Pakistan’s first startup accelerator invest2innovate (i2i) is launching i2i Ventures, its first $15-million fund in the country.
According to i2i Ventures, the fund is on track for a first close by the end of 2018 and will target seed to early-stage opportunities in tech and tech-enabled sectors in Pakistan.
The fund will be anchored by the Dutch Good Growth Fund, a Dutch government fund-of-funds targeting frontier markets such as Palestine and Nepal. Other LPs include high net-worth individuals in East Asia, Middle East, Hong Kong and Pakistan.
In an exclusive interview with DealStreetAsia, i2i Ventures said the fund is in talks with Pakistan-focused VC Sarmayacar to pursue co-investments. Both VCs share a similar focus, targeting seed to early-stage companies. Earlier this month, Sarmayacar launched its first $30-million fund, making it the largest Pakistan-focused fund in the country.
i2i Ventures added it hopes to present a founder-friendly approach to seed investing. This is particularly crucial for the Pakistan market which has seen startups fall prey to predatory investors.
i2i Ventures is a two-person team led by Misbah Naqvi and Kalsoom Lakhani. It is also the first female-led fund in Pakistan.
Lakhani, Partner at i2i Ventures and Founder and CEO of i2i, said: “Pakistan is an environment of scarcity and rent-seeking. As a result, investors tend to operate from that mindset. In some ways, I understand when investors talk about the issue of control, but it runs counter to what is supposed to happen in the early-stage VC space of being able to give control away and diversify your risk.”
i2i Ventures said it continues to fight a perception battle when it comes to convincing new investors and partners.
Naqvi, Managing Partner at i2i Ventures, said: “The macro picture does scare people when you look at the currency fluctuations and the law and order situation, but there are investors that realise that life still goes on at a grassroots level. There are people here that support relationships, and there’s a demand for goods and services.”
“We started having Black Friday in a country that doesn’t celebrate Thanksgiving or Christmas. Consumerism is growing, the population is growing, so people who are bullish are looking at these factors.”
The fund is staggering its fundraising process as part of its strategy to convince sceptical investors about the market. It will secure its first close of $1-1.2 million by 2018-end, allowing to build a track record in the next 12 to 18 months while raising and deploying along the way.
“(The negative perception of Pakistan) is not changing anytime soon unfortunately, but what we’re seeing even with this beta phase is: if we can demonstrate the potential of the market through the deals that we’re making and the type of strategy that we’re employing, our hope is that other people will come onboard in the next stage,” said Lakhani.
Edited excerpts of an interview:
Tell us about i2i. How did you arrive at the decision to start i2i Ventures?
Lakhani: We’ve been operating in the Pakistani startup ecosystem for seven years, after starting the country’s first startup accelerator in 2012. We also license our content to support other programmes in Pakistan as well as in other frontier markets. We do market research and business intelligence insights, help players understand the market and help the players navigate better.
While we’ve worked really closely with local angel investors over the last seven years, we realised that the market wasn’t really positive for startups on the investor side. We see a lot of predatory investors, and a lot of startups fail because of those investments. Having worked with startups for so long and understanding how difficult it is to make it in a market like this, we felt we were uniquely equipped to launch a VC fund. This led us to build i2i Ventures, which is due to launch next month.
Tell me more about this fund. How big is this fund?
Naqvi: The fund is going to be $15 million, and we are just finishing our first close. We are doing the $15 million in a few stages. In this first stage, we are in the process of shortlisting some of the investments that we want to make, as well as getting some of the legal paperwork done to set up the company. We are also looking at options abroad and in Pakistan in terms of where the fund itself will be located.
Since all of these things take time, we’ve already started talking to companies that we’d like to work with or maybe want to invest in and doing some research.
A lot of the times you hear people say in Pakistan that the pipeline doesn’t exist, or it’s really hard to find companies. We’re happy to say that we haven’t really seen that. In fact, we already have a few that we want to invest in, and we’re moving into a formal due diligence phase with them right now.
What we’ve found lacking is finding the right partners for some of these startups. We hope that being a founder-friendly fund and coming from the perspective of having worked with startups for so long, we’re coming in as a fund that’s looking to make money, ride this wave of opportunity while being sensitive to what founders are going through.
But you have been here for seven years. Why go in now? What made you decide this was the right time to go in?
Lakhani: I think a lot of us have been feeling the market for a little while. We’ve been working on the fund for two years. Misbah and I came in as partners about a year ago. I’ve noticed that for the last two years especially, there has been a lot of interest in Pakistan and I think some of that has to do with the population census showing us that Pakistan is the fifth or sixth largest market in the world and the fact that we have a rising consumer middle class.
There’s a really interesting sea change, but also still a lot of trepidation around Pakistan too. We have a lot of people talking to us that have investment funds regionally, but rather than coming into Pakistan, they want to put money into our fund first and see what the market looks like before investing themselves.
Naqvi: I think what’s important also is that there is an interest in entrepreneurship. There’s a growing youth population and the census has been very clear about the opportunity. It’s also about the responsibility to engage youth in a way that is constructive. There are multiple initiatives going on right now at the government and private sector level. There are many incubators coming up. On a larger stage, it is reaching a point where we’re seeing interest coming in from schools so there is a wave that is coming in.
But while that’s happening, there is also a lot of noise going on as well. So instead of just talking about what we want to do, we want to just do it. We want to do the work and let the work speak for itself and hopefully, in another few months, we would have announced a few investments, start to do the work and lead by example.
What kind of noise are you talking about?
Lakhani: Just a lot of people saying that they’re launching funds.
Naqvi: Yeah, a lot of people domestically within the market. So right now, it’s cool and sexy to launch an investment fund, but there are a lot of people who are still disconnected from this space and don’t really know the startups and what their needs are. That type of noise is something that is frustrating on the side of people who work with startups.
You must have seen many startups fall prey to predatory investors.
Naqvi: They do. A lot of investors come in from a perspective of having built companies, but that may not necessarily make them good investors. They might have been good entrepreneurs in their own right, but a lot of time their vision and focus is to take over a company, which is not a very founder-friendly approach.
For a startup, it is also quite stifling. It limits how much money you can actually raise as a follow-on investment; it limits your networks because if you start with one large funder, your balance sheet is restricted and capital is already skewed.
Lakhani: Some of these investors are also a product of this environment. Pakistan is an environment of scarcity and rent-seeking. That’s what our environment has been like for so long. So as a result, individuals operate from that mindset.
In some ways, I understand when investors talk about the issue of control, but it runs counter to what is supposed to happen in the early-stage VC space of being able to give control away and diversify your risk.
How much of this $15 million are you securing for this first close?
Lakhani: Basically what we’re doing right now is we’re calling it our beta phase, so we’re doing about a $1-1.2 million where we’re building a track record. This will be called our beta phase, but it’s all in service to the larger $15-million fund.
Naqvi: We are targeting the next round in the next 12 to 18 months. It will not be our final $15-million close, but it will be another $5-10 million close. The reason why we are calling it the beta phase is because we’re taking these next 12-18 months to demonstrate that there is real potential in the market from a pipeline perspective.
There are also some really exciting deals which we didn’t want to let go of and wait until we’ve raised all of the money. So I think for us, it makes sense to take a small amount, raise it, close it, start investing it, and, in the meantime, start raising the rest of the $15 million, which we will continue to do as soon as this is up. I think by January 1, we’ll be on the road again to raise.
What does the pipeline look like right now?
Naqvi: We are looking at a small deal of around $15,000. We’re looking also at 2-3 deals at around $100,000-120,000, so it’s all at the seed level.
What sectors are you targeting?
Naqvi: We are looking at tech and tech-enabled areas. We are actually agnostic in terms of sectors because there are a lot of interesting things going on and to be honest, we are generalists ourselves.
Lakhani: I can give an example of a startup in our current accelerator programme that I think could potentially be interesting for us, but we’re not looking at them yet.
It’s a company called Ghar Par, which is an on-demand platform for at-home beauty services. Pakistan has long had a culture where all of us have gotten waxing done at home since we were 11 or 12 years old, or at least I was; I was a very hairy child. All of us have had that type of culture but for them, it’s actually taking the salon model and having it at home. Everything from waxing to nails, eyebrows and bridal makeup.
But the best part about what they’re doing is they’re also upscaling beauticians. Normally in salons, beauticians are not making a lot of income, but with Ghar Par, they’re taking home 70 per cent of what they make and are actually earning six times more than an average beautician at a salon.
Ghar Par has already raised $500,000 and their next round will be bigger than that. For us, that’s a super exciting company that gives an example of the type of companies that we’re looking at.
Naqvi: Another interesting example is re-selling luxury goods online. There’s a company that was in the accelerator last year that’s growing really fast with an interesting model that could apply very well to a market like Pakistan. It basically allows people to buy and sell luxury goods like handbags, accessories and shoes anonymously online.
Lakhani: The anonymous part is really important in the Pakistan market.
It sounds like there are more companies than there are investors in the Pakistan ecosystem. How do you plan to shortlist the right companies with just a two-person team?
Naqvi: I think coming from the startup space, we already have a really good understanding of who these people are most of the time and it really comes down to the entrepreneur. We are looking for a certain grit and tenacity in founders.
Lakhani: We tend to choose founders over the idea actually, which is why the success rate with our programme has been so high relative to what you see in the rest of the market as well as globally. We really pay attention to the tenacity of the founders. We pay attention in the interview and selection process, how well they take constructive criticism, are they actually able to take it and absorb it and put that feedback into their companies, how much risk they have taken personally, and so on.
I think the fact that we have an accelerator programme also makes us really unique from other investors. And because we’ve been doing it for so long, we have this funnel of companies that have graduated over the last seven years.
How do you plan to focus your attention on all your companies though? You seem to be pursuing several small, seed investments that will require a lot of hand-holding and attention.
Naqvi: I think it’s a really important point. There are a lot of investors with whom we do not share the same perspective or values, but there are some we actually feel have a similar perspective to ours. Sarmayacar, for example, is one.
We’ve already had several conversations with them about how we can co-invest in deals going forward because we feel there is an opportunity. Even though the deal size is small, there is still an opportunity to co-invest with other like-minded investors because not only do we diversify the risk as investors, we are also able to bring more to the table for the startup.
Do you find yourself fighting a perception battle when it comes to looking for LPs or other VCs to co-invest? There is the mindset that investing in Pakistan involves lots of risks. Is that changing?
Lakhani: I think why we saw that so many of our LPs were of Pakistani origin was because they’re the most willing to take the risk. We’ve definitely fought a lot of uphill battles. I mean, my entire career has been defined even before I launched i2i, on how to change the perception of this market and I think that’s just the reality.
It’s not changing anytime soon, unfortunately, but what we’re seeing even with this beta phase is: if we can demonstrate the potential of the market through the deals that we’re making and the type of strategy that we’re employing, our hope is that other people will come on board in the next stage.
What do they tell you?
Lakhani: A lot of them will be like – “We’ll put money in real estate and get a 50 per cent return” and it’s a totally different type of investment. There are many less risky ways to make money in Pakistan, and a lot of that has to do with the real estate market and the stock market.
Naqvi: Exactly. I think two things: one, the macro picture does scare people, the currency fluctuations, the law and order situation, but there are investors that realise that life goes on at the grassroots level, that there are people here that support relationships, and there’s a demand for goods and services.
We started having Black Friday in a country that doesn’t celebrate Thanksgiving or Christmas. Consumerism is growing, the population is growing, so people who are bullish on the market are looking at those factors.
There are also people who have been burned. These are people who have made individual investments from outside of Pakistan, both of Pakistani origin and not. They have not been on the ground to work with those entrepreneurs and understand the ground realities. Many of these happened in the earlier years when there wasn’t much of an ecosystem supporting them. Today there are many more factors that support entrepreneurs other than that one investor.
I think it is also important for investors to be on the ground, and that’s why some of our investors have come in, knowing that we are here and that we are not “suitcase” investors.
Lakhani: We’ve been doing this for so long, it’s almost as if people are saying, “You’re still here”. And I’m like, I don’t know why but yes, we still are.