Monday September 20, 2021

Pakistan in the new innovation economy

For the last three decades, the world has seen exponential increase in capital formation through formation of idea-based enterprises by some crazy young enthusiasts who dared to think different, challenged the status quo with their insanely disruptive ideas and have made the impossible possible.

I am referring to entrepreneurs like Gates, Jobs, Bezos, Zuckerberg, Page, Jack Ma, Musk and countless others – who have created companies that are valued in trillions of dollars besides fundamentally changing the life for the entire humanity.

Much of this revolution has occurred due to exponential technologies that have emerged, starting from a phenomenal and ceaseless increase in computing power, connectivity of billions of people through the internet and social media, and the infinite amount of data that is freely available. These developments have produced an entrepreneurial culture of big thinking leading to continuous transformation of conventional forms of business and way of life – a process that is continuously reducing costs, improving customer experience and creating a world of abundance.

This culture is generating thousands of new entities called start-ups, based on ground-breaking ideas by entrepreneurs that are constantly transforming old practices into new and efficient ways to solve some of the biggest problems faced by humanity. In the process, the speed of wealth creation is multiplying to unimaginable levels.

Let me illustrate how this system is working from conception of ideas, formation of start-ups, a few of them becoming unicorns (a unicorn is a private tech company valued at one billion dollars or more) and their exit through initial public offering (IPO), via an example of an innovative healthcare insurance company that I came across, formed by a few colleagues of my younger brother, who is in actuarial professional based in San Francisco.

This company, Alignment Healthcare Inc, engaged in providing some unique healthcare plans, products and services for seniors in the US through a technology-based platform with 24/7 access at low cost, was conceived in 2013 by its founder and CEO John Kao based on an idea that came to him due to the personal dissatisfaction he experienced with the existing fragmented healthcare system while caring for his ailing mother. Together with a small team, he partnered with healthcare leaders from across the industry to build a new kind of patient-centric healthcare company that envisioned a connected approach to care and coverage (thus the name ‘Alignment’), leveraging innovative technologies and best practices to drive better outcomes for patients and families.

The company achieved remarkable success in growing its members / customers and revenues over the last seven years, reached nearly $1 billion in the last financial year, and attained unicorn status about a year back. Through an IPO in March 2021, it has raised $390 million by selling just 14 percent of its shares at a price of $18 per share compared to the book value of only $0.02 per share, despite the company having remained in losses (net losses for CY 2020 & 2019 of $22 million and $44 million, respectively).

At IPO price, the company’s market cap was $3.5 billion, which increased to $24 per share on May 25, 2021, with reported market cap of $4.5 billion. This means that a seven-year old loss making company, just listed on NASDAQ has higher market value than the combined market cap of Pakistan’s largest company OGDCL ($2.5 billion), largest bank HBL ($1.2 billion) and the Pakistan Stock Exchange ($085 billion).

This is just one example of how value is being created in tech-based innovative companies virtually every day in the new world. The story of Amazon, which continued incurring losses for several years after its formation – listed in 1997 with market cap of around $300 million – has and has now achieved a market cap of $1.6 trillion is not different. At present, there are around 600 known unicorns in the world with an aggregate valuation of $2 trillion; most of these are based in the US, China, Europe, India and Israel. There are hundreds of unicorns that have exited this list either through IPO / listing or through merger / acquisition, whose values have multiplied.

Today, eight out of the top ten largest companies are data and technology related: Apple, Microsoft, Amazon, Alphabet (Google), Facebook, Alibaba & Tesla, Tencent with aggregate market cap of over $10 trillion. The start-up ecosystem and formation of unicorns is also picking momentum in India, which has over 50,000 start-ups and around 100 unicorns with combined value of $240 billion according to a report of Credit Suisse Group.

While we have seen some increase in this activity in terms of some conferences and webinars, setting up of incubation centres and hundreds of start-ups being established at Lahore, Islamabad and Karachi, relatively very few have achieved significant funding or valuation. The aggregate funding mobilized for start-ups, and most of it comes from Private Equity (PE) Venture Capital (VC) firms outside Pakistan, has ranged around $50 to $70 million per annum in the last two year, which is far too low for fifth largest country in the world. Compared to this, the level of funding in India through PE / VC activity has remained around $10 billion per annum.

So far, while there have been few significant entities like Afiniti, Careem & KeepTruckin with Pakistani founders that have achieved over a billion dollar valuation, not a single unicorn has been produced within Pakistan’s ecosystem nor any significant size company listed on the stock exchange. Clearly, Pakistan seriously lags behind most of the world in the new economy. In terms of India-Pakistan comparison, in the year 2000, the Indian economy was five times bigger than Pakistan. In the last 20 years, this equation has materially changed as the Indian economy, with its current GDP of around $3 trillion, is now more than 10 times of Pakistan’s economy.

The bad news is that this equation is continuously deteriorating at very fast pace, since in the new tech-innovation ecosystem Pakistan is a small fraction of India. In a following article, I will discuss further the reasons Pakistan’s share remains negligible in the new economy and what needs to be done to enhance its scale and dynamism.

The writer is a former managing partner of a leading professional services firm and has done extensive work on governance in the public and private sectors. 

Twitter: @Asad_Ashah