A tale of two valleys [Part – II]

It is a beautiful spring evening in 2032 in Islamabad and Zara, in her late 30s and working for a health-tech startup, is multitasking feverishly while in a meeting online with coworkers from other cities.

Her cubicle is in a coworking space along with many other start-up companies. She checks with satisfaction the latest report from her mother’s doctor via a mobile health app. Utilizing an artificial intelligence based diagnostic algorithm, her mother’s cancer was diagnosed early, and the dosing of anticancer immunotherapy has been precise with effective response and minimal side-effects.

She then confirms her own follow-up telemedicine appointment later in the week to monitor the progress of her IVF induced pregnancy. She also quickly orders online vitamins and supplements recommended by her doctor. In between, she orders dinner to be delivered to her home by a doordash/Uber eat type company as she will be working late due to an approaching deadline.

Although hypothetical, the above mentioned scenario is not far-fetched as it depicts one of the more desirable societal benefits of broad-based digitalization that extends beyond economic benefits to wellness and optimal functioning. It is a logical progression of moving from the current model of healthcare of ‘one size fits all’ (analogue; opaque and unsatisfying) to precision medicine (digital; precisely targeting mother’s cancer cells) to precision health (taking greater control of one’s own health using digital wearables).

Over the next decade, digitalization of Pakistani businesses having gathered momentum during the Covid pandemic of 2020-22 will benefit the consumer in multiple ways. Whether it is the global and local digital platforms of mobility services like Uber/Careem or local food and groceries delivery services vying for their attention, convenience associated with such services will drive the demand incessantly and shape emergent consumer behavior. Widespread digitalization will ensue democratization and wide accessibility of services and greater participation of consumers in the process of their own healthcare.

An integral component of a high growth digital economy is the availability of venture capital (VC) to fund fast-growing young companies (startups). VC funds are typically viewed as high-risk capital from high net worth investors, investment banks and other institutions, and allocated to small companies with exceptional growth potential. For these startups, VC funds are essential as they usually lack access to bank loans or other debt instruments normally available to mature companies with long track records. In lieu of providing risk capital, VC funds get an equity stake in the companies, many times along with board seats so they can monitor company’s progress and influence strategic direction.

As noted in the first installment of this series, VC funding in Pakistan shot up to $384 million in 2021 from the combined $150 million over the previous five years of 2016-2020. This notable jump in part reflected a global increase in VC funding during the pandemic. It was mostly attributable, however, to the demographic dividend from the fifth most populous country in the world (220 million plus) with a very young population (64 per cent are less than 30 years of age); and increasing popularity of consumer-based economy as part of a broad trend globally. Understandably, most of the VC funding for the startups in Pakistan has gone on to fund e-commerce, fintech, and logistics, all directly related to emergent consumer behaviour of the youth of a large population base.

When money was cheap due to negative interest rates during the last few years, valuation of the startup companies shot up along with an increase in the availability of venture dollars.

Those companies with plans to scale aggressively (and requiring lots of funds) were valued highly. With the global slowing-down of the economy and rising interest rates, those same companies will now be at the greatest risk of failing unless they quickly change their business model to cut costs drastically and focus on survival with a long runway while aiming for profitability.

The most recent example of the best funded startup, Airlift – a quick commerce company delivering groceries to consumers from huge warehouses, ‘dark stores’ – announcing the closure of its operations is a salient case in point. The company had raised $10 million in series A in 2020 and another $85 million in series B in 2021. A high cash burn with a focus on rapid expansion (scaling) and a lack of focus on profitability led to its rapid demise.

While this global slowing will create a challenging environment for most startups, this will also be the crucible that separates wheat from the chaff and will severely test the resilience of the Founders and management. While it is not possible to accurately predict how long the downturn will last, preparing for survival is a must for the young companies. Startups that can tighten their belts, embark on innovative solutions that are thrifty and can sustain their companies during the downturn will emerge as stronger and more resilient companies that will lead when the recession ends.

In the first installment, I introduced the concept of an innovation ecosystem, including a network of incubators/accelerators working closely with the VC funds that can provide much needed mentorship and guidance to the founders of startups. An example of this is the recent VC funding of the company Colabs that enables startups and freelancers to build and grow their businesses through its coworking spaces and different other services. In addition, recent fundraising will enable the company to become an important accelerator of the startup ecosystem by building a tech layer on top of offerings like business incorporation, educational bootcamps, and back-office solutions, including talent sourcing and management, payroll management, and legal and tax compliance.

An important driver of an innovation ecosystem in Pakistan will be highly skilled Pakistanis returning after having worked in both established Fortune 500 companies and startups abroad. The phenomenon of the members of this diaspora returning to Pakistan has been creatively labelled as ‘Wapistanis’ by Rabeel Warraich, one of the domestic VCs, who himself fits the bill having been trained at MIT. The objective of facilitating the creation of a sustainable innovation ecosystem over the next few years is a big challenge but also a big draw for these Wapistanis.

The Indus Valley has a long history of self-reliance, and ingenuity in solving real world problems. With some mentoring and guidance, Pakistanis will be ready to channel their talents towards achieving their potential. Given the critical mass of startups, incubators, accelerators, and increasing VC funding, despite the recent global economic slowdown and increased risk of failure for some individual companies, the macro startup scene is already strong enough to demonstrate its resilience, and become an important driver of the overall economy.

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.