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Changing climate for tech startups

Despite several challenges for the local businesses, seven major investment announcements in tech startups rounded off 2019 on a high note.
by Kunwar Khuldune Shahid

The 021Disrupt conference, organised by The Nest I/O in Karachi in November 2019, was unprecedented on multiple fronts. Captioned with the motto ‘nothing innovative ever stood still’, the conference, designed to link up investors and budding entrepreneurs in Pakistan, was more than an event celebrating the growth of innovation in the country – it underlined historic milestones.

Seven major announcements marked 021Disrupt, including the highest ever investment raised by a Pakistani startup. Airlift, the Pakistan-based decentralized mass transit system, bagged $12 million in Series A financing from Silicon Valley firm First Round Capital. Similarly, Egypt-based transport network Swvl, announced a $25 million investment as it expands its operations in Pakistan.

Other announcements included local startups, like homegrown messenger TelloTalk, price comparison site PriceOye, and educational app Queno, getting seed funding worth $1.2 million, $450,000 and $100,000 respectively.

Pakistan’s largest travel portal, Find My Adventure, announced its purchase of budget hotels chain K-Town Rooms, as Habib Bank Limited announced its decision to launch an Investment Fund for FinTech Startups in the coming year.

The array of startups present at the event, the volume of funding raised by local entrepreneurs, and the interest showed by some of the most illustrious business names from around the world made the third 021Disrupt conference to be held in Pakistan the most significant yet. Also, having come up at the tail-end of the soon-to-culminate decade, the highs of 2019’s 021Disrupt bode well for the startup environment in the country heading into the 2020s.

Along with rounding off the 2010s on a high in terms of the investment raised for local startups 021Disrupt also saw the final entrepreneurship environment study for the decade as Invest2Innovate (i2i), in collaboration with the World Bank, unveiled the ‘Pakistan Startup Ecosystem Report 2019’ at the event.

The comprehensive report gives an overview of the entrepreneurship environment in the country, highlighting the challenges and recommendations heading into the 2020s. The report, based on 105 surveys, 51 interviews and 5 case studies, reveals the evolution of the startup ecosystem over the past decade – more specifically from the year 2012.

Between 2012 and the end of 2019, the number of business incubators and accelerators have multiplied from two to 24. There are now 20 formal investors for startups in the country, with 80 coworking spaces facilitating the budding entrepreneurs.

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The study argues that, despite the growth, more tech hubs and infrastructure support are needed to bolster the innovation economy. The gap in early stage capital remains a major financing challenge for the local startups as well.

Supported by the World Bank’s Women Entrepreneurs Finance Initiative (We-Fi), the study also dissects in detail the gender disparity in the current startup environment.

Invest2Innovate, which launched the Pakistan Startup Ecosystem Report, works on identifying impact entrepreneurs for its yearly four-month programme, the i2i Accelerator, which seeks to connect startups with investors. Over the past seven years, i2i has helped 41 startups raise $6 million in investment.

This year the i2i established its venture capital fund, which saw its first investment in the shape of Mauqa Online, a portal to book verified and reliable domestic help and workers.

“Most of the work that we do at i2i, be it the accelerator program, insights arm, or the venture fund, seeps into the ecosystem in different ways in supporting entrepreneurs… Through our work and the three arms of i2i, we have tried to bridge the gaps we have identified over the years in our work with entrepreneurs,” said data scientist Ambareen Baig, the Insights Lead at i2i, while talking to MIT Technology Review Pakistan.

Baig, one of the authors of the Pakistan Startup Ecosystem Report 2019, maintains that the finance landscape in the country has witnessed a revamp over the past decade.

“Some would even call this evolution, as the pace of this change has been very slow. [But now] we have international investors, both local and global, looking into Pakistan as a viable market with tons of potential. We have the government devising specific programs for promoting entrepreneurship at a rudimentary level through incubation centers in universities… However, there are a great many challenges that entrepreneurs have faced during this time and are still facing,” she added.

Among these is the gender gap highlighted in the report. Of the $165 million raised by startups in the past five years, a mere $6 million (3.26%) was granted to businesses led by women. This translated into only 24 of the 101 deals being signed with women-led companies during 2015-19. The fact that a 23.76% share in the overall number of deals resulted in 3.26% of the investment pool for the past five years delineates further the gender gap in the average amount raised per agreement.

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“Women are judged against a much harsher standard. Women entrepreneurs have told us instances where they were asked questions such as, ‘what would happen to your business when you get married’, or where the male founder was asked coding-related questions even after the judges were repeatedly told that the female founder had done the app coding,” Baig revealed.

Tania Aidrus is spearheading the Digital Pakistan initiative.

Amidst the many challenges, all eyes have been on the Pakistan Tehrik-e-Insaf (PTI) government to make the environment more conducive for businesses. With a strong vote-bank among the nationwide tech-savvy youth, the PTI was expected to bring forth progressive policymaking for budding entrepreneurs after coming to power in 2018.

In multiple interviews and addresses Prime Minister Imran Khan has urged the youth to start their own businesses. In October 2019, the government launched the ‘Kamyab Jawan Programme’ aimed at providing loans to facilitate startups launch their own businesses.

In December, the government also inaugurated Pakistan’s first National Science and Technology Park at the National University of Science & Technology (NUST) in Islamabad to further facilitate the development of young businesspersons. The government has also launched its ‘Digital Pakistan’ campaign, which eyes the use of latest technologies for public welfare.

Even so, the economic crises under the government’s watch over the past 15 months has found many critics. Between December 2017 and June 2019, the Pakistani rupee lost half its value, going from 105 against the US dollar to 155. Similarly, inflation saw a 12.7 per cent year-on-year rise in 2019 – a nine-year high.

“The cost of doing business is going up. The policy rate in Pakistan is around 13.25%; in contrast, the US Federal Reserve has a policy rate of around 1.75%,” said financial analyst Farrukh Saleem, while talking to MIT Technology Review Pakistan.

“Therefore, a lot of the big entities from the US are putting money in Pakistan just to play the interest rate and get lots of profit. This is called hot money, which leaves the country with similar rapidity when the interest rates come down,” he added.

Farrukh Saleem, who briefly served as the spokesperson for the PTI government on economy, maintained that the current fiscal policies have actually made doing business harder.

“Any company that is starting off and wants to make profit, now should make enough to pay back the high interest, in addition to the growing charges on electricity and gas supply. These realities have made it unviable to do business in the country,” Saleem said.

Mudassir Sheikha, Careem CEO and co-founder.

“Pakistan has one of the highest rates of corporate tax. [In comparison] India has brought its rate down to stimulate its economy. The focus should be on domestic investors. Instead of giving incentives to foreign investors, domestic investors should be making money, which in turn encourages overseas investment,” he added.

However, despite the many challenges for local businesses – which over the first half of the 2010s were dominated by the turbulent security situation in the country – the previous decade also saw numerous success stories from Pakistan.

A few of them highlighted as case studies in the Pakistan Startup Ecosystem Report 2019 include technology services firm Arbisoft, motorbike-hailing app Bykea, Pakistan’s largest online property portal Zameen, natural beauty company CoNatural, and telehealth firm Sehat Kahani.

Among other successes from Pakistan are e-commerce company Daraz and online delivery platform Cheetay. Ahmed Khan, cofounder of Cheetay and former CEO of Daraz.pk, agrees that a major transformation has taken place in the entrepreneurship ecosystem over the past decade.

“The discount market revamped things. It was Careem that completely changed the landscape in 2016, by offering consumer discount, reducing the costs, and providing incentives to drivers through paybacks,” Ahmed Khan told MIT Technology Review Pakistan.

When Khan left Daraz.pk to launch Cheetay in 2015 the investment climate for startups was completely different to what it is now, he says.

“Rocket Internet was the only one providing any real investments. Other than that, $100,000 here or $50,000 there was the maximum anyone could get – there was no real money. After we started, Sarmayacar, i2i and others came to help startups with funds,” he said.

While Ahmed Khan appreciates the growing investments for startups as headlined by 021Disrupt this year, he maintains that the government isn’t doing enough to help young entrepreneurs.

“They are making the right signals and noise, and, yes, they’ve brought about a change in optics for Pakistan internationally, but the fact is that the government hasn’t really done much. Moreover, the macroeconomic indicators are just not conducive for businesses,” Khan said.

Even so, Khan remains optimistic about the near future for startups in the country, but urges budding entrepreneurs to truly stand out with their ideas.

“There are smart ways of doing businesses. The bubble – where you launched a startup, showed topline growth, went for a quick exit, flipped it around, got investment where there was a lot of risk capital – that story has ended,” he said.

“Fluffy businesses are rejected by the market when they come in the public domain. Don’t ignore the fundamentals of business. Be very conscious of which market you’re in and stick to the fundamentals.”


Kunwar Khuldune Shahid is a journalist based in Lahore.

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