The quest for Pakistan’s first unicorn
The buzz surrounding entrepreneurship in Pakistan refuses to die down. The year 2018 witnessed an increasing number of business plan competitions, start-up events and meet-ups and public/private incubators and accelerators. Although the lack of official statistics makes it difficult to state an exact number, entrepreneurship gurus estimate that almost 500 start-ups came to life in the last 12 months. These are positive developments that should be celebrated.
And yet, not to rain on the entrepreneurship parade, the mentors, investors and industry experts Aurora spoke to for this story advised caution in declaring Pakistan the next start-up hub.
Recent improvements in the entrepreneurial ecosystem notwithstanding, Pakistan does not even come close to competing with the truly entrepreneurial economies of the world. Pakistan’s ranking is 120 (out of 137 countries) in the Global Entrepreneurship Index 2018 (an indicator of the quality of entrepreneurship and the supporting ecosystem). Although it would be unfair to draw comparisons between Pakistan’s ranking and that of developed countries, the reality is that even the developing economies of East Africa, with a similar history of political, social and financial challenges, are performing better on the entrepreneurship scale: Rwanda (91), Kenya (109) and Tanzania (115).
Nevertheless, the picture is not all bleak. In the last four years, Pakistan’s entrepreneurial ecosystem has improved considerably. There are approximately 53 quality incubators and accelerators and venture financing is estimated to have grown by 400%. In 2018 alone, more than 40 Pakistani start-ups raised $317 million worth of funding, a figure set to grow this year with three venture capitalist (VC) funds in Pakistan – Sarmayacar, i2i Ventures and SparkLabs – expected to fuel start-ups with an influx of much-needed capital. It is evident from the statistics that while Pakistan has the potential to become the next start-up hotspot, there are several factors constraining the momentum required for entrepreneurship to flourish in the country.
A nation of entrepreneurs?
Discussions about Pakistan’s entrepreneurial landscape often bring forth the argument that Pakistanis have always been entrepreneurial in nature and SMEDA (Small and Medium Enterprises Development Authority) statistics are quoted to validate this claim. Almost 98% of businesses in Pakistan are classified as small and medium enterprises; recent labour force data states that only 41% of the people engaged in economic activity are paid employees; even in urban areas, where agricultural employment is negligible, paid employment is only 57%, which means that 43% of working people are either employers or self-employed, both of which by definition fall in the category of ‘entrepreneurs’.
Although the number of new start-ups launched in Pakistan is encouraging, the high attrition rate is not. Of the 500 or so start-ups that come up every year, experts consider about half as promising projects, of which typically only 10% secure funding. Of this number, only about five succeed in surviving the initial years, scaling up and becoming profitable.
However, in today’s business environment, this definition of entrepreneurship has become obsolete. International business and economic organisations have created a distinction between traditional shop owners and traders who operate small-scale businesses and entrepreneurs who create disruption through innovation. The Global Entrepreneurship Monitor classifies the former category of people as ‘necessity entrepreneurs’ who run a family business or are engaged in trading to make ends meet. Street vendors, people operating makeshift stalls at Friday and Sunday bazaars, the Memon business community and Dilli Sodagran are classic examples. It would be wrong to ignore the important role these entrepreneurs are playing in terms of limited job creation and generating healthy household incomes, yet, the real value creation in any economy comes from ‘opportunity-driven entrepreneurs’ – people with a vision for scalable, high-growth businesses, driven by innovation and the ability to transform this vision into reality. It is this kind of entrepreneurship that has the potential to strengthen Pakistan’s economy, boost exports and create employment for the almost two million young people entering the workforce every year. Perhaps most importantly, for a developing country such as Pakistan, opportunity-driven entrepreneurs can serve another crucial purpose. In the words of Badar Khushnood, VP of Growth, Fishry.com and Bramerz.com, “entrepreneurship is about fixing existing problems within industries, filling gaps in the market left by large businesses, adding value and increasing productivity.”
The good news for Pakistan is that the kinds of business ventures gaining traction fall in the category of opportunity-driven, innovative start-ups (formally known as Innovation-Driven Enterprises or IDEs). Khushnood attributes the increased interest and activity to a change in mindset from employment seeking to enterprise creation mainly because people have more access to information through technology. Young people are witnessing start-ups across the world transform into multibillion dollar enterprises impacting the lives of millions and these success stories are instilling ambition and confidence in them to strike out on their own. The realisation that there are not enough well-paying jobs is further fuelling the entrepreneurship drive.
It’s (not) all about tech
A look at the sectors in which most start-ups are coming up reveals an interesting picture. Silicon Valley inspired tech start-ups, for which Pakistan has a talented pool of software engineers, programmers and app developers, have been in the limelight for quite some time. In fact, Nabeel Qadeer, Chair of UNCTAD – Commonwealth Entrepreneurship Project in Pakistan, says that at least seven out of every 10 start-up pitches at incubators are tech-related. “Tech start-ups have low capital requirements to create products and deliver services to an international market efficiently and profitably.” Furthermore, in a country like Pakistan, where the ease of doing business continues to deteriorate due to infrastructural, regulatory and law and order issues, tech
start-ups present an ideal avenue to attract foreign investment and bring new products and services to the market because all that is needed is a laptop and a high-speed internet.
However, in the last three years, the momentum has shifted from pure tech start-ups to cross-industry start-ups. These are ventures that take advantage of specialised industry knowledge to create an innovative product/service targeting an unmet customer need, thereby creating disruption. Experts are of the view that cross-industry start-ups have more chances of raising seed money and scaling up because the core business idea is about identifying a gap in an existing market and fulfilling it through process innovations in the value chain. It is less complicated and expensive than developing a completely new product from scratch, conducting proof-of-concept tests and bringing it to the market. A case in point is Uber. They did not invent cars or taxis; Uber identified the market need for an on-demand, ride-hailing car service and created an app to link customers with drivers without taking on the hassle of buying and maintaining cars themselves.
A quick look at the start-ups that raised funding last year provides sufficient evidence to validate the market viability of cross-industry start-ups; 30 start-ups that raised investment last year were classified as cross-industry enterprises – FinTech, e-commerce and delivery, health, agriculture and tourism attracted the most investment. Social start-ups, sustainable, for-profit businesses established to solve problems caused by poverty and a lack of common amenities and resources, once predicted to become top performers, have not lived up to the hype or potential. In this respect, Qadeer points a finger at the inability of social start-ups to monetise their services and generate revenue. Ventures such as ConnectHear, Sehat Kahani and Special Needs Pakistan are pushing the envelope but more work needs to be done to improve the business model in terms of service delivery and profit generation for social start-ups to deliver on the promise of improving people’s lives in meaningful ways.
An important point to remember is that the shift in focus away from tech ventures in no way implies that technology is no longer relevant in creating successful start-ups. In fact, Qadeer points out, “technology should be viewed as an enabler for start-ups, regardless of the sector they operate in. It has become impossible to separate the tech component from any business, large or small.”
Although the number of new start-ups launched in Pakistan is encouraging, the high attrition rate is not. Of the 500 or so start-ups that come up every year, experts consider about half as promising projects, of which typically only 10% secure funding. Of this number, only about five succeed in surviving the initial years, scaling up and becoming profitable. This is not a unique phenomenon.
Pakistan already enjoys an abundance of viable start-up ideas and a large, untapped market. However, to ensure that more start-up ideas reach fruition, experts emphasise the important role of two elements of the ecosystem in which, despite considerable advancement, a lot more remains to be done.
Start-ups everywhere in the world have a high failure rate; global statistics suggest that 70% of all start-ups are doomed to fail. Reasons contributing to failure range from an invalid business idea, an erroneous business plan, insufficient funding or an unsustainable business model. Khushnood highlights a common entrepreneurial pitfall. “People assume that all it takes is a great idea to create a successful start-up. They don’t factor in the reality that an idea is only as good as the execution plan.” In Pakistan’s case, in addition to overcoming these challenges, start-ups have to deal with the absence of two essential elements of the entrepreneurial ecosystem – mentorship and financing.
Bottlenecks in the entrepreneurship ecosystem
Experts agree that the missing link in developing an entrepreneurial culture in Pakistan is an enabling environment – i.e. an ecosystem which not only encourages IDEs, but also helps them to successfully navigate the challenges outlined above. Pakistan already enjoys an abundance of viable start-up ideas and a large, untapped market. However, to ensure that more start-up ideas reach fruition, experts emphasise the important role of two elements of the ecosystem in which, despite considerable advancement, a lot more remains to be done.
The first element pertains to incubators and accelerators and the need to bridge the idea-execution gap. In 2012, incubators and accelerators were almost non-existent in Pakistan. Fast forward to 2019, and a State Bank of Pakistan (SBP) report estimates that there are close to 53 incubation and acceleration programmes from which seven to 15 start-ups graduate every year. These statistics, however, do not reflect the entire picture. According to Qadeer, most potential entrepreneurs are not even aware of what differentiates an incubator from an accelerator and more often than not, use the terms interchangeably. The fact that some programmes are operating in both capacities adds to their confusion. There is an important distinction in their roles and this should not be overlooked.
Incubators provide start-ups with the time and resources at the idea stage to enable them to turn into successful, self-sustaining businesses. Accelerators on the other hand, take on start-ups when they are product/prototype ready with clear concepts and equip them with the tools to establish strong value propositions to maximise chances of acquiring external funding. Furthermore, incubators and accelerators offer their services on different levels. Plan 9 (incubator) and Plan X (accelerator) are projects of the Punjab IT Board. Through the Ignite National Technology Fund or simply Ignite (formerly the National ICT R&D Fund), the government supports five national Incubation Centres (NICs) in Islamabad, Karachi, Lahore, Peshawar and Quetta. Government sponsored initiatives are non-profit and entrepreneurs can take advantage of their services free of cost. Others, such as i2i, 10Xc and the Nest I/O are business ventures that take up equity stakes in the start-ups they incubate and accelerate. Universities have also started to develop in-house incubation and acceleration centres (IBA AMAN CED, NUST CIE etc.), providing increased access to mentorship and networking to students as well as adding entrepreneurial certifications and courses to their curriculum.
The Plan9 Angel Investment Club, comprising industrialists and local businessmen, was the first; now, there are three VC funds that are operational – Sarmayacar, i2i ventures and SparkLabs. Additionally, the Security Exchange Commission of Pakistan (SECP) has reported that two private equity funds and two private equity companies (names not disclosed) with total assets of about five billion rupees and Rs 170 million respectively, registered with the commission late last year.
The growing number of public, private and academic enterprises that are working to create a well-connected support network that aids start-ups in formulating a business plan, proof-testing the business case, pitching for funding and helping with financial and legal documentation is commendable. However, experts warn, “more isn’t necessarily better.” The real strength of incubators comes from the quality of their network; this includes mentors as well as investors. Qadeer argues that “most incubators in Pakistan are merely co-working spaces and only a handful are able to bring international serial entrepreneurs on board as mentors with practical knowledge and experience. Even fewer are in contact with serious venture capitalists and angel investors with the right investment vision and strategy to help incubatees move a step closer to becoming profitable businesses.”
The second element is the need for angel investors. The shortage of venture capital is one of the most challenging bottlenecks in the ecosystem. While there are corporate funds to finance SMEs, VC funds and angel investment networks are a rarity. The Plan9 Angel Investment Club, comprising industrialists and local businessmen, was the first; now, there are three VC funds that are operational – Sarmayacar, i2i ventures and SparkLabs. Additionally, the Security Exchange Commission of Pakistan (SECP) has reported that two private equity funds and two private equity companies (names not disclosed) with total assets of about five billion rupees and Rs 170 million respectively, registered with the commission late last year. This means that start-ups, incubators and accelerators now have access to more funding than before.
However, if having more equity funds investing in Pakistan is a positive development, there is also a caveat – unless entrepreneurs know how and where to invest money, the benefits of increased funding will not materialise. In Khushnood’s experience, entrepreneurs often make the mistake of relying entirely on external funding to get the start-up off the ground. He advocates a different approach. Instead of waiting for seed funding (on average, incubators and accelerators accept only one percent of the applications they receive), it is more effective and efficient to focus on founding a start-up able to create real value for end consumers. When a start-up is successful in this, customer acquisition and, consequently, profitability are easier to achieve. Therefore, even if a start-up fails in raising investment, profits can be ploughed back into the business to scale up and grow organically. Furthermore, attaining profitability prior to the first round of funding gives entrepreneurs more negotiating power with angel investors and VC funds and here Qadeer points out a lesser-known fact: “you can demand a larger investment and give up less equity since you have proof that your business is already working in the real world.”
It is important to remember that investing in a start-up is a risky proposition, particularly in a risk-averse country such as Pakistan. Affluent individuals with capital prefer to park their money in investment options with guaranteed high returns such as real estate. Creating an angel investment mindset necessitates trust building and promoting success stories to make the case to invest in start-ups. As far as VC funding is concerned, the absence of laws facilitating international investors and incentivising local investors makes Pakistan a difficult market to invest in. This is why a number of Pakistani start-ups register in the UAE or USA where ready access to investment and comprehensive patent protection laws are in place. To this Khushnood adds that “people who invest in start-ups look beyond the ROI; they want to make money, but they are also passionate about making a difference in people’s lives at the grass root level. It is up to the government to provide incentives that encourage more people to pool in their money to kickstart the start-up culture.”
Experts are of the view that an enabling regulatory regime, offering tax breaks to scalable start-ups, streamlining private equity investment regulations, strengthening intellectual property rights and improving the ease of doing business, will accelerate the creation of high-value start-ups. These enterprises in turn will generate employment, and more importantly, deliver value-added products and services that can be marketed to remote populations within Pakistan as well as an international audience.
Moving towards an entrepreneurial future
Start-ups have become more critical for Pakistan than ever. A thriving entrepreneurial ecosystem will be instrumental in addressing the widening trade deficit, depleting foreign currency reserves and rising unemployment. Until now, government subsidies and incentives have largely been directed at capital-intensive, large-scale industrial enterprises. Khushnood argues that despite this preferential treatment, large businesses have failed to make good on the promise of boosting exports, attracting FDI and strengthening the economy. This is where start-ups come in. Experts are of the view that an enabling regulatory regime, offering tax breaks to scalable start-ups, streamlining private equity investment regulations, strengthening intellectual property rights and improving the ease of doing business, will accelerate the creation of high-value start-ups. These enterprises in turn will generate employment, and more importantly, deliver value-added products and services that can be marketed to remote populations within Pakistan as well as an international audience.
Despite the bottlenecks, an entrepreneurial culture has taken root in Pakistan. Research indicates that it usually takes a country five to 10 years to create a sustainable entrepreneurial ecosystem from the ground up. Pakistan took the initial steps in this direction in 2012. A continued and unwavering focus on creating an entrepreneurial regime will ensure that by 2025, Pakistan will be home to an independent, self-sustaining ecosystem where start-ups will thrive and perhaps the first home-grown unicorn (a privately held start-up company valued at over one billion dollars) will finally be a reality.
Technology has been the great enabler for Pakistan; especially for the young urban population and perhaps even more so for women, to whom it has provided a means of validation and self-worth that may well have been unattainable for many of them before. The journey through technology’s landscape has seen many iterations; from providing backend support, web design services, app development, e-commerce ventures and finally, an ecosystem capable of supporting start-up led entrepreneurship. Along the way, technology has opened up new vistas for young Pakistanis, enabling them to overcome long-embedded barriers and find access to education and information, as well as gainful employment. Along with this has come a tremendous sense of excitement and of possibilities – and nowhere is it more apparent than in the habitats where Pakistan’s start-ups are found.
So is Pakistan on the verge of creating its very own first unicorn? That so far elusive new venture capable of crossing the one billion dollar value threshold. Is Pakistan set to become the next start-up hub? Will start-ups bring about transformative change to the economy and create significant employment opportunities?
The promise is there. It is estimated that in 2018, 500 new start-ups saw the light of day. Universities and business schools throughout Pakistan are offering entrepreneurship courses and incubator spaces. Private enterprises too have entered the incubator space and so has the Government of Pakistan, most notably in Punjab. Furthermore, although Pakistan is not held to be a venture capital country, it is also estimated that venture financing in the country grew by 400% in the last four years.
Yet, compared to other similar developing economies, Pakistan ranks pretty low in the league table of successful enterprises. In his interview with Aurora (see page 20), Dr Farrukh Iqbal, Executive Director, IBA, refers to the Global Entrepreneurship Monitor, which in 2012 (the last year where available figures have been compiled) reported that Pakistan’s TEA (Total Early-Stage Entrepreneurial Activity) rate stood at 12% compared to the 24% reported for other comparable economies – and what is more, of that 12%, only a quarter were engaged in enterprise for ‘opportunity’ as opposed to for ‘necessity.’
Clearly, much work remains to be done. Perhaps the first thing the rulers and builders of Pakistan’s entrepreneurial ecosystem need to do is to acknowledge the reality check. That despite the hype, Pakistani start-ups constitute a tiny percentage of the entrepreneurial ecosystem and the rate of failure is high. The second thing, given the absence so far of any credible and scientifically gathered data on Pakistan’s start-up ecosystem, is to put together a comprehensive analysis to help them assess where the fault lines are in order to identify what can or cannot be fixed and then formulate a strategy moving forward. Five hundred start-ups may have seen the light of day last year, but how many will survive another year is unknown. The stories make the headlines and then if stuff does not work out, we turn to the next one. Instead, the need is to document and understand what made the success and what made the failure. Self-belief, hard work and luck all play their part, but without a methodical, data-based understanding of what is actually happening on the ground every single day, this ecosystem will continue to remain fragile in its capacity to deliver scale and success.
Two factors are often cited as contributing to the difficulties start-ups face. The first is a paucity of angel investors and venture financing. In this regard, Dr Iqbal is of the opinion that most people who venture into entrepreneurship are able to raise capital from the resources they have at hand. In his view, the venture capital reliance of the Silicon Valley model has not proved easily replicable in other parts of the world, including Pakistan. This view is reinforced by Dr Najam A. Anjum (see page 10), who leads the programme for entrepreneurship for engineers at the IBA. He is of the opinion that rather than spending time on acquiring funds from venture capitalists, entrepreneurs should rely on their own resources and simply push ahead. Easier said than done, but perhaps what may appear as the harder route may be the one that works. Again, these views need to be substantiated through data-based research. The second and greatest impediment to any kind of entrepreneurship are the difficulties that arise from doing business in Pakistan. Inevitably, and there is no escaping this, any business venture will have to deal with the government, and the unfortunate reality is that most institutions associated with the government are deeply-embedded in a culture of corruption with all the concomitant bottlenecks that go with it. The fix here is for all stakeholders to keep talking to the government and work collectively towards creating a culture that is oriented towards enablement rather than obstacle raising.
The road ahead is long, yet none of this takes the shine off the very positive strides Pakistani start-ups are making. They are creating ideas, bringing in a dose of much-needed optimism among young people that given perseverance and commitment they can succeed. Start-ups are basically businesses, albeit technology-focused and largely dependent on their target audiences’ ability to use their smartphone to pay for a service or product. But businesses they are; they are commercial propositions where success means identifying a need and responding to it. In a world kept in a constant state of disruption by technological advancement, young Pakistani entrepreneurs have the talent, the drive and the passion to create their own success stories. They will also need luck and perhaps most of all the data on which to base their premises and decisions.
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