A casual observer could be forgiven for seeing Pakistan as an unlikely investment destination. The country, after all, has seen more than its fair share of strife and instability. However, that narrative is slowly, but surely, changing, thanks to a large and untapped consumer market.
Consumer spending in Pakistan, home to 220 million people, grew 5.7 times to $257 billion between 1998 and 2018, according to estimates by local venture capital (VC) firm Indus Valley Capital. Some go as far as to say that current-day Pakistan looks like Indonesia five years ago.
Lack of capital
In recent years, investors from China and the Middle East have become regular visitors to the South Asian country as they scout for deals.
That said, capital isn’t flooding into Pakistan quite the same way it has in Southeast Asia.
According to i2i’s Pakistan Startup Ecosystem Report, the country’s startups had raised a total of about $34 million in venture funding by the end of September 2019, compared to the 2018 total of $24.5 million. Most of it was at the pre-seed and seed stages as we begin to see the first fruits of Pakistan’s B2C plays in hot sectors such as ride-hailing (Bykea), travel ticketing (Sastaticket), and food delivery (EatMubarak).
Startups do not seem to be as short on talent, compared to many of their well-funded peers in Southeast Asia. According to A.T. Kearney, Pakistan has a base of 360,000-strong software developers and growing.
Source: i2i Pakistan Ecosystem Report 2019. Data as of Oct 2019.
“I first noticed the Pakistani VC opportunity in 2018 when I spent six months in Pakistan, and I saw firsthand how fast mobile broadband internet was being adopted in this country,” said Aatif Awan, founder and managing partner of Indus Valley Capital.
“Today, there are 75 million broadband subscribers in Pakistan, growing by over 1 million every month. This means that consumer startups here can scale to tens of millions of users,” he explained.
According to an Ogilvy and Mather report, Pakistan’s middle class is expected to expand to 122 million by 2025. It stands at 82 million today, roughly 2x that of Bangladesh.
“Pakistan is more urban and has a higher median income and household wealth than India. While India’s average is higher, most of the wealth generated in the last couple of decades has gone to the top,” shared Awan. “That was when I knew this was the time to start Indus Valley Capital and partner with founders to transform this country.”
Pakistan also enjoys lower valuations compared to its Asian neighbours. According to Indus Valley Capital, a typical seed round in India and China would be at $4-5 million, roughly 2-5x that of a comparable seed-stage round in Pakistan.
Source: Indus Valley Capital
Chinese investors eye Pakistan
Chinese investors have already begun eyeing a share of this fledgling market.
In March 2018, Alibaba-backed Ant Financial marked its entry into the South Asian market by paying $184.5 million for a 45 per cent stake in Pakistan’s Telenor Microfinance Bank (TMB), a subsidiary of Norwegian telco Telenor. TMB, in turn, operates EasyPaisa, one of the most widely used e-wallets in the country.
According to the State Bank of Pakistan, TMB already occupies roughly 35 per cent market share in terms of branchless banking transactions.
In May 2018, Alibaba also acquired Pakistani online retailer Daraz for an undisclosed sum. TechCrunch described the deal as a strategic one-two punch across e-commerce and fintech, similar to the Chinese group’s internationalisation moves in India and Southeast Asia.
Venture capital firm Gobi Partners has entered the fray too. Earlier this year, the Shanghai and Kuala Lumpur-based firm launched a $20 million fund with local player Fatima Ventures. The fund has so far deployed capital in startups including travel booking platform Sastaticket and bus hailing service Airlift.
Building interest among overseas LPs and VCs
Several local VCs have emerged across the country in the last two years, including IFC-backed Sarmayacar, i2i Ventures, and corporate venture capital (CVC) units Lakson Venture Investments and TPL e-Ventures.
Sarmayacar, a $30-million Pakistan-focused VC fund led by former investment bankers Rabeel Warraich and Bernhard Klemen, is positioning itself as a local general partner (GP) to overseas investors keen to play in this little known market.
“We’re beginning to see interest from the Chinese to start landscape studies in Pakistan,” said Warraich. “Such conversations wouldn’t have happened a year ago because there wasn’t much happening then.”
Klemen added: “Based on our conversations, these Chinese and Hong Kong investors aren’t looking at making a small commitment alone. They want to ensure there are follow-up opportunities which they can deploy in subsequently larger rounds.”
Meanwhile, other Pakistani startups are getting juicy breaks from several overseas VCs.
Airlift, a Lahore-based bus-hailing startup, has managed to rope in First Round Capital, a Silicon Valley-based early Uber backer, to lead its $12 million Series A round. This was First Round’s first investment in Pakistan and the nation’s largest Series A to date.
Dawaai, a Karachi-based online pharmacy, has raised nearly $1 million in pre-Series A funding from 500 Startups’s 500 Durians fund in Singapore and was reported to be on track to close its $5 million Series A by end-2019.
Such participation has provided some much-needed validation for the market.
“We’ve had a global outlook from the very beginning, and we knew we wanted to build an international business with Pakistan as the starting point,” said Airlift founder and CEO Usman Gul.
Strategically positioned to scale into MENA
Airlift is following in the footsteps of many others that have successfully grown into regional powerhouses. Companies like Careem (ride-hailing), Daraz (e-commerce) and Zameen (property listings) all started out in Pakistan before expanding operations across the Middle East and North Africa (MENA) region.
“Pakistani startups are really well-positioned to scale to MENA,” said Indus Valley Capital’s Awan. “[MENA’s] real bottleneck is talent, which is the Pakistani startup’s advantage.”
According to local estimates, the cost of hiring a Pakistani tech team is roughly 50 per cent lower than one in India. Pakistan also has a long history of being a destination for outsourced tech talent, similar to India.
Several companies already operate significant engineering teams in Pakistan today, such as KeepTruckin, a Silicon Valley-based cargo and fleet management unicorn, and Afiiti, a US-based unicorn developing artificial intelligence for customer call centres.
Pakistan’s startups also share religious, cultural and language affinity with companies in the MENA region. “These make it easier for Pakistani startups to expand into the region compared to Indian startups,” Awan explained.
Pakistan’s Prime Minister Imran Khan, a former cricket star, recently launched “Digital Pakistan”, a digitisation programme aimed at invigorating all aspects of the government and business through technology and innovation. He appointed Tania Aidrus, a former Google executive in Singapore, to lead the effort. Aidrus reports directly to Khan’s office.
“What’s exciting about this government is their desire to truly listen to the business and investor community,” said Kalsoom Lakhani, co-founder and partner of i2i Ventures.
“In the past year, players like the Securities Exchange Commission of Pakistan (SECP) and the central bank have been engaging stakeholders to find ways to improve the regulatory environment for investors and startups. There’s so much work to be done, but efforts like these, and Digital Pakistan with Tania Aidrus at the helm, make us optimistic about the future of this market,” added Lakhani.
Pakistan’s large diaspora community has already caught wind of the change.
According to the Ministry of Overseas Pakistanis & Human Resource Development, there are close to 9 million Pakistanis living outside the country, many of whom reside in the Middle East, the US and Europe.
Many send significant sums of capital back. According to World Bank data, close to $22 billion was sent to Pakistan in remittances as of October 2019, making it one of the highest inflows of remittances in the world. Some have already begun to tap the potential of Pakistan’s overseas community.
A wave of them – “Wapistanis” as they call themselves, referring to a blend of “wapis” (to return in Urdu) and Pakistanis – are leaving the UK, the US and Asia to return home. Some are starting out as entrepreneurs, while others are investing their time and expertise back into the country.
One year ago, Kaleem Ullah, a programme manager with National Incubation Centre (NIC) Lahore began collating a list of overseas Pakistanis willing to write pre-seed cheques for startups at his incubator. That list grew to 34,000 names from just the US and the UK in mere months.
“The overseas response has been very strong. Since these startups are still very young, our cheque sizes are typically small, ranging between $30,000 and $100,000. We’ve already begun matchmaking a couple of them with our angels,” shared Ullah.
Further down the line, Ullah hopes this will grow into a “Wapistani fund” investing in pre-seed and seed startups in the country.
“We’ve graduated three cohorts since December 2017, with the fourth underway. The number of startups is growing with each batch, but the number of angel investments hasn’t kept pace. That’s when I began tapping the diaspora community,” said Ullah.
Overcoming the hurdles
Venture capital, however, remains very much a new concept for local corporates. Many of them are heavily exploitative as investors. Some are known to gobble as much as 60-70 per cent equity on a startup’s first cheque, leaving little or no room for founders to grow sustainably in the long run.
Pakistan’s legal structures are also poorly equipped to support high-risk investments since few such bets were made until the last year or so.
“The reality is that in most developing countries, the incumbents and bureaucracy have no idea about technology, the rules and different ways of looking at things,” said Ali Samir Ossman, CEO of TPL E-Ventures. “The very way that legal language is written is also highly ambiguous.”
For instance, Pakistan’s Companies Act currently does not recognise sweat equity or ESOPs (Employee Share Option Plans), which makes it difficult for big-ticket foreign investors to grant incentives to local founders.
This has led Pakistani founders to register their startups in foreign jurisdictions so they can cash out their ESOPs if and when the company does exit further down the line. Ossman added that Pakistan’s regulators have been working aggressively over the last 6-12 months to find solutions to a number of these issues.
“So far, they have internally proposed changes on ESOP recognition, finding an official definition for startups, among others. The SECP and central bank are also creating sandbox environments to testbed new regulations for startups,” said Oosman.
But Pakistan’s biggest limitation remains very much its overseas reputation.
For the first time in decades, Pakistanis are starting to believe that things are looking up for the country. But it faces the uphill challenge of convincing the world outside of it.
“Every time I tell people that I’ve travelled from Pakistan, I still get people asking why I’ve not gotten myself shot or captured by terrorists!” quipped Klemen of Sarmayacar.
“The reality on the ground is completely different,” he added. “You have to visit the country, talk to the people, and you’ll understand why there’s so much potential. Don’t form a judgment without first discovering it for yourself.”