By Zulfiqar Qazilbash
Startup incubators are increasingly becoming the hub of entrepreneurship in major cities of Pakistan. Apart from the collaborative working space and subsidized services, they provide networking opportunities with mentors, angel investors and in few cases, selected large corporations. Many incubated startups have benefited from the time spent and emerged with angel investment.
However, few have managed to pick up serious VC or institutional funding. This is because there are important changes required in the ecosystem before more incubated startups get larger funding and are able to grow and become “unicorns” that create large scale employment and contribute in meaningful and measurable ways towards the nation’s economic growth.
The sad fact today is that the best brains born in the country leave the country due to lack of sufficient opportunities. According to HEC, Pakistan produces around 450,000 university graduates every year (25,000 in computer science) but our Corporate and SME sector can only absorb a very small number of them.
For those that have attended elite schools in the major cities of Pakistan, chances are that significant number of their classmates are working and living abroad. It is easy to infer that this is largely the case across the nation’s colleges and universities and has been the trend for many decades.
Incubators can play a key role in reversing this brain drain and create new value in the economy.
The need to involve the best and the brightest
However, Incubators can play this role only if entrepreneurship can be established as a viable alternative to employment. This will truly come to be accepted when you are able to offer success stories that inspire and motivate the entrants, which currently don’t exist in the scale needed.
The quickest path to creating these success stories is to involve the best and brightest minds. In the Silicon Valley, many Indian and Pakistani entrepreneurs became very rich in the 1980s by importing into the US, high achievers (usually gold medalists and position holders) from top universities of the subcontinent and putting them to work creating new products for the emerging PC market.
It is hard to imagine that a gold medalist would let go the offer of a multinational job that is difficult to come by but likely to be open to him at that moment, to take up an entrepreneurship development opportunity in an incubator without some sort of corporate sponsorship and/or suitable stipend.
At least not in these early evolutionary stages of this market when there are few success stories he can point to when he tries to explain his gamble to his parents and other stakeholders. Many of the high profile international incubators now offer seed financing to selected incubatees.
Quality of innovation is gated by the experience and skill set of the founding team
The focus of most incubators to date has been IT based entrepreneurship. Conventional wisdom says mobile companies should support, favor and invest in apps that increase demand for internet. Many aspiring entrepreneurs are developing internet based apps for mobile phones and incubators encourage these ventures to experiment with new ideas that have the potential to become the “killer” app.
With few exceptions, the level of technology innovation generated to date, has been limited. Innovation is considered key to overall startup sector growth as can be assessed from our neighbor’s example who is at least decade ahead of us in this endeavor. A recent McKenzie report indicated that, “90% of Indian startups fail within the first five years. And the most common reason for failure is lack of innovation — 77% of venture capitalists surveyed believe that Indian startups lack new technologies or unique business models”.
The issue is that incubated teams are predominantly characterized by recent graduates only. Most of the incubator outreach is done in universities and social media campaigns run by young people that attract young people. Even the decor and culture of all incubators target youth.
Although these aspiring first time entrepreneurs have glaring gaps in their experience and knowledge, there is limited capacity development offered at incubators. For instance, as indicated in a recent survey conducted by a donor program, most incubators do not as yet provide increased access to domain specific knowledge, workshops on market research, product testing or building nontraditional sales channels – major learning gaps in first time entrepreneurs that have no or very little industry experience. Nor do they adequately incentivize them for pairing with academia and experienced industry professionals to increase the team’s innovation potential.
Critical mass won’t occur without enhancing academia and corporate linkages
As the EU Horizon 2020 program for making Europe more competitive by research and development explains well, meaningful gains in innovation are not possible without strengthening academia and corporate collaboration.
Google’s investment of @NEST, the [email protected] incubator is potentially brilliant as it can become a growth engine for software companies in [email protected] Companies support and encourage current and past employees to link up with students and academia to pursue product ideas that the software company can take a stake in if it attains sufficient momentum. But currently this is not happening as much.
In many cases the ideal founding team would tap the energy and creativity of youth but polish it with the experience of a mid-career professional and an academic researcher of the target domain, even in part time capacity.
Experienced mid-career professionals have through their careers developed a greater understanding of consumers, market conditions and product management that allows them to envision and pursue a far more evolved venture. They also have the experience to manage its evolution with reduced risk. In startup friendly economies, corporate VC funds that encourage this are the norm and exist in most of the largest global tech companies including Intel, Cisco, Microsoft, Google, Apple etc.
I can offer first hand validation of the model, as previously, while residing in the US and after ten years in the field, I linked up with Stanford university resources to get my startup going by tapping my previous employer’s Corporate VC fund for seed financing.
Because of our experienced team, we ended up raising altogether US$ 81 million in VC and institutional funding and delivered to the global market two generations of products that yielded multiple US patents. The good news is that some of this has started to happen in Pakistan and some companies have setup Corporate VC funds that have begun to invest in startups that are aligned with their areas of interest.
Academia needs to step up and become the visible bridge between international research and its application into the Pakistan economy particularly in developed sectors like defense, pharmacy, telecom, banking and agribusiness. Such sectors provide large marketplaces and evolved ecosystems to potentially support the high cost of introducing innovation.
Academia alone has the advantage of cheap but motivated students that can initiate and bake the R&D till it is ready for commercialization. This was the vision for the National ICT and S&T R&D funds but so far these funds have made limited advances in linking academia with industry.
Exploring entrepreneurship options other than IT
Although most of the focus is on IT, Pakistan has a consumer led economy and so in the near term, startups in the FMCG sector have the greatest chance of success. Innovation can be in new business models that are built around the growing middle class or efficiently provide low cost goods and services to the BOP through social entrepreneurship that plays a role in getting them out of poverty.
Such business model innovations leverage localized sales and marketing strategies that target our unique demographics and make use of the unemployed youth bulge, appropriately address cultural restrictions on the female gender and/or capitalize on the demand for secondary income.
Finally, programs focusing on solving huge gaps with private sector led innovation in essential service verticals like Education, Healthcare etc. won’t get the required success unless they seed funding solutions similar to the IT R&D Funds and more successfully connect academia with the emerging industry.
The national goals need to be mapped by industry into research that is funneled to PhD programs and incentives provided so energies of the brightest brains are focused here. Interested donors should sponsor national centers of excellence in key areas that bring major stakeholders together in nationwide information hubs.
These would play an important role in providing capacity building in global best practices as well as a bridge into national and international sources of funding and technical assistance. The latest development sector wisdom says that bypassing institutions only weakens them and so government institutions should be involved and their interests aligned and capacity developed to sustain such effort
Zulfiqar Qazilbash is the President of Islamabad Consulting engaged in setting up Corporate R&D capacity and donor backed private sector development projects. He can be reached at [email protected]