Optimism for the future of Pakistani entrepreneurship
Introduction
In the first 5 months of 2021, $85 million has been invested by venture capitalists in Pakistani startups. The increased investment level suggests that foreign investors have trust in the future of Pakistan as an entrepreneurship ecosystem — Pakistan is ready to takeoff. A growing population increased mobile usage and vast strides in the technology sector give investors and entrepreneurs a reason to be excited.
Current state of the ecosystem
Since its independence, Pakistan’s economy has largely been based in garments, textiles, and agriculture. 74 years on and these sectors continue to dominate the economy of the country. However, to a large extent this economical structure has led to a huge degree of income inequality as well as barriers to entry for new entrants. According to The Economic Times, 20% of the population controls half of the income of the country. A representative from the United Nations Development Programme (UNDP) has stressed that in order to combat income inequality, there needs to be avenues for income and social mobility.
Entrepreneurship as an ecosystem looks to have emerged as an avenue for increased social mobility, innovation, and growth. A McKinsey report classified Pakistan as one of the highest potential startup ecosystems in the world. The metrics that McKinsey used in their assessment were a large market (220 million people), one of the youngest populations in the world (median age of 23), a growing middle class and increased tech savviness amongst the population.
According to the World Economic Forum, Pakistan is the 5th most populous country in the world and is on course to hold its position at the end of the century. The potential market for entrepreneurial pursuits presents an attractive proposition for innovators and investors.
In recent years the two largest growth sectors have been in E-commerce marketplaces and FinTech. Companies like Daraz, Bazaar and Erocery have illustrated how Pakistanis are now comfortable using E-commerce as a way of conducting everyday purchases.
FinTech is a sector which is one of the fastest growing in Pakistan. FinTech startups are covering gaps in the market and as a result giving more Pakistanis access to funding, loans, banking, payments and so on. Independent players like CreditBook target segments that previously were underserved like SME’s, women owned businesses and middle-class consumers.
Funding
While raising money has traditionally been a limiting factor for Pakistani startups, in recent years there has been a vast uptick in the funding available as well as the number of investors looking at the ecosystem. Last year despite the Covid-19 pandemic, Pakistani startups had their best year on record with over $65 million raised according to Pakistan Today. As mentioned earlier in the first 5 months of 2021, the level of investment has surpassed that.
A large cause of increased levels of funding has been the emergence of locally based Venture Capital Funds looking to invest in Pakistani startups and entrepreneurs. In the past investment in business ideas were limited to private family office investments. Local VCs have allowed a whole new class of Pakistani entrepreneurs’ access to funding.
Pakistani Venture Capitalists have also provided a sense of security to foreign investors looking to Pakistan as an investment opportunity. In recent times we have seen large levels of investment into Pakistani startups for example in June 2021 Tajir raised a $17 million Series A round led by American Venture fund, Kleiner Perkins. Large acquisitions also made the startup world take notice of Pakistan such as Alibaba’s acquisition of marketplace and logistic company, Daraz, for an estimated $200 million.
Government initiatives
There has been a push by the government to promote entrepreneurship in Pakistan particularly in FinTech. The Central Bank in particular, has been pushing banks away from the manual processes that had been long used towards digitization. In March 2021, the new rules released by the Central Bank requires a minimum level of digitization from banks. Furthermore, more startups have been given approval from the Central Bank to conduct FinTech services. A majority of Pakistanis remain unbanked according to FinTech futures and it is hoped that the relaxation of traditionally conservative regulations will lead to an increase in banked citizens in the country.
The eased rules regarding banking and FinTech has encouraged banks to, open their APIs and share payment rails with startups which allows other companies to build up their startups thereby benefitting commerce throughout Pakistan. The government has also funded incubators in all 4 provinces for startups to gain access to funding and mentorship.
Education is an area in which Pakistan has made vast strides in, particularly with regards to higher education. With more universities and a higher level of achievement by students, many startups now build their technology and platforms in Pakistan due to the increased proficiency in the tech sector. The government underscored their commitment to higher education by increasing the Higher Education Commission’s budget by 15 billion rupees in June 2021. Moreover, the emergence of more private universities like Habib University, lay the groundwork for increased academic vigor moving forward.
Thing to work on
While there have been great strides forward for entrepreneurship in Pakistan, there is still a lot of work to do particularly with regards to who gets to participate. To a large extent, traditionally underrepresented groups like women and lower income workers have had a tougher time getting involved with entrepreneurship.
The gender imbalance in Pakistan is pronounced with the World Bank asserting that only 1% of all entrepreneurs in Pakistan are women and they largely tend to be focused in the fashion industry.
At a time where female participation in entrepreneurship is steadily rising in the world, the stark contrast in Pakistan shows the need for there to be more schemes (both public and private) as well as a change in social attitudes to female involvement in the workforce and in entrepreneurship. A major factor stunting the growth of female entrepreneurship, is the lack of access to funding. According to Durdana Najam for the Express Tribune, “The gender-wise distribution of gross loan portfolio of the State Bank of Pakistan (SBP) shows that only 3% of small-medium business loans go to women as compared to the 97% given to men. Similarly, only 19% of the microfinance loan is lent to women while 87% of the loan goes to men.” If Pakistan fails to address this imbalance, they will lose a substantial resource in building their entrepreneurial ecosystem as well as amplify the gender imbalance in the country.
Another criticism of the Pakistani ecosystem is the access to funding for lower income people. Pakistan has typically had a high level of income inequality. According to a University of California, Berkeley report, “the top 1% income share is 30.2%, the top 0.1% share is 13.4% and the top 0.01% share is 5.1%. These top income shares are significantly higher than those in neighboring India.” This inequality trickles into entrepreneurship in Pakistan with the ‘privileged’ class having greater access to funding by virtue of belonging to the right social groups, attending premier high schools, family connections and previous success in business. However, with the rise of Venture Capital in Pakistan, there has been steps taken to mitigate this inequality. Many Venture funds have recognized the need to source good startup ideas from a wider range of people and classes.
Finally, the areas of participation geographically are a cause for concern. Like many developing economies (and some developed economies), Pakistan has seen urban centers become hubs for entrepreneurship (particularly Islamabad, Lahore, and Karachi) whereas slower growth amongst rural populations. Rural areas tend to have lower levels of education as well as an increased level of poverty. Furthermore, structural forces, such as cultural norms, prevent increased levels of entrepreneurial participation in rural districts. Pakistan must find a way to include people from geographically diverse areas of the country in the startup landscape or else further exacerbate the problem of income inequality.
Things to look forward to and growth
In addition to E-commerce and FinTech, in the near future, Pakistan can look forward to substantial growth in a variety of sectors. These include logistics, E-services, and mobile coverage. The last 12 months has seen a large-scale focus on startups with a focus on logistics (a long-needed benefit in the Pakistani economy). In June 2020, the Dubai based trucking platform, Trukkin, announced that it would be expanding their operations into Pakistan starting with Karachi.
Pakistani logistics companies have also increased their funding levels and are thereby creating a larger footprint in the country. These include the two-wheeler marketplace, Bykea (which has raised $26 million), Truck It In ($2 million), and Airlift ($2 million). The increased presence and funding provided to logistics startups should address the historic inefficiencies in Pakistan’s transport sphere and increase accessibility to logistics and transport services for businesses and individuals.
There has also been a significant increase in the number of E-service startups in Pakistan. One of the longer-term successes is Zameen.com who raised $20 million in Series C funding in 2016. Now they are the leading property portal in Pakistan. Another success has been AugmentCare, enabling patients to video chat with doctors. In Pakistan not everybody has access to healthcare and this startup seeks to address that gap in the market. In 2017 they raised $1 million in seed funding (according to Crunchbase). While there is still a long way to go for E-services to be a part of the everyday life for the average person, the growth of E-services is a reason to be optimistic for the future of entrepreneurship in Pakistan.
The most important factor in facilitating the growth of entrepreneurship in Pakistan, is the growing number of internet and mobile users in Pakistan. According to Data Reportal, there were 76.38 million internet users in Pakistan in January 2020. This was a 17% increase from January 2019. There was a similar increase in mobile phone connections and social media usage which saw a 6.2% and 7% increase respectively in the same time period.
The digitization of Pakistan is the thrusting force that will grow the startup ecosystem. The internet allows the goods and services that entrepreneurs create to be used by their consumers as well as other businesses. If we assume that Pakistan will follow a similar path to India, smartphones will be the primary method of accessing the internet rather than personal computers.
Conclusion
In conclusion, Pakistan is still at a nascent stage of its entrepreneurial journey but is putting in place the necessary building blocks to ensure the long-term success of the ecosystem. For entrepreneurs and investors who are looking to get in early, Pakistan represents a great opportunity as Asia’s next big entrepreneurial hub.
