Since the Digital Revolution in the 1950s, digital technology has become a cornerstone in humanity’s pursuit of evolution. Be that as it may, it has always been a power concentrated in the hands of a notable few, mainly global leaders like the US, China, Singapore, India, Japan, and Israel (KPMG). However, their tech sectors have become increasingly saturated, despite the increase in the use of technology in the era of COVID-19; consequently, avenues have emerged for the underdog countries to rise through the ranks to become global contenders. Amongst them, Pakistan has the most potential both as a technological hub and consumer market.
Founder and Managing Partner of the Pakistani early-stage venture capital (VC) fund Indus Valley Capital, Aatif Awan, is a renowned investor with over a decade’s worth of experience working in San Francisco’s Silicone Valley for major names such as Microsoft and LinkedIn. Back in 2019, he compared present-day Pakistan to Indonesia in 2009. Back then, the Muslim majority Southeast Asian country, with a population of 236 million and a consumer market spending of US$322 billion, was the largest untapped market with no substantial competition for both startups and greenfield investments by VCs. Those that thought that the country’s socio-economic situation was too risky missed out on major opportunities while those that took the leap of faith flourished e.g. GoJek’s Nadiem Makarim whose startup is now worth US$10 billion, and VC East Ventures that gained a net internal rate of return (IRR) of 70% and 65% in the first two funding rounds. As of now, Indonesia ranks 11th worldwide having created 5 unicorns, the only country besides Switzerland to have such an amount. Currently, Pakistan houses the world’s 5th largest population of almost 227 million people that has a consumer spending of over US$257 billion, a 5.7 fold increase since 1998; and just like Indonesia back in the day, the Pakistan startup scene has remained off the international radar until now.
To understand the Pakistani startup scene it is helps to understand the events and factors that have led up to the recent global interest in it. Pakistan experienced its first startup wave back in 2013 wherein its 3 unicorns emerged- Careem, a vehicle hiring company (bought by Uber for US3.1 billion in March 2019); AI software company Afiniti worth US$1.65 billion; and fleet management company KeepTrucking worth US$1.25 billion. These companies kickstarted the country’s startup ecosystem, training thousands of Pakistanis with first-hand knowledge on how to set up and develop their own startup which is why many of the present-day entrepreneurs and founders of Pakistani startups are ex-employees of these firms. This exposure also led to the creation of a strong tech talent base in startup software firms that went on to undertake massive contracts e.g. Pakistani software firm Arbisoft was contracted for 20% of American unicorn Kayak’s R&D during their IPO.
By late-2018/ early 2019, Pakistani startups began to flourish; with a solid base of over 360,000 software developers and over 35 incubators and accelerators across both the public and private sectors, more than 300 startups kicked off operations in 2018 alone with an expected 1000 to be operating within the country by 2025. Aside from the Pakistani unicorns mentioned earlier reaching their record level funding in their Series D rounds in 2019, a popular Pakistani e-commerce platform, Daraz.pk, was acquired by China’s Alibaba for a value between US$150-200 million. Subsequently, another Pakistani startup called EasyPaisa, an e-wallet app was given an investment of US$184.5 million for a 45% stake by China’s ANT group.
It is also interesting to note that both these startups were acquired prematurely as they had only penetrated a fraction of the market before their respective acquirements. Another notable startup, one of Pakistan’s largest successes in the field, Zameen.com, raised an astonishing US$100 million in its Series D funding by February 2019 and has now expanded beyond Pakistan and into the UAE, Bangladesh, Morocco, Spain, and Romania with over 2,000 employees worldwide.
Most excitingly, by the end of 2019 significant Pakistani startups had finished their seedings rounds and moved on to Series A rounds with more funds raised in the year than the past 10 years combined. For example, within 8 months startups Bykea, Cheetay’s and Airlift achieved US$5.7 million, US$7.8 million and US$12 million in Series A funding respectively. Interestingly, in the case of Airlift, the funding came from leading Silicon Valley VC First Round Capital (known for early funding into Uber and Square) which has not made any investments in Asia for a decade until now. The fact that these startups achieved funding at the same level as startups at Silicon Valley goes to highlight the huge potential that Pakistan has yet to explore. And now in 2021, the funding Pakistani startups have received in just several months has reached a value of US$300 million which is more than the past 6 years’ worth of funding combined. According to Faisal Aftab who is the co-founder of London based VC Zayn Capital, estimates the collective market cap for Pakistani startups is to reach US$30 billion by 2031.
Aside from the sheer power of the population and the consumer spending potential, there are multiple reasons for the recent boom in Pakistani startups’ fundraising. Firstly, global tech leaders such as India and Singapore have low-interest rates coupled with high valuation rates which lowers investors’ interest so they begin to explore proximate untapped markets for higher profits; Pakistan just so happens to fit this profile. Secondly, Pakistan’s internet facilities have increased dramatically throughout COVID-19, with internet penetration across the country at a level of 54% (over 100 million users) in 2021 as compared to just 17% in 2019. Whilst COVID-19 devastated the global economy, Aftab notes, it revved up the Pakistani startup ecosystem by diverting the attention of diaspora Pakistani working in foreign countries back to their home country, especially those working in the US banking sector who were laid off during job cuts that took place in 2020 amidst the peak of the pandemic. More overseas Pakistanis with rich experience and funds, termed by Awan as “Wapistanis” (a play on the word “wapis” which means ‘return’ in Urdu), are expected to come back and begin their own entrepreneurial journeys in the startup arena back home.
As exciting and promising the scene for these Pakistani startups is, it is incorrect to assume that’s the consensus across the South Asian country and the world. In fact, the consensus amongst experts that spoke with international news agencies is that the current momentum of Pakistani startups will not be sustainable and that the US$1.5 billion estimated funding pool for 2022 is an ideal exaggeration at best. Co-founder of the Pakistani early-stage VC fund i2iVentures, Kalsoom Lakhani, explains that Pakistani startups generally have followed the blueprint of successful startups e.g. Pakistani digital bookkeeping startup CreditBook is based on both Indonesia’s BukuKas and India’s Khatabook, which lowers the risk perception of international investors but simultaneously makes them more inclined towards a “wait and see what happens” approach after an initial bout of funding rather than a “making Pakistan a strategic part of our mandate” approach. This means that for Pakistani startups to remain on an upward trajectory, they must guarantee that they are consistently high-performing and generate multiple potential exits and unicorns to keep foreign investors’ interest. Additionally, the fact remains that if interest rates in the US and other tech-heavy states go up and bonds become increasingly attractive, there will always be a risk of Pakistan losing out capital to them.
Veteran entrepreneurs in Pakistan such as Furquan Kidawi, owner of the e-pharmacy Dawaai, predict that amidst this boost in funding, startups will focus on usurping as much of the funding pool for themselves as possible but advises them to adopt a strategy of only taking the amount they need to grow and “look a bit beyond the next chair” so they may be aware of other startups’ funding gaps and needs. This will bolster the entire startup community and build a long-lasting legacy for future generations which is exactly what Pakistan needs if it wishes to become an established and formidable contender in the international arena of technology and digitisation.
M.Phil Political Science and Governance