The Pakistan Monument in Islamabad
On August 25, 2021, a tweet by Mattias Martinsson, Chief Investment Officer at Tundra Fonder, a Swedish asset manager specialising in frontier markets, drew the attention of many.
“Have followed Pakistan for 15 years. Can’t recall any time when VC activity was anywhere near [that] we’ve seen in the last few months. Impact of reforms kicking in?”, he tweeted.
The tweet, which referred to the record amounts of venture funding being poured into Pakistan in 2021, well captured the changing market sentiment.
And this positive sentiment could, well, mark a new dawn for the Islamic republic’s startup ecosystem.
However, the picture was totally different until three-four years ago. Pakistan, plagued by security concerns for many years, had not been a preferred destination for foreign VCs. The unrest in neighbouring Afghanistan, following its invasion by a US-led coalition in the 2000s, had ripples in Pakistan. Consequently, the country faced several massive terrorist attacks. Its unpredictable and unstable political system added to the woes.
This precariousness scared away global investors from investing in the nation.
While Pakistan was struggling to check the growing terrorist activities and shed its image as an insecure nation, its arch-rival India was marching ahead, attracting billions of dollars in VC money. India, whose digitisation rate grew fast in the recent years, also minted around 100 unicorns in the last 10-plus years, whereas Pakistan produced none.
Finding the feet
After two decades of uncertainty and confusion, Pakistan’s tech startup ecosystem appears to have finally found its feet — if the growing VC activity is any indicator. In 2021, a record US$352 million was raised by more than 50 local startups, statistics by consulting agency Invest2Innovate (i2i) showed. To put this in context, local startups secured only US$465 million between 2016 and 2021 (see the graph).
What made the 2021 boom more exciting was that a big chunk of the dollars came from international investors. Among them were notable VCs, such as Kleiner Perkins (the US), Defy Partners Management (the US), Wavemaker Partners (Singapore), and Zayn Capital (UAE).
The kind of VC money invested in 2022 so far also brings cheers to the ecosystem. In the first three-month period, startups secured 7x as much investment as in Q1 last year, with names such as Indus Valley Capital, Defy Partners, Acrew Capital, Wavemaker Partners, B&Y Venture Partners, and Zayn Capital injecting capital.
Also Read: The 5 women in tech from Pakistan you must know
Many factors are attributed to this investor confidence. The primary reason is the improved security situation; the number of terror-related incidents in the nation has dropped in recent years. An improved digital infrastructure also worked in its favour. Pakistan, with a population of 228 million, had 82.90 million (about 36.5 per cent) internet users as of January 2022.
Besides, Pakistan recently introduced new reforms to become more startup-friendly. The previous PTI government, led by Imran Khan, realised the importance of startups to the country’s economic growth and wanted it to be a hub for new businesses, along the lines of Silicon Valley. The government had also been very responsive to the growing startup ecosystem and instituted several policies from “tax holidays” through special zones to regularising holding companies to creating fintech licenses.
In February this year, the government also established Pakistan Technology Startup Fund worth one billion rupees (US$5.4 million) to provide seed financing to 50 startups annually.
In addition to these initiatives, the central bank, the SBP, introduced new legislation that allows international investors to invest in an entity registered in a foreign land but has operations in Pakistan (it was disallowed earlier).
The reforms also included a legal framework for Electronic Money Institutions (aimed at offering innovative payment services to the general public), the Digital Banking Policy (aimed at granting the license to set up wholly digital banks), and the setting up of Special Technology Zones.
With all this in place, Pakistan now has an active startup ecosystem, with many incubators and accelerators, including i2i, the National Incubation Centers, Nest IO, Plan 9, and Plan X. Several co-working places like COLABS, Daftarkhawan, and The Hive have also emerged recently.
Many early-stage VCs and angel networks are also operational in the nation. The names include CresVentures, DotZero, Planet N, Lakson Investments, Fatima Ventures, Deosai Ventures, 47 Ventures, i2i Ventures, HBL ventures, Indus Valley Capital, Virtual Force, Karavan, Zayn Capital, Walled City Co.
According to Kalsoom Lakhani, Co-Founder and General Partner of i2i Ventures (the US$15-million VC arm of i2i), the pace at which things are moving in Pakistan right now is probably 20x faster than she had ever seen. Moreover, the time between two successive financing rounds is also getting shorter, she says.
As a result of the changing business environment, many foreign-educated young Pakistanis have started quitting their overseas plum jobs at MNCs like Morgan Stanley and McKinsey to set up their own ventures back home. For instance, Aatif Awan, with over a decade working for tech behemoths such as LinkedIn, came back in early 2020 to launch his own VC firm Indus Valley Capital. This early-stage VC firm has already backed eight companies, including Bazaar (a B2B e-commerce marketplace, which recently secured US$70M in a Series B round) and Airlift (a quick commerce startup that bagged US$85M in Series B in 2021).
According to Awan, Pakistan now has all the necessary ingredients to grow — quality startups, a critical mass of internet users, and smart VC money. It is geographically smaller and well-connected, with fewer provinces. Regulatory barriers are also lower.
All these factors have attracted foreign VCs to Pakistan — the last big untapped market globally.
However, the road ahead is still more than bumpy for local startups.
Lack of exits a problem
As startups make waves and put their names on the global map, new problems worry the ecosystem. They include lack of access to growth-stage capital and reluctance among people to open bank accounts (about 100 million adults don’t have access to formal and regulated financial services).
As for exits, the higher valuation of startups is a common concern for many investors. This effectively closes the possible exit routes for startups. According to Suleman Rafiq Maniya (Head of Advisory) at Vector Securities, it may be hard for VCs to get an exit through the stock market because the valuations of startups are higher compared to listed companies.
Exit through acquisitions is also scarce, likely discouraging investors from investing further in local startups. Barring Alibaba’s acquisition of Daraz and Ant Group’s buying of a 45 per cent stake in Telenor’s EasyPaisa in 2018, there have not been any major exits in the past three years. Awan says that the market is still too early for material exits, and it will take the ecosystem a few years for more substantial exits to materialise.
The Pakistan Startup Ecosystem Report 2021 by i2i warns that if foreign VCs don’t see clear long-term prospects locally, they may desist from cutting bigger cheques or making strategic investments.
The Series A and growth-stage capital crunch also poses a problem to Pakistan like any other emerging ecosystem. “There is a lot that a government can do here but I think it is the private sector that should take the lead here. The government can ensure a fair playing field. For that reason, early-stage Pakistani VCs should take the lead to fill the gap. If they fill this gap, they will be able to attract foreign VCs,” says Taraec Hussein, an investor with Gobi Partners, one of the most active VCs in Pakistan.
What future holds for Pakistan
Indus Valley’s Awan believes that the momentum that Pakistani startups gained in H1 2021 will continue in 2022. More top investors, including traditional and cross-border VC funds, will come to invest in Pakistan. Global accelerators like Y Combinator and 500 Global will also double down on local startups.
“The Pakistani startup ecosystem has had a late start, but it’s taking off quickly. The year 2021 saw more VC funding than all prior years combined, and 2022 seems on track to more than double that. By 2025, the VC funding in Pakistan is projected to exceed US$2 billion annually. In the next three-five years, several unicorns will be minted in Pakistan across B2C e-commerce, B2B e-commerce, logistics, and fintech,” believes Awan.
“We expect the new government to continue with startup-friendly policies. There is broad recognition across the political spectrum on tech being the major driver of foreign direct investment (FDI) and exports, so all parties recognise the importance of investing in the tech ecosystem,” Awan shares.
Conrurrs Gobi’s Hussein: “Venture capital is now a key economic pillar of any country and for that reason, it will be extremely foolish for the new government to pull back some of the reforms brought by the previous government. Also, there is so much buzz, interest and hype around VCs and entrepreneurship, founders and startups in Pakistan.”
However, Awan warns that there will be some failures in the local startup scene. “As more and more startups get early-stage funding, the founders will realise that capital isn’t the hardest part of building a great company. Finding product-market fit is hard. Building a world-class team is hard. Competing with multiple well-funded startups and going after the same market is hard.”
Some startups may scale to a certain level but then fail to go past that thanks to any of the reasons mentioned above. It is not a bad thing but is actually a positive thing for the ecosystem. “Because in the long run, people will learn from these experiences and go on to build something bigger and better,” Awan concludes.
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