Protecting innovation: The need to keep politics out of startup funding

After the fall of the Awami League government, the entrepreneurial community in Bangladesh has been rocked by revelations that several startups were denied funding by Startup Bangladesh Limited (SBL), the government's venture capital arm. Some of these startups were apparently blacklisted for not following allegiance towards the ruling party, raising critical questions within the startup ecosystem. 

In March 2020, Startup Bangladesh Limited was established with the noble goal of providing much-needed capital to early-stage ventures that might otherwise struggle to secure financing. The idea was to foster an entrepreneurial ecosystem where the most promising startups would receive the support they needed to grow. However, recent reports suggest that this ideal has not been upheld. When political factors started dictating these decisions, it undermined the very principles that should have driven our funding processes. 

According to Abdullah Abyad Raied, CTO of 10 Minute School, their funding round with SBL had already been confirmed through a formal agreement. Despite this, they faced a very real threat that the funding could be withdrawn due to a social media controversy. Although the investment was ultimately reinstated, the incident highlights the fragility of government commitments when politics is involved. The fallout from this uncertainty was immediate. The company had to delay a significant capital expenditure for its new English Center branch in Mirpur and prepare for cost optimisations that included potential salary cuts. 

"I believe SBL has a duty to be extremely non-partisan when it comes to these decisions. Any questionable decision affects both the young entrepreneurs as well as the international venture capital funds looking to invest in Bangladesh," he explained. 

For many young founders, who are often at the forefront of our startup scene, this political interference is particularly disheartening. These entrepreneurs are known for their drive, creativity, and willingness to challenge the status quo. They do not subscribe to the herd mentality of blind political loyalty. They are precisely the kind of people we should be encouraging and supporting, yet they are the ones most likely to be excluded from the funding process when political considerations were allowed to dominate. The imposition of political loyalty as a prerequisite for funding not only discouraged these innovators but also sent a damaging message about what is valued in our entrepreneurial landscape. 

10 Minute School's experience was not an isolated incident as the founder and CEO of Shikho also raised concerns on the issue. The company was selected and finalised as per the due diligence process of SBL who were going to be co-investors alongside other international investors leading the round. This deal was only called off last minute based on 'political grounds' that were brought up by a third party. "It is disheartening to see decisions influenced by external, non-business-related factors. This not only undermines the trust startups place in these programs but also calls into question their ability to support innovation impartially," he mentioned. 

The impact of this trend extended beyond the individual startups affected. When government funding is influenced by political considerations rather than business viability, it creates a skewed environment where only those with the right political connections can succeed. This not only stifles innovation but also limits the diversity of ideas that are crucial for a healthy and dynamic economy. Our startup ecosystem thrives on a variety of perspectives and solutions, which can only be achieved when funding decisions are based on merit rather than political allegiance. The politicisation of funding decisions also has serious implications for investor confidence. Both domestic and international investors are likely to view a system where political favouritism plays a role in funding as unreliable and biassed. This erosion of trust can lead to reduced investment and slower growth for the sector as a whole. 

Right now, the credibility of our startup ecosystem is at stake, and regaining it will require significant effort and reform. Raied suggests the SBL board should be more meritocratic, diversified, and focused on returns rather than political spending. This would involve ensuring that the core management, while composed of industry veterans, is insulated from political pressures. The government representatives on the board should be regulated to ensure they do not influence funding decisions based on political considerations.

"To ensure greater transparency and accountability, it is vital to establish clear and standardised criteria for funding decisions, which should be openly communicated to all applicants. Additionally, independent audits and regular public reporting on the allocation of funds would help build trust in the process," Shahir explained.

Given the allegations of political bias, it would also be crucial for the interim government to conduct a thorough review of previous funding decisions made by Startup Bangladesh. This review should aim to identify any instances where political considerations may have played a role and offer a second chance to startups that were unfairly denied funding. By doing so, they can demonstrate a strong commitment to fairness and help restore confidence. 

At the same time, it is important to recognise that government funding should not be the only source of capital for startups. The interim government should take steps to encourage private investment, offering tax incentives for angel investors and venture capitalists, and removing regulatory barriers. This will help create a more diversified funding landscape, where startups have multiple avenues for securing the capital they need to grow. Engaging with startup founders, investors, and other stakeholders to identify and address systemic issues within the ecosystem is also crucial. This engagement can lead to meaningful reforms that support the growth of the sector and promote a fair and unbiased funding process. 

The integrity of our startup ecosystem is crucial for Bangladesh's future economic growth. The future of our innovation economy depends on these crucial reforms, and the time to act is now.