Updated: Jul 9
Part 2 of a three-part report
By BISMA AHMAD
Global Business Journalism reporter
Some of you will not believe it is happening in Pakistan, right? A country known for terrorism, inequality, and political instability is the next potential hot space for the startup ecosystem.
For sure, the wave is coming. Bored with corporate life, Haziq Ahmed, a young Pakistani, began his entrepreneurial journey by joining Foodpanda in 2019. The monotonous work life made him switch his career and move to the startup industry.
According to him, he always wanted to work in an “entrepreneurial system,” where the essence of doing something great lies.
Between 2016 to 2018, startups based in Pakistan secured an average of 10$ million a year, whereas the Middle Eastern and North African regions secured funding of almost 800$ million. However, Abdur-Rahim Syed, a McKinsey & Company partner, termed it a "mind-boggling situation." Further on, he reported that in the next two years, there has been a dynamic shift as in the last two years, the local startups were able to attract almost $500 million in Venture Capitalist funding.
These figures show that by the time Ahmed founded his own startup in 2021, the value of Pakistan's startup ecosystem had been recognized internationally.
He got his first startup job in Foodpanda, a Germany-based food delivery startup that now holds multiple acquisitions worldwide. His journey in discovering the startup ecosystem had only begun, as while working in startups, he gained inspiration from an article written by journalist Stephen Soroka. It was about q-commerce space, and it inspired him to start something on his own with the help of his fellow partner.
His idea was to create a q-commerce company that could deliver groceries in bigger cities of Pakistan within 40 minutes — something that Amazon was not even doing then.
"Nobody was doing something like that; it was kind of a hot space in the startup ecosystem," he said.
Ahmed named his startup Krave Mart, and it managed to raise $6 million in pre-seed funding.
Funding ... or a "death warrant" for investors
According to Dawn News, one of the reasons the startup could secure a considerable amount of funding within just four months in 2021 was because Krave Mart was co-founded by a team of “rock stars.” The statement said they were former executives of other startups such as Daraz, Foodpanda, and Swvl. Ahmed added that for experienced entrepreneurs, it is easier to gain funds due to their networking skills. That usually needs fresh graduates. Our people only understand the game plan if they see the same model working in another country.
Most venture capital companies included international names like China's MSA capital and German Global Founders, and only one was a local venture. The reason is that the local venture capital companies usually demand a higher degree of confidence in startups' game plans. Ahmed noted that even if potential funders thought the idea was feasible, they still would be afraid to sign their “death warrant.”
One of the reasons for this kind of reticence is that in countries like India and Pakistan, failures in startups are not understood by society to be a natural part of economic development. Given the economic and political instability in Pakistan, it is often hard for investors to believe in the prospect of long-term growth.
But the young generation of entrepreneurs is looking for a formula to find funding. To overcome resistance from local funding organizations that prefer to invest in small-scale businesses rather than in a promising startup idea that they see as "high-risk" investments, some startups will take seed funding in exchange for 80% of the startup's shares.
Despite the challenges, experienced professionals who observe startup trends predict that after India and the Middle East-North African region, Pakistan looks like the next player in a regional wave of entrepreneurship.
Atif Awan, founder and managing partner of Indus Valley Capital, said in a podcast for McKinsey & Company that never had he dreamed of moving back to Pakistan, let alone start a Pakistan-focused venture fund. He had years of experience working in some of the biggest startups in Silicon Valley, such as LinkedIn.
He had just arrived in Pakistan in 2018 to take a break from corporate life. Nevertheless, he observed that a population of almost 230 million people with a median age of 22 was filled with passionate startup founders who contacted him to seek advice on startup growth and funding. That led to him restoring his faith in the startup culture of this country and investing in it.
"I knew if I did not do it, I would regret it," he added.
According to Ahmed, it still seemed like a minor deal to the majority of locals, and that is why foreign venture capitalists have played a more significant role in encouraging young entrepreneurs to build Pakistan’s ecosystem.
Unlike the Middle East/North Africa region or even the U.S., 98% of startup founders in Pakistan are local, so they are already familiar with their market problems. However, it is still hard to gain the confidence of local investors in Pakistan because they still consider this space risky as it is still a new culture for them.
"The whole system is totally unknown to locals, but eventually, few like Zayn Capital and Indus Valley Capital are developing," Ahmed said.
Maturing the incubation space
In order to attract international venture capitalists and for the tech hub to realize its true value, it is essential that governments play a key role. They should provide incubators and workspaces to train these entrepreneurs and offer them incentives.
"In this side of the world, no one would give capital to new startups because they often fail to realize that the ground realities of a developed country are different from a developing one," said Usama Tauqeer, a digital correspondent for the first incubator in Pakistan.
Plan9 was the first incubator launched by the government of Pakistan in 2012. But without enough seasoned entrepreneurs, startups needed to utilize the resources of incubators more often, so they almost always failed. The success rate of startups from incubation centers was just one in 100.
Regarding startups' success, the typical response from the interviews was that many instruments play their roles, such as flow of capital, socio-political reasons, lack of priority given to startups, and immature market.
The drawback of such government-run incubators is the low success rate. Previously startups working on their idea in an incubator needed to be in touch with the ground realities of the market.
"In government-run startups, the success rate means little to you," said Tauqeer.
Private educational institutes such as the National University of Science and Technology (NUST) and IBA, and FAST have also started to provide mentorship and incubators to promote the startup culture, according to McKinsey & Company. But with public and private incubators troubled by low success rates, young people in Pakistan are starting to explore the gaps in the tech market and produce innovative products.
Pakistan is one of the youngest countries in the world. People under the age of 25 make up almost 70% of the population. And they are reshaping the nation's startup culture.
Haroon Abdullah director of people and culture at SWVL, a daily commute-based startup, says the emerging culture is all about space that encourages youth to take advantage of it. Therefore, to be an active player in this change, Abdullah recently switched to another local agriculture-based startup, Tazah Technologies.
"This idea of sustainability has always been very close to my heart," he said.
Even though a startup based on farming and digitalization might seem challenging, he had confidence in the role of sustainability in today's climate crisis.
The author Don Tapscott perfectly defined the attraction of being part of the “entrepreneur system.” His book “Grown up Digital” classifies the "Net Generation" as young people between the ages of 11 and 30. Their generation has known nothing except the Digital Age and is part of the latest technological advances. Startups allow entrepreneurial young Pakistanis to be part of the system and to take charge.
The first wave of the startup boom
The startup boom came into Pakistan until 2019, with the first wave of successful startups like Careem, Daraz. Its success made the stakeholders and government realize that this startup ecosystem is worth the risk.
"This has only been made possible due to the contribution of International Investors," said Ahmed. "Our local Venture Capitalists are behind in their contribution to the startup ecosystem."
According to Pakistan's Q3 2021 Venture report by MAGNITT, these local startups were able to secure $15 million more in the last quarter of 2021, the combined capital of the previous two years. Omar Shah, the CEO and founder of COLLABS, a co-working space, analyzed the report by saying that the digital disruption across industries has been the eye-catching aspect, driving innovations and investor traction into our ecosystem.
This gave confidence to startup founders like Krave Mart, Airlift, Tazah Technology, and many others. Unfortunately, many startups shut down before they reach their goals. Dawn News reported that the success rate still is only 10%. This makes experts ponder factors that can be at play, such as lack of training, funding, and a clash of visions.
That is why Pakistan's government and multinational companies like Jazz and Telenor have worked to evolve incubators and accelerators. Given the numbers mentioned by a Dawn News report, almost 22 incubators have been newly launched by the government.
While these incubators were not used before 2019, the government has transformed its policies to improve the success rate. They are not only funding startups but also training them, providing space to test their products to prepare them to be players in the market.
According to MAGNITT, this ecosystem development happened five to seven years ago in other developing countries such as India and Indonesia. Pakistan came later, but it has now entered that landscape. Startups in Pakistan have needed to catch up on this trend due to various problems, but now the system is realigning its priorities. The prize is huge: one of the largest consumer-driver markets in the world.
"Our government needs to realize that the power of startup ecosystem can transform the landscape of our economy," said Ahmed.
Seeking role models elsewhere, Pakistani startups often think of Silicon Valley, the essential inspiration for startup ecosystems worldwide. Cofounders like Ahmed believe that using the existing models of other countries is acceptable as a starting point. However, over time, they should be personalized to cater to the local market's needs.
Other startup cultures offer lessons more relevant than those from America. Shahrukh Swati, a successful founder of Nearpeer an education-based startup, said that he took more lessons from the next-door startup ecosystem of India rather than Silicon Valley.
According to Jehan Ara, President of P@SHA, these shining stars would become global products helping our startup ecosystem to finally take off.
"I think the industry needs those first few breakthroughs; the shining starts," Ara told McKinsey and Company.