The entrepreneurship virus

(The article was first published in Mar-Apr 2014 edition of Aurora.)

It’s official; entrepreneurship is a virus and a highly contagious one at that, spread by coming into contact with other entrepreneurs.

An October 2013 study by the Kauffman Foundation (a Kansas-based organisation committed to advancing economic independence by educational achievement and entrepreneurial success) titled ‘Getting the Bug: Is Entrepreneurship Contagious’ polled 2,000 Americans to demonstrate that there is a significant link between knowing an entrepreneur and becoming one.

The study also stated that “funding and programmes to encourage entrepreneurship and wealth creation can have an impact simply by bringing together entrepreneurs and non-entrepreneurs, particularly among those groups who have the least exposure currently, and helping it go ‘viral’.”

That statement may well have been written for Pakistan where a plethora of activities – business plan competitions, startup events and meets, online resources for entrepreneurs, business incubation and acceleration services and entrepreneurship education at the university level (designed to bring would-be entrepreneurs into contact with successful ones), have amalgamated to create the momentum needed to make establishing a startup a truly viral affair.

From SMEs to startups

Pakistanis have always been entrepreneurial by nature and SMEDA’s (Small and Medium Enterprises Development Authority) statistics show that 99% of economic establishments in Pakistan are small and medium enterprises set up by individuals or groups of entrepreneurs. These businesses contribute 40% to the GDP and 30% to exports from the manufacturing sector.

However, there is an important distinction between the small businesses mentioned in the SMEDA statistics and the kinds of enterprises that are gaining traction in Pakistan today. The former are traditional businesses whereas the latter are innovation driven enterprises (IDEs), more commonly known as startups.

IDEs are, what one Kauffman Foundation report calls, ‘the sexier step-brothers and sisters’ of the SME and are focused on building competitive advantage through innovation. IDEs are most commonly found in the tech sector where creating apps and business enterprise systems is currently all the rage.

However, innovative business ideas are also finding a space in non-tech businesses of which social enterprises – sustainable, for-profit businesses established to solve the problems caused by poverty and a lack of common amenities and resources – are becoming popular.

It makes sense that these are the types of businesses that are becoming popular in the Pakistani context.

Tech startups – for which Pakistan has very capable human resource in the form of a huge crop of engineers – require very low capital investment (a laptop and a mobile phone will do!) to create products that can easily and efficiently be marketed worldwide.

Nabeel Qadeer, Programme Manager, Plan9 (a tech incubation project of the Government of Punjab) explains that in a country like Pakistan, which is an increasingly unsafe place to do business, tech startups are the perfect way to attract foreign investment.

“Geography is irrelevant when you are creating an app or a game; you can do your work sitting in Multan and Peshawar and people will download it from the iStore without knowing or caring where it was made.”

Social enterprises, on the other hand, are being encouraged not only as a way of creating products, services and opportunities for the 60% of people living below the poverty line, but also to turn common problems such as lack of water, electricity and other basic amenities into business opportunities that will ultimately result in greater economic prosperity for a wider cross section of people.

Azhar Rizvi, Founding Vice Chairman, MIT Enterprise Forum of Pakistan, says that if Pakistan is to progress, “we have to focus on the poor; these [social] businesses are not a charity, we are doing this for purely economic reasons.”

Who wants to be an entrepreneur?

Rizvi, who has been working to develop the entrepreneurship space in Pakistan for over six years, explains that two types of people are most likely to initiate startups: recent university graduates, and more commonly, people who have already been working in a large organisation for five to seven years and then quit their job to start a business.

Their reasons for wanting to be entrepreneurs run the gamut, from having the freedom to be more creative and making a difference in other people’s lives to having greater financial independence and more control over their own future. Another major motivator is exposure to success stories of other Pakistani and international entrepreneurs who have had a big break.

According to Qadeer, “You can work as a GM for Nestlé for 20 years but you will not be able to make the kind of money you will get if you make a successful app and it is then acquired by a venture capitalist. This kind of awareness was not present in Pakistan before.”

Kalsoom Lakhani, CEO, Invest to Innovate (i2i – an accelerator programme for social enterprises) says that while plenty of young people are “completely motivated by the ideas around the world of the stuff they can do to change the environment,” entrepreneurship has “also become sexy”.

The popularity of entrepreneurship is evidenced in many ways – Plan9 for example receives 7,500 new business pitches in every cycle (every six months) which it must then whittle down to the top 15. Similarly, Rizvi reports that 35% of all business plans submitted to the Global Innovation through Science and Technology (GIST) programme (an Obama Administration initiative to promote entrepreneurship in Muslim countries) are from Pakistan. He also reports that there are currently at least 25 to 30 running projects (businesses) in each of the Pakistani universities that have some form of incubation (this includes IBA, LUMS and NUST among others). These figures are merely the tip of the iceberg.

Although the abundance of new business ideas is encouraging, their success or failure is another matter entirely. International data shows that 70% of all startups are doomed to fail. Reasons for failure range from an invalid business idea, the lack of a business plan, failure to raise funding, poor sales, marketing and distribution strategies to (and this is especially true in the case of social enterprises) an unsustainable business model. In the Pakistani context, these reasons are exacerbated by problems which range from the trivial – lack of office space in which to carry about business activities – to the absolute deal breakers – absence of mentorship and access to financing.

An ecosystem for entrepreneurship

The experts say that the key to developing a successful entrepreneurial culture in Pakistan is the creation of an ecosystem that not only encourages and nurtures the growth of new, innovation-based businesses, but also helps them steer around the common causes of entrepreneurial failure as outlined above.

Such an ecosystem presupposes the existence of good ideas and a population to market these ideas to – both of which Pakistan has in abundance. The essential link between these ideas and their market is an enabling environment, which among other things, requires government level initiatives. The Prime Minister’s Youth Loan Scheme, designed to give loans of up to two million rupees to existing entrepreneurs is one step in the right direction (although it has been widely criticised in the press for other reasons).

However, as Faraz Khan, CEO, SEED Ventures (an incubator) who consulted on the Government’s youth business programme points out, finance is only one (albeit an important) part of the equation but “without the proper monitoring and guidance, entrepreneurs will not be able to use these funds effectively; what is needed is a great combination of access to finance and an environment that helps people use these funds properly.”

Incubation and acceleration services play a key role in connecting new and existing entrepreneurs to potential investors as well as teaching them the skills they need to develop and grow their business. As Qadeer puts it, the key roles of an incubator, in addition to providing basics such as an office space, are to “create channels for funding and a solid mentorship network.”

The experts say that the key to developing a successful entrepreneurial culture in Pakistan is the creation of an ecosystem that not only encourages and nurtures the growth of new, innovation-based businesses, but also helps them steer around the common causes of entrepreneurial failure.

Incubate, accelerate

Lakhani says that when she decided to set up i2i two years ago, there were hardly any players in the business incubation and acceleration space. A January 2014 article from Tech in Asia reported that there are now 27 different incubators in the tech space alone.

At this point it is important to differentiate between an incubator and an accelerator. An incubator provides the first push to startups at a very early stage, when all they may have is a business idea; an accelerator, on the other hand, works with already existing businesses which may have been in the market for a few months to a year but are having difficulties with certain aspects of their operations (branding and customer acquisition are usually the major issues). While many incubation centres also offer an accelerator service, there are some which only deal with accelerating business and not incubation.

Incubation and acceleration services are offered on a number of levels. There is Plan9 which is a project of the Punjab Government and its services are offered free of charge to entrepreneurs; others like SEED Ventures and i2i are for-profit businesses in themselves and take an equity stake in the businesses they help incubate; still others operate at the university level in the form of business plan competitions and events such as IBA’s Invent, NUST’s Discover and the MIT Pakistan Forum’s Business Acceleration Programme. Additionally, incubators also partner with universities (i2i with LUMS, Plan9 with NUST) to give practical application to entrepreneurship courses which have become an important elective on many curriculums.

The common elements in most of these incubators are that they accept entrepreneurial ideas or business plans on a regular basis (usually annually or biannually) and then put these individuals or teams through an intensive four to five month process where they help in validating the business idea, finalising the business model, putting their legal and financial documents in order, teaching them how to pitch for funding, with the process culminating in pitching to potential investors (university level business plan competitions usually offer a fixed monetary prize).

New entrepreneurs can learn a great deal from this process. Saba Gul, founder of Popinjay (a for-profit social enterprise that produces handbags embroidered by female artisans in Punjab and markets them abroad) says she went to two accelerators, one in the US and the other in Pakistan (i2i) and both programmes were formative in that they put her in touch with “entrepreneurs who already had the level of skill I was aspiring to… and with local mentors in Pakistan who understood what it was like to be a female entrepreneur in Pakistan.” She says i2i also helped to connect her with someone who “became a vehicle through which we eventually got funding.”

However, it is important to note that not all incubators are created equal. Lakhani says that because of the noise happening around entrepreneurship, a lot of people want to launch an incubator, but “quality is much more important than how many we have.”

Creating angel investor networks

An essential quality of a good startup incubator is its ability to connect entrepreneurs with a network of angel investors – affluent individuals who provide capital for a startup in exchange for ownership equity. These angel investor groups are necessary in the absence of funds which provide small financing for startups.

Khan says that while there are corporate funds available in Pakistan to finance SMEs, the ticket size is too big (usually five to 10 million dollars). “We need a fund that invests between Rs 50,000 to two million rupees.”

So far there is only one formal angel investor network in Pakistan, i.e. the Plan9 Angel Investment Club, which consists of local industrialists and successful businesspeople. Qadeer says the Club is distinctive because “this is the first time deep pocketed individuals who have never invested in tech before (they invest in agriculture and other industries) have come together to listen to new pitches and then take a risk.”

Along with giving entrepreneurs access to local investors, Plan9 has recently signed an MOU with Blackbox, a California-based incubation service, whereby two Pakistani startups from every Plan9 incubation cycle will be sent to Silicon Valley to pitch their ideas to international tech investors.

“The mentors and investors there,” says Qadeer “are the founders of YouTube and other great tech startups, so our kids will go international and get that type of funding.”

Other incubators like SEED and i2i connect entrepreneurs to a more informal network of investors, a mix of expat Pakistanis and successful business people living in the country who are relatively young – from their late 30s to their early 50s – “self made and know firsthand what it is to build a business in Pakistan, so they are really excited to mentor and invest in young startups,” says Lakhani.

In spite of these initiatives there is a need to create many more formal angel networks in Pakistan. One of the key considerations in creating such networks, says Rizvi, is deal flow (the rate at which investors receive business proposals).

An essential quality of a good startup incubator is its ability to connect entrepreneurs with a network of angel investors – affluent individuals who provide capital for a startup in exchange for ownership equity. These angel investor groups are necessary in the absence of funds which provide small financing for startups.

“Six years ago when we thought of starting an angel fund, there was no deal flow. Now that you have 25 to 30 running projects in every university, we have the necessary deal flow so we need investors who are domain experts so that they will invest in the same industry.”

While deal flow exists, angel investors still need convincing to take a chance on a high risk startup. Clearly, this is not the sort of thing that can be rushed into and necessitates building a level of trust and a clutch of success stories which can then be leveraged for future investments.

Rizvi believes that formal associations of investors will emerge in Pakistan within the next two to three years. His assertion is that angel investment requires people who want to earn money but also have a strong passion to change the entrepreneurial history of Pakistan. “It has to be people who invest to give back – someone may have helped them once and now they want to pay it forward.”

However, young entrepreneurs also need to be educated about the advantages of equity investment. All three incubators agree that most entrepreneurs are very fearful of letting anyone have a stake in their business lest their idea or their profits will be stolen. Rizvi believes that this sort of thinking comes from a primitive instinct to own things and this needs to change for an innovation driven entrepreneurship system to progress.

Building for the future

Startups, both social enterprise and tech related, are important for Pakistan; not only will they help to increase the pace of economic growth by creating jobs and new business opportunities, they are also essential for the inflow of foreign direct investment and to help alleviate poverty. The existence of incubators, accelerators, business plan competitions, university level initiatives and a small group of angel investors are all the right ingredients to create a nurturing environment for these businesses to thrive. However, formal angel investor networks willing to invest in new, high risk businesses, and mentors, who for their part are willing to share their knowledge and experiences with young entrepreneurs, are still needed.

The good news is that there is plenty of development in the works. All three incubation services interviewed for this article have big plans in the next few years. Lakhani says i2i is planning a countrywide road show starting in March in order to expand its network and get as many applications as possible into every cycle because “the more applications we get, the better entrepreneurs and business ideas we will find.”

Khan, who launched the first SEED incubation centre six months ago, is aiming to grow organically in the large cities (Lahore, Islamabad, Quetta and Peshawar) in the next two years. However, SEED is also partnering with the Rural Support Programme Network (the Pakistan Poverty Alleviation Fund’s flagship programme) to develop the largest rural incubation network in Pakistan. Khan is also hoping to launch a structured social enterprise fund by the end of 2015.

Plan9, which has recently launched its Tech Hub, a co-working space for freelancers in every field, is hoping to launch Plan X, an accelerator programme, and a venture fund, which Qadeer says will be “the biggest in Pakistan”. Although Plan9 by virtue of being a provincial government initiative can only work in Punjab, it has opted to set up entrepreneurial cells in universities across Pakistan.

Rizvi says that the momentum that is being created today by these combined efforts will have a cumulative impact a few years down the line in the form of a new parallel economy.

Obviously not everyone who submits a business plan, applies to an incubation programme, or even takes a university course will eventually become an entrepreneur but that is not the point. Research shows that people who go through an entrepreneurship or incubation programme, especially at university level learn essential problem solving skills and are better able to work with people across various disciplines. Ultimately this will give them a better understanding of how to be a stakeholder or an intra-preneur within a larger organisation and not just a cog in the wheel. And if this is not enough to satisfy them, then they have been bitten by the entrepreneurship bug and it is all systems go to coming up with an innovative new business idea. Whatever the case, the end result can only be good for Pakistan.

Marylou Andrew is Head of Product Excellence, Hobnob. marylouandrew@gmail.com