Over the past few years, Pakistan’s economy has been battered by rising inflation, COVID, supply chain shocks and high energy prices. The silver lining for the country in this world of constant shocks is its booming startup sector.

Previously, Pakistan has always lagged behind the Middle East in attracting Venture Capital - VC funds, but now the gap is shrinking. Overall, venture capital funding in Pakistan as a percentage of GDP grew ten times faster than in the MENA (Middle East/North Africa) region over the last three years and is now at parity. Formerly, the investment probability ratio of Pakistan relative to MENA was 80:1; now it has decreased to 7:1 (Husain, 2022).

In recent years, Pakistan has seen significant growth in the tech industry and attracted a high level of foreign investment. Nearly $345 million was raised in VC funding by startups in Pakistan in 2022.

Pakistani startups currently have a market capitalization between $1.5 billion and $2 billion. This figure is expected to rise to $6 billion within five years and $30 billion by 2030 (Husain, 2022). Many factors have contributed to this change of events, which we are going to dissect extensively in this article.

Why is Investment a Preferred Option for Startups in Pakistan?

First, let’s understand what investment is and how it works before we delve deeper into investment trends in Pakistan.

Getting a steady flow of capital is crucial to any startup's success. For that purpose, most startups try to self-finance, which is a misstep on their part as they eventually run out of cash before they can score a profit. A few startups also opt for bank loans to gain instant capital. However, this option is not feasible for two reasons. Firstly, they lack a proven success record to support their loan request. Secondly, these loans have a high-interest rate, so the profits get channelled towards paying off this loan.

Based on the above discussion, the most viable option for startups is to get funding/investment from investors. Investors consider various factors for this decision, including product market size, business model feasibility, the financial performance of the company and its subsidiaries, etc.

Angel Investors vs Venture Capitalist Firms

Startups can raise funding either from angel investors or venture capitalist firms. Angel investors are affluent individuals who passively invest their money into startup ventures. Venture capitalist firms hire VC investors to make investment decisions on the firm’s behalf. They demand a higher equity stake and operational control over the business they are investing in.

Pakistan: A Perfect Setting for Startup Investment

From a demographic point of view, Pakistan is equipped with all the essential elements of a favourable startup ecosystem. Here’s a close look at the fundamentals in Pakistan;

• The country has an approximate population of 230 million, making it the fifth largest in the world. (Pakistan Population (2022), n.d.)
• There is an overwhelmingly young population (63% of the total population) with a median age of 22.
• Pakistan has the third largest number of English speakers globally, with 108 million speakers. About 27% of the Pakistani population speaks English as a first language while 58% speak English as a second language. (English Speakers By Country - WorldAtlas, 2018)
• It boasts one of the fastest-growing middle classes comprising 114 million mobile broadband subscribers. (Abbasi, 2022)
• As an added bonus, more than 20,000 IT graduates and engineers are produced yearly in Pakistan.
• The country has 13 software technology parks and is home to almost 300,000 English-speaking technology professionals. (Information Technology, n.d.)

Why Has There Been a Lack of Investment in Pakistan for Such a Long Time?

Even though the landscape of Pakistan was investment ready, it was hardly attracting any VC funding compared to other countries of the MENA region. Here are a few contributing factors to this lack of investment:

• From 2016 to 2018 the startups in Pakistan were averaged approximately 10M yearly in VC funding, which hardly served as one-third of a basis point of overall GDP ($ 0.05 per capita).
• On the other hand, the MENA region had a flourishing venture capital market with $800 million in annual VC funding. It clearly depicts that Pakistan was clearly not a burning platform for investors to take risks. (Awan, n.d.)
• It has been decades since the macro economy of Pakistan remains a captive of agriculture and the giant conglomerates exercising monopoly in the market. Thus, that leaves little room for other businesses to thrive.
• Adding fuel to the fire was a comparatively lower (roughly 15%) contribution of capital information to the overall GDP. Our neighbouring countries, India and Bangladesh, have a capital information contribution of 30% and 32%, respectively. These figures and scenarios portrayed Pakistan as a country that lacked behind in tech adoption. (Awan, n.d.)
• The offline-to-online shift of the people in Pakistan was slow which was discouraging for tech startups. However, with the onset of Covid 19, this shift has now quadrupled

Economic Factors That Have Shifted the Investment Climate of Pakistan

The number of Pakistani startups has grown dramatically over the past few years. Although the whole Middle East region is accelerating, Pakistan is on a faster trajectory in comparison to other countries in the region. Here are a few factors that have contributed to the increase in investment.
Startup-friendly regulatory reforms by the government
In recent years, the Pakistani government has implemented very progressive regulatory reforms. Since Pakistan has a challenging macroeconomic climate, the government is keen to support startups. It stems from the fact that our country is caught up in the balance of payment and lack of reserves. Therefore, the government perceives startups as an opportunity to break the cycle.
There have been several regulatory initiatives, a recent one being the establishment of special technology zones. These zones offer a lucrative environment for investors, where they are given tax breaks.
SBP and SECP regulations for foreign companies
The State Bank of Pakistan and the Securities and Exchange Commission of Pakistan (SECP) have drafted regulations to promote startups. These regulations enable foreign startups to structure themselves as foreign holding companies to cut down on red tape. (External Relations Department, 2021)
Tech savvy culture & increased internet penetration
Extended lockdowns during COVID-19, low-cost mobile phones and affordable data availability have increased internet penetration in the country. According to an estimate, there will be more than 180 M, mobile users, in the country by the end of the year. This tech-savvy culture along with the rising Gen Z population creates a breeding ground for tech startups to thrive. The inclination of top talent toward startups
A few years ago, the top talent in Pakistan was either coerced to move abroad or hired by multinational firms if they were inspired to make big bucks. Now there is a phenomenal shift that has contributed to 250+ startups since 2015. Today the country’s top talent is more tuned into either starting their own startup or joining one.

Booming and Breeding Tech Industries of Pakistan

In recent years, investors have gained massive returns from e-commerce to Fintech industries. Here’s an overview of the tech-based startups in Pakistan.

• The eCommerce startups in Pakistan are both B2B and B2C. The B2C (business to consumer) services are commerce startups that offer grocery delivery, pharmacy delivery, and fashion shopping, as well as online ticketing. Among the B2B startups, we see rapid digitization of informal retail stores (kiryana stores) in Pakistan. Some of the most notable eCommerce startups include Tajir, Bazaar, Dastgir, Retailo, Jugnu, and bookme.pk.
• Fintech is now on the rise due to positive regulatory changes by the government, like the introduction of new Electronic Money Institutions (EMIs) and digital banking licenses.
• There has also been a noticeable trend regarding the digitization of education and the health sector, which has a significant impact on the country. Fintech and digitization of education and health include EasyPaisa, JazzCash, SadaPay, NayaPay, Noon Academy, Ilmi, Marham, and Tabiyat.pk
• Deep tech and SaaS-based startups are still uncommon in Pakistan. There is a huge market need for these in the global economy, especially in the US and European markets. Pakistan has a huge market for IT professionals. We can eventually start building software and Deep tech companies to service these markets.

Wrap-up of 2022 Startup Investment in Pakistan

In the first quarter, Pakistan’s startup market witnessed fast growth in funding, which came down to $172.75 million in the subsequent quarters. The second quarter recorded $102.94 million while the third only $55.4 million.
The funds received by startups in Pakistan stood at $284.8 million by the end of the first half of 2022. The investment value surged to $328 million in the next quarter, whereas it now stands at $345 million. The Pakistani startups attracted significant investment amounts in the first eleven months of 2022, but this investment took a downtrend every quarter.
According to Data Darbar, a leading platform mapping updates about Pakistani startups, despite the global economy slowing down, and the challenges brought on by the high costs of doing business, Pakistan has remained an attractive market for investors in innovative business models.
TechShaw, a research site, claimed investment received by Pakistani startups stands slightly higher at $5 million or 1.4% by November 2022. However, data from different sources varies because of no centralized government system tracking.
As stated by CEO Data Darbar, “We are Rs. 15 to Rs16 million short of what we raised in the same period of last year. This time, there were even fewer deals made, compared to the corresponding period of last year. It seems that everybody has resorted to a just “wait and watch” policy concerning Pakistan’s macroeconomic situation.” (Hanif, 2022)

The Final Verdict

Pakistan is an attractive economy for foreign, and local investors, who continue exploring its potential through funding in multiple sectors of startups. However, the expected inflows of funds from various Venture Capitalists (VCs) remained slow in the second half of 2022 due to the global economic recession and the domestic political turmoil – which is likely to continue in the next year too.
Pakistan needs to focus on these issues and provide investors with a potential platform for investment. The moment to act is now since the amount of money invested globally in startups is increasing. Pakistan must attract and facilitate foreign investors trying to invest in Pakistani innovation to maximize this trend and gain from it.
Startups create unique business opportunities in mainstream sectors enhancing their overall size and dimension. It helps in facilitating customers by introducing innovative products and services. The untapped market of Pakistan offers unlimited opportunities for startups. However, in the current socioeconomic conditions, startups need to tread carefully to survive and thrive in and out of Pakistan.
Startup founders should work consistently on innovation, maintaining the quality of their Service. They ought to adopt technology and good business practices to remain viable and sustainable in the local and international markets. Startups should develop business models based on scalability, to attract funds from foreign investors and VCs. Their models should be exemplary to set a benchmark for expansion in countries other than Pakistan.

References

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