Politics and Venture Capital: An Uneasy Mix

In light of recent circumstances in Bangladesh, I think it’s crucial to talk about the relationship politics plays in how money flows globally, especially venture capital funding for startups. Politics plays in the governance of an economy, which in turn determines whether money flows in and out of that economy. Venture capital is an asset class that invests into startups globally. So how does politics affect venture capital and how comfortable is the relationship between the two?

To talk about politics in the same breath as venture capital might be a little strange. At first glance, it’s hard for your average startup founder to find a correlation between the pair of them. Whether you’re early-stage or Series funded, startups always stick to their gameplan and don’t necessary equate their goals with political affiliations. Are venture capitalists of the same opinion though?

Recently, 10 Minutes School, an edtech startup in Bangladesh funded by Tier 1 VCs like Sequoia, has had their funding cancelled by Bangladesh’s government venture capital firm, Startup Bangladesh Limited.

What was the context? Bangladesh had a recent change in government that came as a result of mass student demonstration for reforming quotas on lucrative government jobs. This created a negative backlash for citizens and mostly students who wanted to avail the jobs based on merit. As such, even 10 Minute School CEO became vocal on Facebook in support of the student’s demands. What was the result? Their funding got cancelled.

Startup Bangladesh Limited is a government-backed venture capital (GVC) firm under the Information and Communication Technology Ministry of Bangladesh. Called the ICT Ministry in short, and inaugurated in March 2020 former government’s tutelage, the firm raised a fund BDT 500 crore or around USD 42M (As of Sep 4, 2024, USD 1 = BDT 119.56 ) sponsored by the government of Bangladesh. They have funded one the likes of Loop Freight, Truck Lagbe and Pathao as well, among others.

Exploring some of the avenues in which pre-seed, seed and growth-stage startups raise funding, GVCs play a crucial role in building the startup ecosystem if they play it the right way. This involves keeping government interference free from startup development, something that seems to have escaped Startup Bangladesh’s mind when they cancelled the funding for 10 Minute School. However, we have to ask ourselves, is this the only case of government interference in startup development?

In recent years, China has implemented a series of regulatory measures on Alibaba, Tencent and ByteDance making it more difficult for them to operate independently.

Some observers like The Economist, The New York Times and The Wall Street Journal have argued that there are a few major reasons for the government placing a regulations on China’s tech giants, a summary of which is listed below:

• Rise of tech giants: With immense financial wealth and influence, these companies may pose a challenge to the government with information flow to and from China.

• Data sovereignty: The fear of foreign governments getting access to Chinese data may have acted as a key driver for regulating these companies.

• National security: In order to consolidate government power, they may try to consolidate control over critical technologies and prevent potential threats from emerging within the tech sector.

• Political dissent: Bangladesh has shown recently how Meta can be used to organize protests and spread critical information. Political dissent may be motivation to control tech giants in order to limit their ability to do the above.

• Economic nationalism: Reducing dependencies on foreign technology may China to promote domestic champions that can be promoted globally.

Placing national sovereignty over global benefits put countries at risk of compartmentalizing their activities from the world. It leads to a higher exodus of talents for regulatory-friendly countries and also take away the platform for companies to grow accordingly. Key concerns with political interference in GVCs include:

• Favoritism: Funding companies that favor politically connected or aligned with the political parties priorities.

• Reduced competition: Political interference can distort market forces and reduce competition. This leads to a loss of innovation in the market.

• Corruption: Startup teams can misuse funds for personal or political gain. If they are well-connected, it may drain funding and lead to a loss of public trust.

• Bottlenecked innovation: Funding startups based on political considerations lead to a loss of appetite for risk-taking and research, limiting innovative ideas from scaling into a business.

To mitigate these risks, it is essential for GVCs to operate transparently, adhere to rigorous governance standards, and prioritize merit-based investment decisions. Independent oversight bodies and robust regulatory frameworks can also help to ensure that GVCs are not unduly influenced by political factors. Most importantly, the trust of companies taking funding from these institutions need to be present.

If you have a great idea for raising capital, let’s talk: [email protected]