Pakistan: Surveying the start-up scene
Challenges, opportunities and lessons for Pak's SMEs
Highlights
- Defining success for a Pakistani SME
- The sectors ready for disruption
- How can Pakistan become a more women-friendly entrepreneurial environment?
- What has the government done right on the start-up support front, and what it still has to do
The state of its entrepreneurial ecosystem says a lot about a country, and Pakistan is no exception. While experts tell GN Focus there are some promising signs, a lot of work remains to be done in order to take the nation’s start-up scene to the next level.
The definition of success
“Pakistan is a few years behind the Middle East and North Africa when it comes to its start-up landscape, so there are very few that have gone big,” explains Zubair Naeem Paracha, Founder of MENAbytes and Qraar. “You could count the start-ups that have been able to raise Series A [funding] on your fingers.”
For Meenah Tariq, Partner at Karavan, success is a relative term in the world of start-ups. “Currently in Pakistan, success is being defined in terms of the ability to survive (while bootstrapping) and successfully raising funding at the end of that struggle period. To be able to do so, a founder needs to be extremely resilient, knowledgeable and passionate about the problem they are solving, and also have the knowledge and understanding of the fundraising value chain. What successful entrepreneurs also have in common is the power to convince Pakistani venture capitalists [VCs] of their ability to create value for their customers and stakeholders alike, and to raise follow on rounds of funding.”
Pakistan is a few years behind the Middle East and North Africa when it comes to its start-up landscape, so there are very few that have gone big. You could count the start-ups that have been able to raise Series A [funding] on your fingers.
Under the assumption that success equates to building a company with a $100-million (Dh367-million) valuation, tech entrepreneur Osman Haneef shares some common denominators these Pakistani start-ups tend to share: “First, they are funded and supported by foreign capital and investors – see Daraz, Easypaisa and Careem.
“The role of foreign organisations is perhaps to be expected given that the local ecosystem is still in its nascent stages. And there is hope that as the employees of Careem and other companies exit, they will then reinvest in new local start-ups. They would effectively become the equivalent of the PayPal mafia of Pakistan. However, as of now, the biggest players are not indigenous.”
Ripe for disruption
Asked to name a sector he feels could be aided by start-up entrants, Paracha cites real estate technology, or proptech. “Proptech start-ups could solve a lot of problems of the real estate sector in the country. The tech players that have been operating in this space have not been able to innovate enough. They have disrupted the real estate scene of the country to some extent but due to lack of innovation are going to get disrupted themselves now if they don't act quickly.”
Tariq, a consultant with the World Bank and former Head of Strategy and Accelerator at Invest2Innovate, agrees there is definitely room for more start-ups in the proptech space, adding that entrepreneurs can target any sector where there are already a few start-ups already trying to find a product market fit – health, education, beauty, hospitality and logistics. “We have a huge local market, with a large youth population that is rapidly coming online and embracing technology. We don't currently have winners in any sector, but hope to see a few good start-ups emerge with large market shares over the next year or so.”
Haneef, the former global Head of Special Projects-Business Development at BIMA, one of the world’s leading micro-insurance and telehealth organisations, explains, “in the time of COVID, we are already seeing how some of these early players in telehealth and distance learning are becoming more prominent.
“The Pakistan ecosystem is in the midst of its own platform wars. An increasingly digitally literate customer is deciding what platform they want to use for the services of tomorrow. The big opportunity is becoming the digital platform of choice for a major service in Pakistan – which platform will become the local Amazon, ApplePay or AliPay? The players who are able to become the platform of choice – such as Uber/Careem – will dominate their sector for years to come.”
We have a huge local market, with a large youth population that is rapidly coming online and embracing technology. We don't currently have winners in any sector, but hope to see a few good start-ups emerge with large market shares over the next year or so.
Paracha predicts niche e-commerce and direct-to-consumer start-ups will do very well over the next few years. “If you take the regulations out from the equation – which is obviously not happening – banking is the biggest sector, in my opinion, that will be disrupted, but a lot depends on the regulators there.
“We'll also continue to see the rise of different mobility start-ups in the country. Bykea and Airlift started it but I don't think they will be the only ones. And as more people come online and develop the habit to shop online, online grocery shopping in the country will also grow. The last one is edtech. There are so many challenges around education in Pakistan that entrepreneurs could help solve.”
A woman’s place?
Citing the Global Entrepreneurship Monitor Report for 2019, Tariq says the ratio of women to men entrepreneurs in Pakistan is 3:10. There are myriad reasons for this. “The hurdles are many, from social limitations to lack of access to training and early stage capital. Unfortunately these issues persist in 2020, but on the positive side there are now a number of programmes that aim to particularly facilitate and enable women entrepreneurs. This includes the Women Entrepreneur Financing Initiative by the World Bank, the USAID Small and Medium Enterprise Activity (SMEA), which provides business support services at subsidised costs for women entrepreneurs, and the recent measure by the State Bank of Pakistan to provide soft loans for women entrepreneurs.”
Haneef says, “There are far fewer women than men, especially at the management level, in businesses (start-ups and more established organisations).” While he agrees there are numerous cultural and social obstacles, he adds, “Businesses shouldn't use that as an excuse for the appalling representation of women in most management teams in Pakistan. Flexible working hours (remote working options), day cares (which are mandatory for organisations with a certain female workforce in Punjab), and special transportation facilities make it easier for many organisations to overcome these obstacles and hire and retain talented women.”
Government role
Before Pakistan can enjoy a thriving start-up ecosystem, certain fundamentals need to be in place. “If the government were able to deliver on its services more effectively – such as healthcare, education and security – it would make a tremendous difference to businesses and start-ups,” explains Haneef.
But he says those are longer term changes. “In the more immediate term, the government could do much more to create regulatory sandboxes, where start-ups are able to operate with minimal restrictions so that they can develop a model that works and governments can then adapt the rules to help mitigate any risks and protect the consumer while not killing these new business models.
“Pakistan's regulatory bodies have been examining many of these suggestions but it is difficult for regulatory bodies to suggest innovative models or changes because bureaucrats only get blamed when an innovation fails, and they rarely get rewarded when the innovation succeeds. These asymmetric incentives make it difficult for the regulator to be agile and forward-looking in Pakistan.”
In the more immediate term, the government could do much more to create regulatory sandboxes, where start-ups are able to operate with minimal restrictions so that they can develop a model that works and governments can then adapt the rules to help mitigate any risks and protect the consumer while not killing these new business models.
For Tariq, the Pakistani government would do well to look at India for examples of successful policymaking initiatives on the start-up front. “A number of policies and packages were introduced by India to promote and support entrepreneurship. For the start-ups themselves, the Indian market serves as a comparable market for a number of products and services.”
However, she does give credit where it’s due. “The government has been quite involved in the start-up ecosystem in recent years, especially through its funding of five major incubation centres through the Ministry of IT in five cities across the country. This helped create hotbeds of entrepreneurial activity, and brought entrepreneurship into the mainstream. The next step has to be upskilling these centres to start creating knowledge pools around the communities that have been formed.”
“A crucial step is also the creation of an early stage investment fund or a government-supported fund of funds, since early-stage capital is a major gap in Pakistan at the moment. Early-stage capital is high-risk, and most VCs are not comfortable enough to invest at this stage, which is where the government comes in. The creation of such a fund will help create deal flow for later stage VCs, hopefully also attracting more international funds to enter the market.”
Paracha believes that Pakistani entrepreneurs often find it particularly tough to raise capital at the time their start-up may need it most, in its nascent phase. “As some VCs including Meenah may have pointed out, there are almost no angels in Pakistan. We have had a lot of investors who are looking to invest in tech businesses for a 50-60 per cent stake, but that's not how it works. There are also a lot of accelerators and incubators in the country but I keep hearing that a lot of them are interested in photo-ops than anything substantial. Most of these accelerators don't really invest a significant amount of money in start-ups, offering things like mentorship and space instead.” He adds that it is very difficult to move money into and out of Pakistan, which remains a very big challenge for all entrepreneurs.
Finally, Haneef warns that we should be wary of start-up hype. “Start-ups and technology are not a panacea that will make all our worries disappear. We need to invest in the fundamentals – education, security, health and good governance – and that will enable us to build an ecosystem that can thrive and grow on its own terms.”