Rabeel Warraich is the founder of Sarmayacar, a multi-million dollar seed fund syndicate dedicated to Pakistani startups. He is currently the interim chief executive officer of Patari and has previously worked in investment banking and private equity with organizations including Morgan Stanley and GIC Investment Management. MIT Technology Review Pakistan sat down with Warraich to discuss the state of venture capitalism in Pakistan and the up-and-coming technology startups.
What is the scope of venture capitalism in Pakistan?
It would be useful to first give an overview of venture capitalism because the concept is not very clear to everyone in Pakistan. Venture capitalism represents a form of financing given to early stage businesses which are high risk but also carry high potential for growth and return. It is generally used by businesses which would find it difficult to get bank or debt financing, so they can get financing from investors in exchange for an equity position in the company instead. This form of financing has been prevalent in the United States and other ecosystems for many years.
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Our hope is that through our platform and some others that have emerged recently, we would finally be able to kickstart the industry in Pakistan. So far in Pakistan, we have seen some venture capital activity primarily from international investors that have backed certain companies, for example, Zameen.com’s parent company was able to raise in excess of $30 million. PakWheels and Rozee.pk raised funding and, of course, Daraz.pk raised a substantial amount of money — close to $50 million — before being acquired by Alibaba. I believe these are the ‘green shoots’, or the early signs of venture capitalism taking off in Pakistan.
One thing that has been missing in the past is a local venture capital fund. Most international funds would want a local partner to not only help them make better decisions, but also do diligence and some hand-holding once some investment has been made. This is the avenue that we want to kickstart: a dedicated venture capital firm for Pakistan which not only bridges the risk capital gap compared to international markets but also brings together best practises and domain expertise to help early-stage businesses.
What was the motivation behind creating Sarmayacar?
By way of background, I grew up in Pakistan, ended up in the US for my studies. Then I went to the United Kingdom and started my career in investment banking. By 2011, I was working in private equity. I wanted to bring together syndicates and international investors who could back companies in Pakistan, but did not have the right avenue to do that.
Foreign investors who haven’t spent any time in Pakistan don’t know what is the right platform to invest through. It’s difficult for them to get comfortable with one of the big conglomerates in Pakistan which might have 15 or 16 different business minds, of which only one might be investing into other businesses.
So I started Sarmayacar with the intention of bringing together these like-minded investors, and also used my own money to form small syndicates on a deal-by-deal basis which then end up investing in some early-stage companies in Pakistan. I have now relocated back to Pakistan to do this specifically. We are close to announcing our first flagship fund: a dedicated venture capital fund of about $30 million. All of our capital is foreign direct investment. I believe this would make us the largest venture capital firm in Pakistan. With this we hope to be in a position to lead the situation, not only in Series C funding but also in Series A.
Can you give us some examples of success stories in Pakistan?
The one true success story that I like to point out is Zameen.com. They were able to crack a market that has traditionally been dominated by real-estate agents. They have also managed to expand [the model] to international markets. Overall, I think they are doing quite well.
This is just the tip of the iceberg if you are to talk about success stories — there is the case of Daraz.pk being acquired outright by Alibaba is a kind of exit which will encourage investors about the health of the ecosystem. The fact that we have had Chinese interest manifested through an acquisition of an entire company bodes well on two counts: firstly, that exits have started to happen, and secondly, that Chinese interest is actually starting to translate into actual invested dollars in the digital space in Pakistan.
The amount offered for Daraz may seem smaller than expected but the underlying performance and certain other dynamics are also significant factors. For instance, they have acquired not just the Pakistan office but offices in a few other countries as well.
The lower than expected figures are a function of a few things, including how efficiently the capital raised previously was spent. The big challenge of any ecosystem, especially in Pakistan, is the need to raise awareness. Five to seven years ago, we weren’t even aware that you could go online to buy stuff in Pakistan. So Daraz had to educate everyone first. Then they had to compete with other e-commerce players in both acquiring customers and being able to sell what are ultimately low-margin products for a competitive price. In terms of their underlying numbers, I think the value that has been paid is what it is. The bar has basically put a value on it but I think it is on the lower end of the range that they should have gone for.
Do you think there is enough investment in Pakistani startups right now?
It’s started to happen but it isn’t enough right now. If I were to sum up all the venture capital investment in the last year, it would be less than the value of one street in Karachi’s Defence Housing Authority (DHA). This should give you a comparison of how much traction this industry has had but this also means that there is a dearth of capital, and quite an opportunity to capitalize on.
The way the venture capital industry works is that you face failure but you keep banking on that one true success to be a home run which would return not only the money you invested but also something on top of that. That’s why the risk taking element is extremely crucial in this industry. However, the propensity to take risk is not common in Pakistan because people come from slightly traditional investing mindsets and don’t fully comprehend the opportunities available in backing scalable business models, which can then generate value. For venture capitalists, as long as you have one or two of such instances — it justifies all the other losses incurred in backing other risky companies.
What are the biggest hurdles to investing in Pakistani startups right now?
There are quite a few challenges. Firstly, the required workforce is in short supply. We have a large number of resources but we don’t have leaders who are able to take companies to an international level. It is only by truly being innovative that we can push boundaries and remain incentivized in the long term rather than just thinking about short term gains. This is an area where we are still learning. I think it’s partly because Pakistan as a country hasn’t gone through that trajectory. For example, I can’t point to that many people around here and say that this person made this company, raised venture capital, ended up expanding to X number of countries and and then sold it and made Y millions.
Entrepreneurs who have built such companies in the past or investors who have invested in a similar space are not really in the Pakistani ecosystem yet. Most of them are sitting abroad and while they have done very well for themselves and are now looking to increasingly participate in the Pakistani ecosystem — that hasn’t yet translated in them moving back and taking ownership of something like this or trying to push it forward.
I think there is a longer debate to be had on how universities and school systems are training people. I think we have an entrepreneurial mindset as a nation. What we don’t have is the right kind of training or experience to be able to make informed decisions on how to scale businesses, when to raise capital or what to look for in an investor, so it’s very much an education problem and it extends to investors too. Some of the investors we have come across are not very familiar with how to invest in this space and would typically ask for a majority stake, which in my opinion, disincentivizes any entrepreneur in taking the company forward.
The second challenge is that regulation and policies around venture capital are still, I would say, a little bit poorly defined because they approach it as a mutual fund, making it less attractive for investors to register venture capital funds. It’s easier to establish a fund outside of Pakistan, both from a tax perspective and a regulatory perspective.
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The third challenge is that we need follow-on capital to be available from within the country as well. There is only so much that international investors can do to come in, cherry-pick good opportunities and take the ecosystem forward. It will be very difficult to move beyond one or two success stories until we have a sustained push by some of the local families and participation by corporations, either by giving business to startups or by working with them.
In 2016 Fatima Group invested in a media startup, MangoBaaz. Do you think that’s an indicator that local corporations are developing an interest in this ecosystem?
I would categorize that as an investor putting money into a startup — not necessarily Fatima Group leveraging its very broad setup and experience in multiple different lines. Most companies are aligned with what their traditional businesses have been. Fatima Group has big exposure to agriculture and they look for agri-tech businesses but they haven’t really invested in such a startup. What I mean by corporations getting involved in slightly different. They need to give opportunities to local startups to provide them with products or services they would otherwise pay large amounts of money to a foreign vendor for. This is some of the ground level push that is required.
As an investor, I believe that the best form of funding for companies comes from customers who want to buy their products or services. However, until the government of Pakistan and large corporations in the country also become their customers, it will become very difficult for these companies to generate a business and become successful at a national or maybe even at an international level.
What advice would you give to budding entrepreneurs?
I would advise them to focus on solving problems. There are so many problems in the country that need locally developed solutions. We don’t even need to obsess ourselves with having the next big innovative breakthrough come from Pakistan. Why are ride-sharing platforms working in Pakistan? It’s because mass transportation is a big issue. ProCheck, one of the companies that we have backed, helps detect counterfeit medicine and protect the identity of the brand. Upto 30 percent of consumer products in emerging markets are counterfeit and Pakistan is no exception. A few years ago, more than a hundred people died after consuming substandard medicines. So this is a local solution that is not only helping manufacturers protect their brand identity but also helping consumers verify via a simple SMS message whether the medicine they are about to consume is genuine or not.
Patari, another company that we backed, was the first to introduce the notion of paying royalties to artists. It was also the first company that legally sourced music on its platform and has the largest selection of legally obtained music in Pakistan. It has more than 3,000 artists on its platform. It discovered previously unknown artists like Abid Brohi, made stars out of people that were previously working in menial jobs or had no avenue to make inroads into a music industry that is traditionally very tough to break into. And what’s the validation of that? Patari has had five nominations in the Lux Style Awards. In a commercial sense, it probably doesn’t translate into anything meaningful for an investor but the reason I highlight this is because we recently heard that Netflix has finally overtaken HBO in its number of Emmy nominations. For a distribution platform to have that grasp over content and their own original shows to be recognized in this way means that people are willing to watch or listen to it. This is what we want to make Patari — not just a distribution platform but also a content generator focused solely on serving listeners, and bringing good artists onto the platform by making their music available for listeners.
Do you have any advice for other venture capitalists?
This might sound a bit self-serving but I think international venture capitalists need to work with locals. The localization requirement in Pakistan is so strong that it will be very difficult for them to make material gains unless they are working together with local investors. I would encourage them to initially co-invest with some of the investors and then see if they want to participate directly via funds or take leading positions. A common misconception among international investors is that Pakistan is a dangerous jurisdiction to invest money in because there is a risk of your money not being allowed to be pulled out of the country. I don’t think that is correct at all. In our country’s history, there have not been any incidents of the state not honoring the proceduralization certificate which authorizes investors to take their capital back. Yes, there have been delays but that is not uncommon in other markets. Pakistan, as a investment destination, is actually much more attractive than even India. It allows 100 percent foreign ownership, there are very expansive double-citation treaties with many different jurisdictions, there is proper protocol set up in terms of how investment comes in, besides appropriate governance structures are already set in place.
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Venture capital industry relies on sharing. We need to share both our successes and failures because that is eventually what venture capitalism and the venture industry is about. It’s about increasing the odds of success in every situation because you cannot predict whether something is going to be an absolute success or a failure. This gives you an opportunity to learn from other people’s experiences. Silicon Valley became what it is today because all the smart people came together in a conducive environment for sharing. Whenever something works, other companies leverage that and try to do something similar, and whenever something doesn’t work, people try to learn from that and don’t waste their dollars on trying the same thing.
The same thing needs to happen among the local venture capitalist industry. We need to share our deals and experiences with other investors so that ultimately the entire ecosystem does better, which in turn would lift everyone else since the rising tide lifts all boats. However, this mentality is very different to how traditionally capital has worked in Pakistan because we have been a monopolistic society with respect to capital. When we were young, we were taught that the majority of the wealth was controlled by 22 families in the country. Now we might have 60 or 70 families but very rarely do these families own a minority stake in a company and bring together another family that also has a smaller stake. Technically, it’s all control driven because they want to have the majority stake. In venture capital, if you are taking a control position, then you are just disincentivizing the team or the founders completely. And that doesn’t work — it hasn’t worked completely in any ecosystem before and I don’t think it’s going to work in Pakistan.