Pakistan's Start Up Scene Reels Venture Capitalists In

 
 

Pakistan is brimming with talented individuals, a testament to which is the country’s top ranking on the world’s largest freelancing portal, Odesk. Yet, most of the on-ground opportunities have been marred by political and security instabilities that have tainted the country for years.

However, with the improving security situation, due to which multiple opportunities are opening up for the South Asian gatekeeper, the start-up landscape has also started to shine and venture capitalists now showing an interest in local startups in Pakistan.

“Pakistan has a very high mobile penetration rate and with the recent rollout of 3G and 4G technology, the Internet uptake has been very steep. When you combine all these factors with the rapidly improving security situation in the country and the low cost advantage, Pakistan becomes a very compelling story for investors,” shares Khurram Zafar, executive director of Lahore University of Management Sciences’ (LUMS) Center for Entrepreneurship.

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Though startups did occasionally spring up in the past, it wasn’t until the launch of Plan9, the first start-up incubator in the country, in 2012 that the phenomenon established a strong foothold in the country.

Earlier, entrepreneurs in the country relied on the principle of  self-help. From managing and arranging seed capital to adapting and molding their ideas to existing market trends, the newcomers had to do it all.

“The startup ecosystem was non-existent, especially due to the lack of mentors and experienced people who had lived through the whole cycle of success,” says Saad Khan, a video gaming enthusiast who tried, albeit unsuccessfully, to set up a mobile gaming company in 2010. Now working in a bank as a branch manager, the one-time entrepreneur laments about the “once non-existent ecosystem” and “nascent Internet industry” that contributed largely to his company’s failure.

Slowly and gradually, with the onset of a few success stories like Convo, which attracted international attention at an early stage, the market for entrepreneurs was established in Pakistan. Despite their relative advances, thriving in the budding ecosystem was challenging, especially in the absence of VCs and angel investors whose only perception of Pakistan stemmed from the media narrative. Gilles Blanchard, co-founder of the site Seloger.com, admitted that he knew “nothing about Pakistan” except for what was portrayed in the international media before he invested in Zameen.com.

However, the little-known talent that emerged at that time from Pakistan was enough to capture investor attention. Undeterred by the general perception of Pakistan, foreign investors like Blanchard were the first ones to ride the start-up wave, hoping to reap the benefits of an emerging market.

“People who have an appetite for emerging markets will be attracted to Pakistan. It’s considered one of the next big frontier markets,” shared Shaun Di Gregorio, CEO of Frontier Digital Ventures, a venture capital fund based in Malaysia that has in the past invested in Pakistani startups.

Moreover, in terms of emerging markets, Pakistan holds an edge over its regional counterparts due primarily to two reasons. First, Pakistan has no limit on foreign equity, which enables investors to hold a 100 percent stake without the help of any local partners. Second, a 100 percent repatriation of investment capital is allowed. Hence, every penny earned in profit can be returned to the original investor with ease.

Hence, even if relatively new, the Pakistani start-up industry is on the right trajectory. To put things into perspective, in 2013, just four companies raised less than $6 million between them in funding. Similarly, in 2014, out of 10 tech startups that raised investment, only six disclosed their raised sums, which stood at almost $6 million. In 2015, investments in local startups experienced a steady rise as 24 of them managed to attract investors, local and international.

Despite nine startups keeping investment details under wraps, the remaining 15 raised a hefty amount of almost $30 million, with a projected growth rate of 400 percent. With 2016 just starting, two Pakistani startups–one of which kept its investment details undisclosed–have already raised $20 million in funding.

While it emerges as Asia’s next big tech contender, there is a lot that needs to be done for Pakistan to command its position in the startup race. Taking its example from its regional counterparts, the government needs to introduce upgraded corporate and securities laws to facilitate asset-light, knowledge-economy business. Moreover, the 8 percent tax on gross revenue which is forcing local information technology companies to move abroad needs to be revised.

To give the startup landscape a boost, according to Khurram, Pakistan needs more capital to back the startups, particularly seed stage capital so more companies can grow to a stage where they can access more funding.

Emphasizing the importance of seed capital, Ali Raza, CEO of Shopistan, shares similar sentiments: “Apart from international investors, we need indigenous VC funds that can supply, or facilitate access to, capital to eligible local startups.”

And more importantly, to grow and mature, the country needs “more bridges between Pakistan and the outside world which are best built by the diaspora looking to stay connected with the country,” says Khurram.

Lastly, Pakistan needs more positive press in the international media, which highlights the success stories of the nation and the multitude of opportunities it has to offer to international investors.

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