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.