people for money in the first place. Of course there is an upside to working with a bank – you don't give away your company's equity.

But it must be kept in mind that a bank is not your partner. So they are not going to give you advice, mentorship, or access to corporations and the global window. We, the VCs, take a small amount of your equity – we are not buying out your business. You are still the majority shareholder even through some of the later stages of funding. We make sure you have the final say when it comes to making crucial decisions.

So basically I, the VC, am becoming a part of you. If you fail, it is a failure in my portfolio and to all my investors. So it is in my best interest to make sure that you succeed, no matter what.

This a big, big difference between a VC and a bank. You will get money from a bank, but from a VC, you'll get smart money – because of all the advice and mentoring that comes with the investment.

What are the most crucial points a VC looks for in a startup?

There are three pillars. First, it has to be a great team. I have to trust you because I am literally writing you a million dollar cheque. I have to believe that you are the right person to build and scale this business. You are the one who knows it and gets it. I have to believe that you can take the company from zero to 10 million, 100 million or even 1 billion dollar valuation.

Second, the product has to be something that has a lot of potential. It doesn't have to be something that hasn't been built before. There are times when we see a business enter a saturated market by doing something different then their competitors. You need to prove that you are better and different than your competitor.

Last but not least, there is the issue of the market size. For example in the US, we look for companies with a market size of over USD 100 million.

When does a VC expect return on their investment? Is there a timeframe?

The fund lifecycle for a tech business is generally 8-10 years. When a VC invests in a business, they look for an exit period of 3-7 years. So VCs start planning an exit 2 years before the end of the fund cycle because we need to get the money back to our investors. But it varies with region. In US, the expectations are high. So we expect to see the startups meet the milestones in 6 month to 1 year. Otherwise it's a red flag. In that case we have to devise an early exit plan.

What is the current startup scene in Bangladesh?

The startup scene of Bangladesh is still at the earlier stages. There are lots of gaps in the startup scene right now. Surely, there are great startups, great founders and great individuals with exciting ideas, but there isn't any vehicle to support the growth of the startup ecosystem. Interestingly, the scene is changing. Many key components are aligning together and the total startup ecosystem is scaling up. Well, that is the reason why I travelled so far to come here. And you will see more of me in Bangladesh now.

What is Fenox Venture Capital's plan for Bangladesh?

If you look through our portfolio you will get to see that most of the businesses we work with are technology companies. Unlike many other VCs we don't restrict ourselves to a certain type of tech companies. Rather we work with all types: mobile, cloud, SaaS, tech media, etc. We work with broad technology types because we want to invest in anything that is emerging and exciting and we can keep on growing in. In Bangladesh, we are looking for the same thing.

Engineer-turned-writer, Shahriar Rahman is Sub-Editor of the tech publication of The Daily Star. He is also Head of Operations at HiFi Public