Pakistani startups have raised a total of $563.5 million across 255 deals since 2015 with $350 million raised via 83 deals in 2021 alone, accounting for over 60 percent of all deals completed within the past seven years.
A report by Invest2Innovate titled, “Pakistan Startup Ecosystem Report (PSER) 2021” documents the developments in the startup ecosystem in addition to the challenges and opportunities during the last two years. It parses out the current growth patterns such as increasing interest from notable international investors, the emergence of hyperlocal business models solving real problems, and regulatory shifts that have occurred during this period among others.
Invest2Innovate’s Insights arm, through a series of surveys, gathered data from 150 startups, 17 investors, and 20 entrepreneurship support organizations (ESOs) operating in Pakistan.
The data was further triangulated via 52 interviews with founders, investors, support organization leaders, and policy-makers. In addition to these primary data points, secondary data and literature were also referenced to draw comparisons with other comparable ecosystems within benchmark nations such as Bangladesh, Indonesia, Egypt, and the Philippines.
A Shift in Investment Trend
Recent years have seen an increasing shift in how investors in developed economies have sought to broaden their holdings to emerging and frontier markets including Pakistan. Resultantly, local startups have raised $563.5 million across 255 deals from 2015 up till now, and they have raised $350 million via 83 deals in 2021 alone.
In part, the strides made by the ecosystem can be attributed to a more facilitative policy regime. For instance, the Securities and Exchange Commission of Pakistan (SECP) has established a separate legal definition for startups (in the same vein as Corporate Entities and Section 42 Non-Profits).
Pakistan exhibits significant similarities with respect to how investment capital is concentrated in a small number of sectors (16 percent of Indonesian investment capital existed in the domain of financial services and payments in 2020, while 27 percent of total Pakistani investments were concentrated in the fintech sector in 2021). It bears mentioning that 43 Indonesian tickets for Seed, Series A, and Series B funding have increased by $300,000, $2 million, and $8 million, respectively, while the respective ticket sizes in Pakistan have increased by $2.4 million, $1 million, and $38.5 million.
Both ecosystems have exhibited exponential growth in investments raised during the past two years with Pakistan showing an increase from $65 million in 2020 to $350 million in 2021.
The federal government has likewise established the Special Technology Zone Authority (STZA) to develop STZs to focus on supporting tech-based organizations (including startups). Moreover, the study’s mapping of entrepreneurship support organizations (ESOs) in the country shows that there are approximately 98 ESOs operating in Pakistan, which range from incubators (22) and accelerators (13) to coworking spaces (18).
Additionally, university-based business incubation centers (24) and other organizations including foundations, business associations, and conferences/challenges (13) also form part of the local business support ecosystem for both new and mature founders.
Although these recent developments portray a positive outlook for the Pakistan startup ecosystem, the report documents an associated set of challenges for parties within the ecosystem. With respect to investors who had responded to the survey, a vast majority preferred to invest in early-stage startups. This implies that financial capital for later-stage rounds is scarce due to a lack of investors willing to invest at those stages.
This is in line with how the present investment trends have shaped up so far — most deals in 2021 were at the pre-seed ($32M raised across 14 deals) and seed stage ($123M raised across 46 deals) – and confirms that a lack of funding for companies in later stages may be an emergent issue when startups begin to reach that phase of their growth lifecycle.
A significant majority of the investors participating in this study also pointed out that a lack of laws allowing for the seamless inflow of foreign investment capital into the country as well as appropriate VC-friendly legislations and processes are a considerable barrier to investors.
A glaring gender disparity is also highlighted by the barriers female-founded startups face in accessing capital; resultantly, solely female-founded startups account for only 1.4 percent of all investments raised within the past seven years.
Although the availability of a larger number of support programs is a positive sign and indicates greater accessibility of support services to young startups, the report highlights several shortcomings among support services. These include the lack of services for more experienced founders and startups at later stages of their business lifecycle as well as a noticeable lack of effective investor-readiness elements within local support programs.
Similarly, key stakeholders were reported as highlighting that, in regards to human capital, while the supply of technical talent in Pakistan is sufficient, it lacks several key attributes such as critical thinking abilities, product-oriented experience, and cross-functional flexibility compared to their counterparts in other regional ecosystems.
As Pakistan’s economy currently faces a recession on the other hand the startup ecosystem is booming, which is an indicator of an accelerated digital economy in the future. Therefore, the government and other key stakeholders must address the collective interests of all parties involved and create a favorable environment for them that will determine the course of the entire digital economy.
The fate of the startup ecosystem and its role in the economic recovery of Pakistan rests on whether a better environment for startups is created where they not only survive but thrive.
Some key data points identified as part of the report include:
- 230 Million: Total investment amount (in USD) raised by founders who have had both prior education and work experience internationally.
- 100%: The percentage of surveyed investors who prefer to invest in early-stage startups compared to only 47% of survey respondents who would invest in growth-stage startups.
- 3 to 10 Years: The most commonly cited timeframe for when investors expect to see a return on their investments in local startups.
- Pitching and storytelling, and Access to like-minded entrepreneurs: the most commonly cited benefit of participating in an ESO program by 79% of founders responding to our survey.
- 64%: The proportion of surveyed founders who feel that the existing support programs in Pakistan do not adequately prepare startups for investment-raising.
- 55%: The proportion of founders who cited tax rates as being a hurdle for their operations (due to the non-harmonized range of taxes applied to sales and income tax).
- Product Managers, Growth Executives, and Data Scientists: Three key roles that both founders and investors emphasized during interviews for building up an effective startup team.
- 90%: The proportion of support organization leaders who felt that there’s a lack of managerial talent within the ecosystem.
- 87%: The proportion of surveyed founders who agreed with the statement that universities in Pakistan do not adequately prepare their students for launching their own business
- Finding a suitable investor: The key investment barrier faced by 84% of female founders.
- 53%: The proportion of surveyed male founders who agree with the statement that raising investment is a challenge for females.
- Fashion/Lifestyle and E-commerce: The predominant two sectors represented among the sample of female founder respondents.