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Pakistan at a venture crossroads

Kaamil Hussain
Sunday, Apr 14, 2024

( Part – I )

With a growing population, a youthful workforce, and a surge in technology professionals, Pakistan can be fertile ground for corporate ventures and corporate venture capital.

Handicapped by a lack of capital, misalignment of financial incentives, and regulatory constraints, however, Pakistan has seen missed opportunities. As market dynamics shift and the foundations for a thriving venture ecosystem form, large Pakistani companies can embrace venture-driven growth, shaping this ecosystem and reaping the benefits of Pakistani entrepreneurship – or risk falling behind in a world racing towards progress.

Pakistan is known for its unbelievably chaotic cricket team, which forms one-half of the greatest sporting rivalry on the planet. Not to mention colourful textiles and embroidery, and dishes like Burn’s Road Nihari, Student Biryani and Seekh Kebabs.

What Pakistan is not known for? A vibrant startup and venture ecosystem.

In my conversations with Pakistani entrepreneurs, investors, and executives, I heard a lot of scepticism about the future of venture-driven growth in Pakistan. That's despite Pakistan having, in my opinion, the foundational elements for a thriving entrepreneurial ecosystem. For starters, the nation has the fifth largest population in the world. And that population is both overwhelmingly young (with a median age of 22) and bilingual – Pakistan has the fourth largest number of English speakers in the world. Add to that one of the fastest-growing middle classes, more than 100 million mobile broadband subscribers, and a growing cohort of technology professionals, and you have the seedlings of a fertile market for new ventures.

And yet, Pakistan lacks the startup success stories of its Middle Eastern, North African, and South Asian peers, such as India, the UAE, and Saudi Arabia. It ranks 76th among the 100 economies featured in StartupBlink’s 2023 Global Startup Ecosystem Index, and until recently, venture capital funding deployed in Pakistan was a trickle compared to similar developing economies in the Middle East, North Africa and other parts of Asia.

Despite the scepticism displayed by my contacts in Pakistan’s business community, I believe that the country holds tremendous promise for entrepreneurship and venture-driven growth. Many of the historical barriers that have hampered advancement are slowly but surely falling to the wayside. The technology talent pool and infrastructure is maturing, and Pakistan’s corporate giants are in dire need of new avenues for growth.

The advancement of startup activity and venture capital in Pakistan has historically been limited by: political and economic instability; an unsupportive regulatory environment; shortages of high-quality talent (exacerbated by brain drain); and large Pakistani corporates not participating. The latter is perhaps the most concerning.

Instability at the highest levels of government has resulted in inconsistent policies. Coupled with dramatic currency fluctuations, this has hurt investor and business confidence, thereby discouraging venture growth. Local taxation frameworks unfavorable to investors have further exacerbated the issue and limited the capital available to Pakistan’s startups. Weak enforcement of intellectual property rights has made it difficult for the country's upstarts to safeguard their ideas and inventions effectively.

Pakistan has also struggled to develop and retain top-tier technical talent. Pakistanis who have had the means to do so have historically left the country. They find work in the West or growing MENA economies like Saudi Arabia and the UAE. Many Pakistanis studying abroad at US and UK universities have also chosen to remain abroad. The Pakistani diaspora is now one of the largest immigrant populations in the world, the majority based in the Arabian Gulf. This has led to a brain-drain for Pakistan, while also creating a potential expat market for Pakistan’s startups.

Finally, the very large family-run conglomerates that have long dominated the Pakistani economy with captive business models, have focused more on incremental growth and short-term income than on pursuing exponential growth and transformation. These local market behemoths have not been forced to consider or invest in transformative endeavors, so far. But market dynamics are changing. The industries that have traditionally sustained the Pakistani economy, face impending declines. Much like Brazil in the early 2010s, Pakistan is at an inflection point.

Pakistani corporates need to embrace entrepreneurship and venture-driven growth or they will miss coming opportunities and fall behind.

In many ways, Pakistan’s venture ecosystem can be compared to that of Brazil’s a decade ago. The early 2010s saw the founding of Brazilian tech startups like Gympass, Loggi, QuintoAndar, and the minting of Brazil’s first tech unicorns. 99, a ride-sharing unicorn, was acquired by Didi Chuxing in 2018, while Nubank, a fintech unicorn, went public in 2021.

At the time of their inception, Brazil’s startups and investors were dealing with unfavourable taxation policies, shortages in technical talent, and regulatory barriers. VC funding in Brazil amounted to almost $310M. In the years that followed, this number rose dramatically as the Brazilian government introduced new policies and programmes to promote entrepreneurship. The push by government organizations to support new ventures in Brazil was accompanied by an expanding middle class, greater consumer spending, and increasing internet and mobile penetration. The parallels with Pakistan are obvious.

Brazil also experienced shifts in cultural attitudes toward entrepreneurship and risk-taking, as Brazilians saw the success of American upstarts and homegrown unicorns. Brazil attracted both local and foreign Venture Capitalists looking to fund ventures, such as Monashees, Kaszek Ventures, Redpoint eventures, and Valor Capital Group. VC funding more than doubled, from almost $310 million in 2012 to $746 million in 2015. And by 2021, VC investment in Brazil reached almost $9 billion.

While the regulatory and tax environment in Brazil is by no means optimal, and the country still faces limitations around technical talent and infrastructure, there have been undeniable improvements on all fronts in the past decade. Brazil’s venture investors, family offices, large corporations and entrepreneurs have taken advantage of these changes. Brazil has developed a thriving venture ecosystem that has produced 25 unicorns. In addition, Sao Paulo has cemented its status as the startup hub of LATAM.

While there are obvious differences between Brazilian and Pakistani markets, there are also many parallels. Those parallels suggest Karachi and Lahore could rival Riyadh and Dubai to become a startup hub in the region. Regulatory bodies are in the early days of implementing policies and programmes designed to foster a conducive environment for new ventures, mirroring the regulatory reform seen in Brazil.

Notably, in February 2021, Pakistani companies were permitted to establish holding entities abroad while retaining their operating company in Pakistan. This is key to attracting foreign investors. The State Bank of Pakistan also changed policies regarding the repatriation of investment, removing the requirement of obtaining prior approval before repatriating. Moreover, the State Bank regularized the issuance of convertible debt, making it easier for startups to raise funds through debt financing that can be converted into equity. And they have created a framework to streamline cross-border digital banking.

Elsewhere, the Ministry of Information Technology and Telecommunications announced its intention to invest in local startups through the government-funded Pakistan Startup Fund. While much more regulatory change is needed for Pakistan’s technology and entrepreneurship ecosystem to thrive, this is a good start. It's a signal that historical regulatory barriers are slowly falling. These changes provide Pakistan’s venture investors, corporations, family offices, and entrepreneurs with the opportunity to replicate something akin to what Brazil’s venture ecosystem has created.

Today, Pakistan is in a similar position to Brazil circa 2012, and regulatory changes in the country have already created progress when it comes to new venture creation and investment. Venture investment in Pakistan grew almost tenfold from $36 million in 2019 to $350 million in 2021.

A key catalyst for the growth in domestic startup activity was the success of Careem – a ride-hailing platform acquired by Uber for $3 billion in January 2020. The company’s rapid success created what is known as the 'Careem Mafia' (resembling the PayPal Mafia). This group of former employees and founders have gone on to found and invest in other Pakistani startups. The successful exit of Careem, the rise of upstarts like Daraz, Zameen, and Dawaai, and the balloon in VC dollars invested in the country, has already inspired aspiring entrepreneurs and motivated technical graduates, educated abroad, to return home. They're sensing new opportunities.

To be continued


The writer is a venture associate at Mach49.