2020: A Year on the Ground

Here are excerpts from our yearly letter to existing and prospective investors at Anchorless Bangladesh. We hope this information will provide further insight into how we view the opportunity and the shared optimism of our global investor base.

Dear Partners and Friends,

Anchorless dedicated 2020 solely to supporting companies, founders, and the wider startup ecosystem in Bangladesh through the COVID-19 global pandemic. While the virus was devastating in developed market economies, its impact was far more serious and unpredictable in emerging market nations, who lacked the necessary infrastructure and resources to rapidly respond in a coordinated manner. As in other geographies, much of the responsibility was borne by the private sector, and we have been particularly impressed with the way in which corporate and startup communities in Bangladesh learned to adapt and navigate the pandemic. While many companies were either forced to close their doors or pivot business models, the resulting group of survivors and new ventures has emerged from this crisis far stronger. These companies are solving real problems for the country and expanding quickly.

As was the case in many countries, the events of 2020 made all stakeholders in Bangladesh realize the importance and inevitability of technology and digitization. While this is a global phenomenon, the effects were far more pronounced in places like Bangladesh and the changes being made as a result are far more significant across all segments of society. What was unique to Bangladesh going into 2020 was a disproportionately low level of domestic commerce being done digitally despite a massive and growing pool of online tech talent. Bangladesh was behind only India, and ahead of the United States, as the world’s second largest source of digital labor. As a percentage of total population size, Bangladesh had the largest percentage of the population providing digital labor of any country. Even so, the benefits of that tremendous intellectual asset base were accruing abroad rather than domestically. In 2020, that dynamic was forced to change, and as a result there is an explosion of new opportunities. We are thrilled to be on the ground with the individuals making these opportunities happen, and we are doing everything we can to nurture the development of this incredible untapped talent pool.

In 2020, Anchorless met with over 160 startups as well as numerous governmental, academic, and corporate institutions to establish and maintain a 360-degree view of the ecosystem. We have created comprehensive and sustainable institutional partnerships in Bangladesh, and we have earned the trust of key stakeholders throughout the broad ecosystem. As a result, we believe Anchorless has become a recognized resource and local point of contact for other regional investors and companies interested in Bangladeshi startups. The breadth and depth of our expanding network enhances our ability to discover, vet, and add value to the companies we invest in.

Portfolio Companies

We are delighted to have deployed $2.2 million into three high-growth startups despite 2020’s volatility. The Anchorless team has worked closely with each company on a near-daily basis, assisting however we could as each encountered unique opportunities and challenges throughout the year. The process of supporting teams during a chaotic period greatly improved our ability to marshal resources and coordinate solutions in Bangladesh, and that institutional knowledge will pay additional dividends going forward. The first three companies we chose to invest in were Gaze (artificial intelligence), Loop Freight (logistics), and most recently Maya (digital healthcare). All three are led by incredible teams doing important work that we are thrilled to be a part of.

Additionally, we have signed a term sheet for our fourth investment and pending our confirmatory due diligence process and closing procedures, we look forward to sharing more details with you soon. 

Ecosystem Building

Over a year into operating on the ground, a significant portion of our work in Bangladesh has focused on ecosystem building. Founding partner Rahat Ahmed and the rest of the team in Dhaka have spent time forging partnerships with relevant stakeholders. This includes Rahat working with Startup Bangladesh Limited, the government’s startup investment vehicle, on supporting their investments, and NSU Startups Next, a startup incubator at the nation’s leading private university, North South University. Additionally, by engaging with international government entities and capital, we are building supportive relationships; these efforts will improve future growth of enterprise and prime the environment for companies on a go-forward basis.

Technology in Bangladesh: Trust and Data

The stakeholders in the startup community in Bangladesh continue to set the foundation for the ecosystem’s inevitable surge; founders are learning, evolving, and finding ways to adapt in the post-COVID era. While the rate of change in the ecosystem had been rapid pre-COVID, that pace has only increased in Bangladesh. Here are some of the patterns we see in Bangladesh and similar markets:

The puzzle companies must solve is how to sequence developing technology, gaining the acceptance and trust of customers, and harnessing those together in a viable business model. In our view, trust is the most important variable. Technology businesses are often not a question of technological capability, but rather reception and utilization. Users must be both able and willing to engage with new products. If customers do not trust a vendor on the street or on the Internet, issues arise. Without trust, customers are slow to adopt new business relationships and significantly less willing to pay higher prices for higher quality goods and services because they assume the vendors is simply shipping the cheapest option. This can form an unfortunate, self-reinforcing loop: because buyers generally will not pay a higher rate for quality in a low trust environment, suppliers then must try to compete on cost, and this in turn ends up validating the buyer’s suspicions. Business-to-consumer (B2C) focused companies such as Maya have figured out how to break this loop by providing significant value to users first for free, thus building trust. This allows them to develop significant advantages over their competitors eventually leading to premium pricing.

In a business-to-business (B2B) environment, a customer that does not trust a vendor is not going to take the risk of adjusting their internal workflows with new software or procedures from that vendor, meaning the switching costs of products must be risk-adjusted for a “trust factor.” Inverting this, businesses who have figured out how to build trust with customers end up with immense competitive moats. This is true anywhere, but in emerging markets its importance cannot be overstated. There is a snowball effect to this. Trust with customers means they will be receptive to new technological features and workflows around them, meaning a company that has earned trust can expand their features better and faster than others because they can iterate based on real customer feedback. A company with the beachhead of high-trust relationships with customers and some simple but useful features will generally be able to beat companies with more advanced technology but no high trust customer cohort. A company who can build trust and advanced technology is incredibly hard to disrupt in a market like Bangladesh. There are several strategies to address this, but one that works the best in B2B is the one that has been executed by Loop: build the business using more traditional methods, develop technology based on the customer’s priorities, and then leverage the increasing trust and size of the business conducted to enact significantly broader, mutually beneficial technology and workflow adoption.

Over time, social proof and transaction precedent reduces per customer sales and on-boarding frictions, increasing the ability to roll out new features without adoption frictions. It is important to understand how trust relates to new features. If a company wants to add an incremental feature where the customer immediately understands how that feature will drive their bottom line instantly, this requires a given level of trust. However, if the company wants to add a more "step function” type feature that requires buy-in from the customer, where the customer may receive material benefits over time but not necessarily immediately, this requires a much higher level of trust. This means that only companies who build this high level of trust can even attempt to make major innovations. The interplay between trust and innovation is of vital importance and is frequently misunderstood by both operators and investors.

As shown above, Bangladesh’s internet is growing at an incredible rate. But the market is not without nuance. Perhaps the most underappreciated issue in Bangladesh and other developing markets is the dynamic of smartphone prices dropping far faster than memory or wireless data costs. Consumers in these markets are price sensitive, so they opt for the cheapest phone that has enough memory to store the apps and data they use every day. When they want to use an app, they download it over Wi-Fi, use it to buy, view, or listen to something, and then delete it to save the memory space. As an extension of this, they naturally prefer in browser mobile web applications as they reduce storage needs. Despite this being an observable market dynamic, we have been surprised at how often it has been missed. It has caused major problems for large tech companies trying to capitalize on the rapidly expanding smart phone penetration in developing markets. Generation 2 companies mentioned above struggle with this, as the user journey ends up being defined by this constraint as downloads do not actually translate into an installed base. This adversely impacts customer acquisition cost (CAC) and customer retention metrics for many companies. Again, trust is a barrier, but in this case a user must trust that your application will be something they want to use so frequently that re-downloading would not be worth the effort. Any company that overcomes this barrier has a significant competitive advantage.

Staying Connected

We at Anchorless are incredibly excited about the opportunity set we see in the coming year and beyond. Please feel free to reach out to us at [email protected] if you're interested in learning more about Bangladesh, the ecosystem and the founders who are building the future.

—The Anchorless Bangladesh Team