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Wednesday May 29, 2024

Pakistan at a venture crossroads ( Part – II )

The majority of funding has gone to e-commerce and fintech start-ups

By Kaamil Hussain
April 15, 2024
People work at their stations at the National Incubation Centre (NIC), a start-up incubator, in Lahore. — AFP/File
People work at their stations at the National Incubation Centre (NIC), a start-up incubator, in Lahore. — AFP/File

Pakistan’s startup and venture landscape is very much in its infancy. Only in the last decade have networks of formal early-stage investors started to form. The most active VC firms in Pakistan, including Fatima Gobi Ventures, Indus Valley Capital, Zayn VC and Sarmyacar, were all founded in the last five years. Between 2018 and 2021, total VC funding in Pakistan increased more than 20-fold to reach an all-time high of $350M, 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.

Both investors and the business community have expressed apprehension after VC funding in Pakistan fell in 2022. Investors pulled back in light of a macroeconomic slowdown and after getting burned by unsustainably inflated valuations and the eventual correction. Pakistan was not alone in experiencing such a drop in VC funding. The market is recalibrating, as investors show more discipline in assessing deals.

Corporate Venture Capital (CVC) is becoming more important globally and will be critical to the next evolution of entrepreneurship in Pakistan. Since 2015, roughly 1000 CVCs were created globally, and more than 25 per cent of global VC investment in the last three years has come from corporate investors. Corporate venturing unlocks inorganic growth opportunities and can power a reputational and cultural shift within large organizations.

To quickly turn back to Brazil, many industry leaders from the South American country have recognized the importance of corporate engagement in venture building and venture investing and set up corporate venture capital funds, incubators, and accelerator programmes. Most of these CVC units were set up in the past three years. Though the funds are still relatively small, they already play an outsized role in the Brazilian startup economy – participating in 59 per cent of all funding rounds in Brazil in 2023.

To fully unlock Pakistan's startup and venture potential, it's imperative that the large corporate players that have traditionally dominated the country's economy actively participate in the creation and growth of new ventures. For the most part, these established corporate entities have historically not felt the need to innovate or take risks. Of course, there have been some efforts from Pakistan’s industry leaders to explore startup engagement, investment, and even creation. Yet by and large, these endeavours have been informal or haphazard, yielding neither the financial nor the strategic returns to generate enthusiasm about corporate venturing in Pakistan. As a result, the vast majority of Pakistan’s corporates have opted for more conservative investments. They seek incremental growth and greater consolidation of their already dominant market position.

A big reason many corporate venturing efforts have failed in Pakistan's corporations is the culture of, and need for, control. This has created an environment that is not conducive to the growth and scale of new ventures. Pakistan’s family-run conglomerates and industrial giants have historically focused on creating larger, more market-dominant companies and maximizing their share of the pie.

Their venture-building efforts have also focused on control and domination. Venture-driven growth, however, requires creating and investing in ecosystems that increase the overall size of the pie itself. By relinquishing their need for control and embracing a mindset of shared winning, Pakistan’s corporate giants can unlock previously unimaginable growth opportunities. And in the process play a pivotal role in nurturing the growth of startups, as well as the broader entrepreneurial ecosystem in Pakistan.

As companies shift from a narrow-minded and self-serving approach to a synergistic ecosystem approach to growth, startups and investors also need to shift mindsets. Pakistan’s entrepreneurs and VC investors have looked at the population of Pakistan and seen a massive market opportunity. What they fail to consider, however, is the massive disparity in behavior and characteristics between different groups in the country. Instead, many of them use the characteristics or behaviors of a minority of the population but use the entire population size in their business plans and pitch decks.

The real addressable market for many startups in Pakistan is limited. To successfully scale, Pakistan’s startups must bring their inventions and innovation to the surrounding region, treating Pakistan like an incubator for regional transformation. Just like Brazil’s startups look to serve Colombia and Bolivia, so too Pakistani startups must look to other parts of the Middle East and South Asia – like the UAE, Egypt, Turkey, and Iran.

Venture-driven growth, done correctly, allows corporates to take advantage of promising opportunities by systematically placing small bets, learning, moving quickly and doubling-down. Pakistani corporates can benefit tremendously by embracing systematic venture-driven growth. They can grow Pakistan into an entrepreneurial hub and then reap the rewards of ventures both inside Pakistan and in the broader region.

If they remain inactive, however, they will miss a huge and arguably once-in-a-lifetime opportunity. In fact, as Pakistan’s largest companies have been slow to act, international corporations are already benefiting from Pakistani entrepreneurship. Chinese tech giants, for example, have invested in or acquired Pakistani tech companies. For example, Alibaba acquired e-commerce startup Daraz in 2018 and Ant Financial took a 45 percent stake in fintech Easypaisa soon after.

The consequences of "doing nothing" go beyond missing out on potential growth opportunities. Lack of technology adoption and entrepreneurship in some of Pakistan’s largest sectors, like agriculture and textiles, could altogether shrink those industries. Significantly.

Take agriculture, which accounts for 22.25 per cent of Pakistan’s GDP and 40 per cent of the nation’s employment. Almost 70 per cent of Pakistan’s exports are derived from agriculture. While Pakistan is categorized among the largest agricultural countries, its crop yields are much lower than international benchmarks. According to the recent The State of Pakistan's Agriculture 2023 report by the Pakistan Business Council, the growth of the agriculture sector now approaches stagnation. The rapid pace of climate change poses a threat to Pakistan as a whole and specifically to the agricultural sector. Extended heatwaves and flooding events are likely to significantly impact crop yield and worsen the existing crisis.

Domestically, with a rapidly growing population, Pakistan faces the challenge of feeding a projected 403 million people by 2050. Agriculture has historically served as the backbone of the Pakistani economy. Yet if Pakistan wants to maintain its level of agricultural exports and feed its growing population, significant advancement in agritech and foodtech is necessary. Agricultural production globally has undergone a period of rapid digital transformation driven by digital connectivity, data systems, AI and analytics, Internet of Things (IoT), robotics, sensors, and imagery devices. However, almost none of these technologies are used in Pakistani agriculture.

Earlier this year, the Pakistani government advanced its Corporate Agriculture Farming initiative which allocates unused public land to corporate farming, with the intent to revolutionize the agriculture sector. Large Pakistani corporates have a tremendous opportunity to fund and partner with agritech startups applying new technologies to develop modern farming methods. Not to mention startups that develop new low-cost machinery required for modern-day agriculture.

The textile industry also plays a pivotal role in Pakistan's economy, accounting for 8.5 per cent of GDP, 46 per cent of the industrial output, 54 per cent of the total export earnings and 38 per cent of the country's workforce. However, like the agriculture sector, obsolete technological infrastructure has stifled the advancement of the textile industry in Pakistan. The need for technological advancement is severe. If manufacturers are unable to keep pace with evolving technology, they risk going bust. Once again, there is an opportunity for established corporations in Pakistan to invest in, or partner with, startups developing modern machinery and applying robotics, analytics, and AI to the textiles industry.

Whether it is in agriculture, textiles, financial services, real estate, or any other industry for that matter, corporate venturing needs to be one of the arrows in the quivers of Pakistani corporates. Corporate venturing can involve strategic partnerships, minority investments, and/or acquisitions of startups. Developing robust Invest / Partner / Acquire strategies is incumbent on the C-suite of Pakistan’s established corporations. These firms need to design and execute world-class VC funds, launch compelling accelerator programs, develop impactful venture acquisition capabilities, and forge mutually beneficial strategic partnerships with startups in Pakistan and in the broader region.

This will allow them to support and enhance existing capabilities while also diversifying and expanding their portfolios. It will enable large corporations to gather knowledge and insights on emerging technologies and business models, facilitating horizontal expansion into new markets and vertical expansion across the value chain.

The foundations for a thriving entrepreneurial and venture ecosystem are forming in Pakistan. Pakistani corporates have a tremendous opportunity to shape this ecosystem, and more importantly to reap the benefits of Pakistani entrepreneurship. Staying on the sidelines will prove detrimental. Brazilian companies have recognized this opportunity for what it is, and many have set up corporate venturing units to invest in startups.

Pakistan’s corporate behemoths should follow suit.


The writer is a venture associate at Mach49.