In July 2022, Pakistan’s fledgling start-up scene was dealt a major blow. Airlift, a fast delivery start-up that had raised $85m barely a year earlier, said it would permanently close operations due to the “devastating impact” of worsening economic conditions.
“This has been an extremely taxing decision that impacts a large set of stakeholders and an emerging technology ecosystem,” Airlift wrote in a statement. Start-up failures are common in more mature markets, and seen as an integral part of the innovation and disruption process. But the collapse of a company hoped to be Pakistan’s first ‘unicorn’, or start-up valued at above $1bn, rattled the country’s nascent tech scene.
Several advisors, investors and entrepreneurs tell fDi that Airlift’s failure has caused Pakistani start-up founders and investors to shift their focus away from pursuing “hyper-growth” to building more “sustainable” business models.
Similar to the caution permeating the global tech and venture capital (VC) industry, start-up funding in Pakistan has dropped considerably. Start-ups in Pakistan raised just over $15m in the final quarter of 2022, the worst volumes since the first quarter of 2020 and 79% lower than the same period a year earlier, according to Data Darbar, which tracks the Pakistani start-up scene.
“Given the global slowdown and Pakistan’s macroeconomic and political challenges, things are tough right now and will likely remain so in 2023,” says Aatif Awan, the founder of early stage venture fund Indus Valley Capital, which is focused on Pakistan and had invested in Airlift.
Several acute challenges currently facing the country — including dwindling foreign exchange reserves, security issues, blackouts and severe flood risks — are causing many young Pakistanis to leave. Despite significant obstacles, those involved in Pakistan’s ecosystem believe that the country’s demographics and rapidly digitalising economy make it an untapped opportunity with potential for long-term growth.
When Shamim Rajani co-founded her software development business Genetech Solutions in Pakistan’s commercial capital Karachi back in 2004, she remembers a “lot of stubbornness” from the government and local corporates towards the IT sector.
“Pakistan wasn’t [even] ready for women CEOs in the tech sector then,” remarks Ms Rajani, adding that she had to look for global clients in countries like the US. “Saying these words today, I don’t even believe it myself.”
The country’s tech sector has since become much more democratised. Along with digital skills training and incubation programmes, an increasing number of banks and private companies have set up start-up funds.
“The level of funding and support has improved a lot in recent years,” says Sana Shah, the programme manager at the National Incubation Center (NIC) in Pakistan's most populous city Karachi, one of eight public-private tech innovation hubs established across the country since 2016.
Based out of the NED University of Engineering and Technology, NIC Karachi is funded by Pakistan’s national technology fund, Ignite, and operated by LMKT, a private tech company which runs two other NICs in the cities of Hyderabad and Peshawar.
Atif Khan, the chairman and CEO of LMKT, says the philosophy behind the incubation centres “was not to create unicorns”, but to act as digital skills development centres: “We are training and grooming a lot of talent in the country.”
NIC Karachi has already incubated more than 250 start-ups, such as ride-hailing app Bykea and London-based proptech platform Gridizen. Kamran Mahmood, the CEO of Gridizen, who recently returned to Pakistan to join NIC Karachi, says he has found it even easier to meet decision makers at large companies in Pakistan than the UK.
“[NIC Karachi] is doing an excellent job of internationalising and progressing the start-up scene in the country,” he says. Data Darbar figures show that Karachi-based start-ups attracted $236.7m of funding in 2022, equivalent to two-thirds of Pakistan's total and almost double the previous year. The financial capital is followed by Lahore ($69.2m) and Islamabad ($41.6m).
“Karachi really offers the best chance for Pakistan to catch up with other start-up ecosystems,” says Rabeel Warraich, the founder and CEO of Sarmayacar, a Pakistani early stage VC fund set up in 2018.
Later stage support
Between 2018 and 2022, total VC funding in Pakistan increased more than 20-fold to reach an all-time high of $333m, according to Magnitt, an emerging market data platform. The majority of funding has gone to e-commerce and fintech start-ups, including Karachi-based online marketplace Bazaar Technologies, salary advance app Abhi and Lahore-based e-commerce platform Jugnu.
Despite rapid growth, Pakistani start-ups face difficulty raising funding due to very few quality local VCs, relative to other countries; an unwillingness of local commercial banks to provide uncollateralised loans; and stringent policies on start-up financing.
“Government is doing [the minimum] to support the ecosystem,” says Adeel Shahid, the chief financial officer of Arzan VC, a Kuwait-based fund that has made several investments in Pakistan. While NIC, Ignite and other incubators provide support to start-ups, up to their Series A funding round, Mr Shahid says “after this stage, there is no support in the ecosystem due to which companies struggle to progress further”.
This is evident in how Pakistan compares with other emerging markets. In 2022, Pakistani start-ups attracted $315m of VC funding, trailing other countries such as Turkey ($1.63bn), Nigeria ($838m) and Egypt ($517m), according to Magnitt figures.
A major concern among investors in Pakistan’s start-ups is whether they can repatriate and retain their investment in US dollars, according to Bilal Abbasi, the general manager of Ignite, Pakistan’s national technology fund.
“I have seen a lot of [Pakistani] start-ups getting registered in Delaware, Singapore and Dubai,” he says, noting that many investors prefer to invest in holding companies in other tech hubs rather than directly in Pakistan.
Beyond competition for tech talent from remote work abroad and local multinational IT operations, Pakistan’s start-ups must contend with brain drain from the country. A 2022 survey by the Pakistan Institute of Development Economics found that 37% of Pakistan’s population would leave the country, if given the chance. The figure is even higher (62%) for young men aged between 15 and 24.
While Airlift’s collapse shocked Pakistan’s nascent tech scene, its large funding had inflated the cost of talent in the ecosystem, making it difficult for other start-ups to compete. Mr Warraich notes there could be a silver lining to the saga: “Ultimately, the ecosystem might be better off in the long run, despite the short-term pain.”
This article first appeared in the February/March 2023 print edition of fDi Intelligence. View a digital edition of the magazine here.