A tale of two valleys: Part - I

Long before Silicon Valley became famous in the late 20th century for creating a digital revolution, another famous valley made its mark on the world’s map some 4500 years ago.

Consisting mostly of the existing areas of Pakistan along with some parts of Afghanistan and India, Indus Valley was truly unique for its time and place, in functioning as an egalitarian society, espousing a matrix model of governance, and in placing a premium on human ingenuity. The other well-developed civilizations at that time such as in Mesopotamia or Nile Valley were based on a staunch hierarchy of a ruler and a ruling class.

Given this history, it would be natural to think that the current denizens of the Indus Valley, many of them descendents of the original inhabitants, would be naturally attracted to Silicon Valley ethos of egalitarianism, innovation, self-reliance, and ingenuity in solving real world problems. Further, one would assume that the digital revolution and its associated economic benefits would be well entrenched here. Surprisingly, that has not been the case until very recently.

While some brave souls have made concerted efforts to encourage digital start-up activity in Pakistan during the last decade, combined Venture Capital (VC) funding for start-ups between 2016 and 2020 constituted less than $150 million. This trend seemed to change overnight during 2021, when powered in part by rapid digitalization to bring parts of the economy online during the pandemic, VC funding shot up to $384 million. This is more than twice the combined VC funding from the previous five years.

This appears to be an important harbinger of a shift in sentiment re: Pakistan’s potential as a start-up nation. However, most of it seems inspired by two factors: the demographic dividend from the fifth most populous country in the world (220 million plus) with a very young population (64 per cent less than 30 years of age); and increasing popularity of consumer-based economy as part of a broad trend globally.

Not surprisingly, most of the investment has gone on to fund e-commerce, fintech, and logistics. While this is a welcome change in the VC funding trends, and whereas demographics and shifting consumer behavior are powerful trends for continued increase in VC funding, there is a need to address other critical factors that underlie a sustainable startup and innovation culture to complete digital transformation of the economy. These include but are not limited to enabling institutional policies, abundance of skilled human capital from institutions of higher learning and research, availability of VC and R&D funding, and physical and telecommunications infrastructure. Many of these seem to be either underdeveloped or are not aligned together currently in a cohesive framework in Pakistan.

The Global Innovation Index (GII), published annually by World Intellectual Property Organization (WIPO) in Geneva Switzerland, that measures many of the above-mentioned factors among others, ranks Pakistan as 99th out of 132 economies in its 2021 edition. According to this index, Pakistan is lagging neighbours and peers such as Sri Lanka, Iran, India, Indonesia, Egypt, and Vietnam, and only just above the 100th ranked Namibia.

With the impending bear market globally in publicly traded equities, there probably will also be a downturn in the availability of venture capital funding. With some preparation, this can have the silver lining of Pakistan’s startups being better prepared when the next move up in VC funding happens in 2-3 years. It is thus a good time to take stock of the startup scene in Pakistan with the objective of facilitating the creation of a sustainable innovation ecosystem over the next few years. So, what is an innovation ecosystem?

Innovation ecosystem: In a broad sense, an innovation ecosystem consists of institutions with enabling policies and regulations, skilled human capital and R&D, transportation and communications infrastructure, a market friendly environment supportive of entrepreneurship, and a supportive network of different stakeholders in the ecosystem. While at first blush, this seems to be a tall order to accomplish in Pakistan, I believe that many components of the innovation ecosystem are already present in various stages of development. With further development, proper alignment and reinforcement of one another, the objective of optimal functioning of the entire ecosystem is achievable. For example, Pakistan has numerous institutions of higher learning that with slight shifts in orientation and a better alignment with the private sector, can produce graduates better prepared for a digital economy.

Similarly, a supportive network of incubators/accelerators working closely with the VC funds can provide much needed mentorship and guidance to the founders of start-ups. A wide acceptance by consumers of the recent online shifting of various segments of the economy is a good indication that a market friendly environment exists which can be leveraged appropriately. These are just some of the examples, but the larger point is that there is no reason why Pakistan can’t emulate Indonesia's numbers in VC funding of $7.72 billion from 2021.

Although it has taken a while for the ethos, culture, and excitement of the digital revolution initiated in Silicon Valley more than five decades ago to reach the Indus Valley, it has finally arrived with a bang. The task on hand is how to break down different components of this revolution and to tinker with them in a Pakistani context so they can be aligned together to facilitate, perpetuate, enhance, and then sustain this revolution. At the same time, intimidating sounding terms like angel investors, venture capitalists, start-ups, scaling, incubators/accelerators etc. need to be explained in easily understandable language so they become exciting and inviting for the youngsters who have the potential over the ensuing few years to become superstars of this burgeoning revolution.

In the next few installments, I shall elaborate on various components of an innovation ecosystem, with suggestions regarding their implementation, alignment, and enhancement in a Pakistani context. I will also describe the nature and purpose of venture capital funding for start-ups during various stages of pre-seed, seed, series A-D, and exit strategies for the successful companies.

Pakistani people have a long-standing tradition of being enterprising, passionate, and energetic. They just need a roadmap, guidance, and mentoring to channel their talents toward achieving their potential, moving up the chain on the Global Innovation Index, and toward transforming their country into a proud member of the global family.

To be continued

The writer is an angel investor deeply networked in the Silicon Valley Innovation Ecosystem and a professor of psychiatry and Behavioral Sciences emeritus at Stanford University.