By Ahmed Khan
THE tall claim that Pakistan ‘has a lot of talent’ has echoed across its short history. It has been coupled with even taller claims of immense resilience, opportunities and prospects. Generation after generation has been born with a sense of entitlement, whether it has its base in religion or ethnicity, or even some elaborate social promise is not the question.
The question facing our socio-economic fabric today is whether that immense potential can be realized and the sense of entitlement can be justified. The country has been on the verge of greatness and on the precipice of despair.
Keeping the above rhetoric in mind, one can be forgiven for viewing the current buzz in the country regarding vigor and energy with a hint of cynicism. The past three years have seen nothing short of an entrepreneurial revolution in the country. As always getting exact and reliable data in the Third World is challenging. Reasons vary from lack of interest to fraud and tax evasion to general paranoia or the Big-Brother-is-watching-you syndrome. Estimates put the number of Internet users between 20 and 30 million.
Of course this number is increasing rapidly, albeit from a low base. Internet penetration currently stands at 29.14 percent, and mirrors the absolute number of users. Of these, over 50 percent are on Facebook. The relevant consumer generation − 18 to 34 age group− is the one taking the most interest in this technological progress. Statistically and demographically, things are looking bright for a country maligned in the international media by overemphasis on terrorism, sectarian violence and political and economic instability. These numbers will only continue to rise.
- Technology has bright future in Pakistan.
- This is the time to invest in this sector. PITB’s projects like Plan9, PlanX, LCE and P@SHA’s DotZero and Nest i/O are showing extreme promise and are poised for takeoff.
- The entry of cellular companies and banks to the mix will only add value and accelerate the success of these startups.
This is because the number of cell phone subscribers has been constantly rising. Added to it is the launch of 3G and 4G by all leading cellular network providers. Millions of Pakistanis will have the Internet at their fingertips at a blazing speed in the next few years. Hopefully, it will be used for purposes other than self-gratification, tabloid consumption and random socialization. This provides investors and startups with an interesting opportunity to explore the fertile landscape of Pakistan’s economic sector.
For starters, the successful startups over the past few years have mushroomed dramatically. Pakistanis are realizing the huge potential of technology and social media that has truly been unlocked with all the leading brands adopting it to engage with current and potential customers.
Online channels are gaining prominence for shopping, information dissemination and collection and networking. While traditional forms of businesses need huge capital investment, technology and online businesses need minimal investment and offer high rates of return. Even well-established corporate giants are increasingly engaging customers through digital mediums. This is why digital advertising budgets of leading companies are being increased. Reliance on traditional marketing is still there but the companies have realized the massive untapped potential of increased sales and profits through digital marketing. Brands, like Shan Foods, are showing their advertisements on their social media pages before telecasting them on television.
To add to the agony of traditional businesses, incubators backed by the government, educational institutions and the private sector have popped up to support entrepreneurs to come up with innovative ideas and business plans. These incubators help entrepreneurs through funding and mentoring in all business aspects.
Pakistan’s largest province, the Punjab,has established an incubator and accelerator, Plan9 and PlanX, which have been responsible for several success stories. Incubators in the country usually have an incubation cycle that lasts a few months where they provide rent-free office, training and a platform for entrepreneurs to connect with potential clients. The Lahore University of Management Sciences (LUMS) Center for Entrepreneurship (LCE), MIT Enterprise Forum (MITEF), NetSol and Pakistan Software Houses Association for IT and ITES (P@SHA) Nest i/O are some other notable entrepreneurial ecosystems.
Assets and Challenges
All ecosystems are providing Pakistanis with opportunities to explore the hidden value of the startup world. People from all over the country are coming forward and developing their unique ideas with these incubators. By filling in an online form, the idea is presented to an unbiased panel of judges who evaluate the business plan and then approve and disapprove it. Lesser-represented factions, like the minorities and women, are given special consideration.
The challenge is whether these ventures can realistically eclipse the returns offered by more traditional sectors like real estate, stock market, textiles, cement, and sugar where the annual return on investment (ROI) stands at around 25 percent. But like all traditional businesses, they have also had their share of lean periods. The year 2013-14 was the stagnant period for real estate. The Karachi and Lahore stock exchanges behave erratically and are volatile, coupled with the fact that they are constantly manipulated by a few powerful players, for smaller investors, they represent a serious risk.
The others are inherently commodity businesses and the recent global crash has served as a warning at the end of the day; this is speculation and borderline gambling. Of course, the jury is still out, but the initial signs look exceedingly positive. PakWheels.com and Zameen. com have exceeded $10 million in valuation and raised multimillion-dollar funding at this valuation.
All they need now is to continue this trend and other successes will follow. Smaller startups like Markhor, BookMe, Interacta, XGear, Travly, Eyedus labs, EatOye and MARO Tandoors have all exceeded $1 million in company valuation while investing a mere fraction of that amount. There is still a constant challenge of infrastructure. While being housed in incubators where startups are sheltered, lack of office space and inferior facilities and services will hamper their growth. Kudos to the Punjab Information Technology Board (PITB), LUMS and P@SHA for providing not only a conducive environment but credibility, access to experts and investors and of course the moral support.
The private sector now needs to step up to take charge and pave the way for these businesses to truly flourish by international standards. International acceptability and access to global markets still need to be figured out. Regulation is another challenge: more protection needs to be provided to investors so that they can feel secure. The founders also need equal amount of protection to ensure they are not bullied out of their own companies. The current laws are archaic and will continue to be a deterrent to progress.
Despite infrastructure and regulation challenges, the claim that the ‘startup revolution’ is here to stay and could be the key catalyst for a significant economic upheaval is pretty strong. Looking at the first-year data from the LCE, we see some remarkable numbers. It has incubated 29 startups since its launch in September 2014, with 26 of them still operating.
The first-year failure rate of only 10 percent against global averages of 20 percent is commendable.
Admittedly, the base is small, but we are only concerned with directionally correct data and not absolute values. The startups have raised cash amounts in excess of $600,000. An approximate spending by the LCE, including infrastructure and operational expenditure, is $400,000. The LCE takes about 7.5 percent equity for incubation and, as its Director Khurram Zafar says, the approximate value of all the startups is north of $6 million, placing the LCE equity value at $475,000. So in all accounts, the numbers add up.
And as mentioned earlier, the startups are headed in the right upward direction. Some other interesting statistics are that LCE startups have combined annual revenue in excess of $200,000 and managed to create more than 120 jobs directly and over 350 indirectly.
The PITB was a pioneer for setting up the first government-backed incubator in Pakistan in 2012, which paved the way for startup culture in the country. The PITB’s projects, Plan9 and PlanX, have housed over a 100 startups to date, out of which 58 percent are continuing to grow and flourish. Again global averages place three-year failure rates at 40 percent, so the performance exceeds expectation. Being a pioneer and having a much larger surface area and impact sphere, the PITB has spent about $5 million to date. That really shows the government is promoting this space.
Locally, PITB-backed startups such as Pantera Energy, Bookme.pk and Patari have made a substantial impact. Pantera Energy, an engineering company providing solar energy solutions has net revenue exceeding $50,000 a month. Whereas Patari, a music streaming website and mobile app, has an exponentially growing user base of over 30,000 active users per month within just a few weeks of launch.Both Plan9 and PlanX are also actively engaged in bringing global attention towards Pakistani startups in the form of various international collaborations with Blackbox Connect, Startup Istanbul, Funding Lab, so on and so forth. Their startups have also received prominent coverage in international blogs and media like TechCrunch, TechinAsia, Hindustan Times and CNN, which has brought the world’s attention to this progressive side of Pakistan. Markhor, Plan9’s first incubation cycle startup, became the first company from Pakistan to be accepted into Y Combinator (a seed accelerator based in the Silicon Valley). Markhor also conducted Pakistan’s first known successful Kickstarter campaign where they raised over $ 107, 000. Another PITB backed startup that has created waves internationally is Travly, which brought the world’s attention to the untapped local market of public commuting, leading to speculations regarding Uber launching in Pakistan soon.
It’s ironic how initiative and impetus have come from the government rather than the private sector, especially in a lucrative space. The startups have not disappointed, rising almost $3.5 million in cash capital from local and foreign investors, which include angel and institutional investors. Being a Punjab government backed initiative, both plans have no financial stake in any of its residents; otherwise, the combined valuation of $60 million is pretty mouth-watering.
DotZero, a co-working space in Karachi, has just launched a fund for startups. In a recently released statement, it valued its startups at $20 million. This includes the ones they have invested in and housed. The P@SHA incubator, called Nest i/O, is still at a very early stage.
A rough estimate puts the value of startup industry somewhere above $150 million. This represents a compound annual growth rate (CAGR) of almost 150 percent if we look at it over three years. Such returns are not offered by any other line of business. One more argument in favor of investing in startups in Pakistan is the small-ticket size.You can get into a startup right with amounts as small as $10,000.
Enough has been written on these companies for the audience to be aware of their success and scale. One such highly motivating success story is that of Markhor, developed by two college dropouts from one of the most conservative parts of the country. Together, they succeeded in selling online and exporting high quality homemade leather shoes and sandals (known as “Peshawari Chappals” in local parlance), in the process also aiding craftsmen by sharing 70 percent of profits with them. This is just one success story out of many others out there which highlight how incubators have had a great impact on the lives of the common man in Pakistan. Markhor is now at Y Combinator, which is the premier accelerator in the world. That alone speaks volumes of its progress.
There have been many large-scale success stories as well, reshaping the way businesses will be conducted in the future. Rocket Internet, an Internet platform, has shown its faith in the country by developing projects such as Daraz, Kaymu, Lamudi, and Food-Panda. These are all inspiring stories of e-commerce ventures which have used the Internet and technology to come up with unique business models. These ventures have given traditional models of businesses a run for their money and are providing a level playing field for smaller sellers who don’t have enough capital to compete with retail giants.
For instance, Kaymu has actually listed more than 30,000 active small vendors from all over Pakistan, providing them with a platform to sell their products online and compete against the corporate giants. These vendors have a collection of over 200,000 products available for sale. This venture has changed the lives of many small vendors.
“One of their vendors is a guy who works as a courier delivery man. He sells lipsticks on Kaymu and is actually doing pretty well. This guy is leading his category and making tons of money,” says one insider in the know who prefers to keep his name out of it.
Reshaping Shopping Patterns
There are many other ventures reshaping the shopping patterns of Pakistanis. For instance, PakWheels and Zameen have provided ordinary citizens with platforms to buy and sell cars and property online. A decade ago, deciding to trust an online listing would have sent jitters down the spine of the previous generation, but now it is a common occurrence. Like all rare and unorthodox ideas, most innovative ventures in the initial stages face resistance in establishing trust and taking time to gain familiarity. For instance, another venture, Savaree, a cab service, is reshaping social interaction while traveling. But once the benefits of cost, convenience and the desire to interact with like-minded individuals are realized, this venture will become the Uber of this region.
There are many other unique ideas currently in work in incubators of many leading organizations. For some, the time is just ripe to make an instant impact while there are others whose time hasn’t come yet but is just round the corner. Nevertheless, ventures like these provide a golden opportunity for investors to put faith in Pakistani startups and earn huge dividends in return.
While it is true that e-commerce has had a huge impact on businesses in Pakistan, it is also true that Pakistan joined the party late. In comparison to its neighbor India, and similar-sized markets, such as Indonesia and Nigeria, Pakistan is lagging behind. And comparing it with more developed countries in Asian region, such as Malaysia and the Philippines, Pakistan is way behind.
The Numbers Game
The data shows a huge gap between Pakistan and the developed Asian countries in terms of the number of Internet users.
Most people would interpret the image as Pakistan being way behind other countries but, more importantly, this is a huge investment opportunity to take a large untapped market with immense potential. The greater the gap, the greater the rate of return will be on the investment. One thing is certain that Pakistan will grow. This is because the number of Internet users is bound to increase given the large number of people having access to cell phones and the recent launch of 3G and 4G packages by all mobile network companies as mentioned earlier.
Tackling Traditional Hiccups
If there is ever something causing hindrance to the massive potential of technology in Pakistan, it is the lack of proper infrastructure. Data shows that the number of fixed broadband Internet subscribers is the lowest for Pakistan mong the selected countries. This means that a major part of the population is unable to explore what e-commerce has to offer because of absence of connection.
Major parts of the country don’t have access even to proper roads and wire systems, meaning a majority are unable to use the Internet. This is one reason why Pakistanis from the far-flung areas have to come to major cities (Lahore, Karachi, and Islamabad) to get into incubators. With the right infrastructure, these far-flung and rural areas can get instant access, allowing them to explore the countless opportunities e-commerce has to offer.
Another reason for Pakistan joining the proverbial party late is because of consumer lifestyle. The media hype of the much publicized war on terror caused the common man to become paranoid and society polarized. People were wary of scams and frauds and couldn’t trust any online activity blindly. There were many news items reporting several frauds and how a few wrongdoers had run away with people’s money without keeping promises they had made. Online shopping websites, such as Homeshopping, Symbios and Shophive, had to work extremely hard to overcome this resistance from the public.
Building trust is never an easy task, especially in a fragmented society. With the passage of time, these online companies did succeed in gaining people’s trust. This is evident from the massive growth of the e-commerce industry in Pakistan as data indicates.
One major way Pakistani e-commerce ventures managed to gain the public confidence was by making modes of payment easier. Most Pakistanis were wary of paying before the product actually got delivered. Unlike developed countries, the shopping pattern of Pakistanis was quite different. People wanted to see the product first and then pay. Realizing this, online companies followed similar trust-deficit countries, such as Mexico, to adopt the cash-on-delivery system allowing buyers to pay once the
product reaches their doorsteps.
Another important step in building trust was offering effective return policies in case the product was defective or not up to the expectations of the customer, which most traditional retailers were reluctant to do. These two steps played a crucial role in winning people over. Word of mouth and peer validation were also an important factor.
Using social media, people got together and shared their online experiences. As is the nature of our culture, criticism is always more prominent than praise. So, negative experiences were always in the majority. Therefore, online companies made extra efforts to ensure that customers had a good experience and shared it. These companies raised their game to come up to customer expectations and given the rising numbers of transactions and visits we can safely say the battle is being effectively fought.
The parallel must be drawn with what is now the more traditional IT services sector. Companies that started in the last decade like NetSol, InfoTech, Systems and Arbisoft went through their economic cycles but are now global behemoths. Even these companies have established their forte in newer technologies that benefit from Apple and Google app stores. The emergence of Mindstorm studios, TkXel and Gen IT whose revenue is mainly built on building apps and games traded on these stores further add credence to this claim.
The more cynical readers will argue that compared with Indian giants like Infosys, they are still insignificant but the progress cannot be denied. It is no longer a case of labor arbitrage, the country possesses a higher skill level than is available in other parts of the world and international companies have realized that and started respecting them.
Keeping this success in mind, the argument can definitely be made that given the proper dedication and attention the upcoming startups will attain similar levels of success. The government, albeit after lobbying by an increasingly powerful sector, abolished tax on the export of software. If the PITB continues its trend of educating the government in business-friendly policies, hopefully the policies will continue evolving to deliver a positive impact.
The Prospective Scenario
The new startup sector in Pakistan is gaining prominence and relevance with each passing day and trends show a positive sign. The numbers of Internet users are rising and with proper infrastructure and the right investment, these numbers can go even higher. A majority of customers still prefer traditional means but online businesses are being increasingly considered as an acceptable alternative. The question now is what the future holds for this new found industry and, more importantly, can significant foreign investment be attracted?
The sheer population, spending power and economic growth show that this is a massively untapped market, especially in the lesser-served areas. The Cybercrime Bill and government protection against harassment also shows online political will. The younger generation is accepting more of this new culture and businesses. Almost everyone has an interesting anecdote of their elders, surprised with knowledge of systems and companies that only exist online.
Making the case for enticing foreign companies to consider investment can be built on the fact that cost and difficulty of starting a business have gonedown considerably.
The number of people with the Internetaccess may increase as well. As World Bank data shows the influx of 3G has led to the Internet population to increase by several magnitudes in other nearby countries. Looking at India and Sri Lanka, we can see that their Internet user population skyrocketed after the induction of the 3G technology. Pakistan has arrived late to the party but we can expect a similar rise in the country, as well.
Infrastructure is a problem which hasno short-term cure but positive news is coming out of Pakistan. China and Pakistan have agreed terms to make the China-Pakistan Economic Corridor to ensure the construction of new infrastructure. The corridor will pass through some of the most far-flung and neglected areas of the country. So, new roads and line networks will be in place, allowing local people to get instant access to technology. With many potential projects in incubation centers and huge Chinese investments coming in, the time is ripe for investors to invest in the diversity of Pakistan.
The entry of cellular companies and banks in the cellular and digital world will also help these new technology companies enhance their reach. Being able to collect payments and deliver money remotely and electronically will play its part in the growing of the ecosystem. Of course, it still needs to grow to be significant, but the contention is that directionally it is consistent with the claim that the signs are optimistic.
Other countries in the region such as India, Malaysia and the Philippines are full of success stories once their ecommerce industries took off. India’s Flipkart is one such a great success story. Founded in 2007 by an Indian, it quickly became India’s leading online store. Snapdeal is another leading player in India. Such e-commerce ventures have led to a healthy competition in India and as a result, the country, the people and the investors have benefitted greatly. Lazada in Malaysia and eBay in the Philippines have changed the way people shop and achieved widespread acclaim from all parts of the world. These countries identified the opportunities pretty early on and capitalized on a non-existent competitive environment.
The Right Direction
Taking all these things into consideration, Pakistan seems to be on the right track. Up to 70 percent of the population is below the age of 35 and the landscape is changing. Cellular subscribers are on the rise. The recent launch of 3G and 4G by all cellular networks of the country means access to a blazing fast Internet on the fingertips. The right idea can make an instant impact.
With favorable government policies, minimum initial investment requirement, and several high quality incubators and an ecosystem that is fast maturing, the startup industry is the most happening place in the country. Innovative ideas with solid implementation plans and viable traction are validating the system, with both foreign and local investors actively looking to invest.
The next few years will be crucial to determine whether this is a false dawn or an actual emergence of entrepreneurship. With conventional businesses unable to keep pace with the rising population, a thriving educational system that is churning out millions of high quality graduates every year who are eager to make their place in this new global village this is the right time to be an entrepreneur in Pakistan.