2021 was a game-changing year for the nascent Pakistani startup ecosystem, which saw a record $350 million in fundraising across 81 deals. This sum was more than what the country’s startups garnered in the previous six years combined.
However, that momentum was cut short in 2022 as the global and domestic macroeconomic uncertainty, coupled with a high interest-rate regime, slowed funding activity in the south Asian market.
To make matters worse, several prominent startups in Pakistan had to shut shop or withdraw from the market as the funding tap dried up. Pakistani delivery startup Airlift ceased operations in July, while tech-enabled transport firms Swvl and Uber and used car platforms Vava Cars and Car First withdrew from the market. Moreover, the State Bank of Pakistan revoked the in-principle approval granted to YC-backed fintech startup Tag in October.
The challenges and the bleak investment landscape notwithstanding, Pakistan-focused venture capital investors and startups believe that the country still promises a viable market potential.
Speaking during a virtual session titled ‘Pakistan’s long-term investment potential intact despite funding slowdown’ at DealStreetAsia’s Asia PE-VC Summit 2022, Zayn Capital co-founder Faisal Aftab said, “I think Pakistan was and still is an amazing bet. We’re very bullish on Pakistan in a long-term view.”
Aftab added that the Fed rate hike-induced liquidity squeeze has severely impacted Pakistan because it is a more nascent startup market. ”We had a lot of companies that were funded. Some were depending on incremental capital. I think 2023 is going to be potentially more painful, not just for Pakistan, but for some of the regional tech ecosystem as well, especially for companies that need constant incremental capital and are still struggling to find the base model for their business,” he said.
Zayn Capital is a venture capital fund with a primary focus on seed-stage ventures in Pakistan.
However, it’s not just the global macroeconomic sentiment that has dampened the funding and operating environment in the country.
i2i Ventures general partner and co-founder Misbah Naqvi said, “On top of the global economic slowdown, we have unique challenges in our country. We’ve had political instability, recent floods and the economic impact of them, and the shrinking of the economy – the pressure that’s coming in is going to be felt for quite some time.”
Despite these challenges, Naqvi believes “thriving Pakistani startups should be able to attract capital that is comfortable with the risk that Pakistan is now representing”.
“It may not be everyone’s cup of tea, but I do believe that there is going to be a possibility of attracting capital for those business models which are not only addressing a big need, but where the founders are building from a position of strength and really coming in with solid unit economics,” she added.
Naqvi also emphasised that the tough climate will determine who the strong founders are. “Potentially new companies will be built, but with a different mindset than a lot of companies that were being built in 2021 where money was just being thrown at everyone,” she noted.
i2i Ventures is an early-stage venture capital fund focused on tech-enabled high-growth startups in Pakistan.
Profitability focus
Sharing his perspective from the startup lens, fintech PostEx founder Omer Khan said, “2022 is an opportunity to show global investors that Pakistan has quality founders who cannot just raise funds, but also build businesses.”
He recalled that in 2020 or 2021, the mindset was more about achieving as much growth as possible within less time, burning more funds, achieving economies of scale, and being more profitable at a higher scale. “Our focus from that scaling or rapid growth has now turned into more profitability,” he noted.
“Capital is important for startups…But for us as founders, we have to make sure that the fundamentals are strong. The unit economics is positive. And then with that unit economics and strong fundamentals, we are able to build strong businesses…And when the markets start to normalize, it’s easier for us to go out and scale more rapidly or into the other markets,” he reasoned.
This approach to building startups that are focused on the fundamentals and strong unit economics will add value to the ecosystem, Khan added.
Echoing the views, Oraan CEO and founder Halima Iqbal said, “Pakistan for the first time came under the radar of investors in 2021. There’s a lot of people who have laid the groundwork for us to get there.” Oraan is a Pakistan-based online money committee [local saving model] designed for women.
“These startups – the companies that we’re building – are also a breeding ground right now for the next set of founders, which I am particularly very excited for. We didn’t have a lot of precedents that were set for us. A lot of challenges that we faced were first-time challenges. But as the next set of founders learns about how to build better companies – the potential that Pakistan has in terms of tech disruption perspective is massive and it’s a very exciting space to be in,” said Iqbal.
On the need for establishing governance structures and frameworks, Naqvi pointed out that this aspect needs to be talked about more in Pakistan.
“A lot of founders are first-time founders, they may not understand the different aspects of the legal landscape. We [as investors] can actually help bring in value add from that perspective and help hold them accountable in terms of where the money is going, how the money’s being spent,” said Naqvi, highlighting the role of local VCs.