When your business is tearing down the old to build the new, you have every incentive to say out loud just what is wrong with the old, and why it deserves to be torn down.
Turn to Twitter or Clubhouse, the two social media apps of choice for tech startup founders and venture capitalists, and you will find – on almost any given day – a long discussion about how credentials do not matter, only the quality of one’s ideas and the drive to execute do.
Like all good lies, this one is at least partially true.
The truth in it is the fact that yes, the quality of idea and motivation to execute well matter a lot in the success or failure of a business, but one other thing also matters: money. And to raise money, it seems, those who control the purse strings of investor cash – the venture capitalists – seem to have a very strong preference for old-fashioned credentials.
And when it comes to venture capital in Pakistan, one credential seems to matter more than any other: a degree, whether undergraduate or graduate, from the United States of America. Only 0.45% of Pakistanis who attend a college or university get a degree from the United States, yet founders with an American degree accounted for fully 46% of total funding that went to startups between 2015 and 2020, according to Profit’s analysis of startup funding data compiled by i2i Ventures, a venture capital fund.
Here is what might shock the egalitarian sensibility even more: founders with just a Pakistani degree – as is the case with about 97% of Pakistanis with a college degree or higher – account for just 16.4% of total venture capital during that period.
This is not a simple story about a lack of egalitarian outcomes in a new industry in Pakistan, however. It is an exploration of the story behind the numbers: what it means for the numbers to be skewed this way, how Pakistan compares globally, and what the implications are for startup founders who do not fit the profile we laid out as the most coveted by venture capitalists.
And for our friends at the Lahore University of Management Sciences (LUMS) who may be wondering if there is a “LUMS exception” to the general rule of “US Grads Preferred”, the answer is yes, but with some significant caveats.
A note on methodology (feel free to skip)
Before we dive into what the data reveals, first a few disclosures on how we compiled the data. For startup funding data, we relied on the database created by i2i Ventures on venture capital transactions over the past six years. The i2i database includes 173 transactions between January 1, 2015 and December 31, 2020, involving 122 startups.
We then excluded all transactions for which the funding amount was undisclosed, and then further excluded any transactions for which any other major detail was undisclosed as well, such as the name of the startup, or the names of the founders. This whittled down the list to 129 transactions involving 96 startups, and approximately $201 million in total venture funding for Pakistani startups over that period.
For each of those 96 companies, we totaled all disclosed funding (this, unfortunately, excluded some marquee transactions where the deal size was not disclosed, such as Dawaai’s most recent round). We then looked at the list of founders as i2i had been able to discern them. After further refining to exclude startups that raised less than $100,000 in total disclosed funding, we were left with 80 startups on which we had reasonably complete data.
We then went through the LinkedIn profiles of all 148 founders of those 80 companies, and entered both their educational credentials as well as their work experience (the latter of which ended up not being materially different from the effect of the educational credentials). For any founder with both a foreign and a local education, we included their most recent or relevant foreign degree rather than their local one (with the exception of LUMS, for which we tracked when a LUMS graduate obtained a foreign degree).
We then divided the total funding amount by the number of founders in order to be able to attribute funding levels by country in the case of founding teams with varying educational credentials. For example, if a startup raised $1 million in total funding, and it had two founders with US educations and two founders with Pakistani educations, the US would get attribution for $500,000 and Pakistan for the remaining $500,000 of that funding amount. In an ideal world, we would have known the founding team’s respective shareholding, and weighted it accordingly, but that data is not readily available for any startup.
Serial founders are counted as many times as they raised capital and the amount raised attributed to their country of education every time. This, in our view, is not double counting because each time a serial entrepreneur raises capital is money being deployed towards their business and not towards other businesses it might potentially have gone towards.
The data discussed below utilises the above methodology.
The dominance of the Americans
The numbers tell a very clear picture: if you have a degree from the United States, you are far more likely to get more funding than if your education was entirely within Pakistan. Of the 148 founders whose data we examined, 80 (or about 54%) were educated entirely in Pakistan, but they accounted for only 16.4% of total funding, or about $32.5 million out of the $198 million in total funding raised by Pakistani startups between 2015 and 2020.
The 35 founders with American degrees, by contrast, accounted for 46% of total venture funding of Pakistani startups, with about $2.6 million in total funding per founder compared to just $0.4 million per founder for those with a Pakistan-only higher education.
Those numbers become even more astounding once one places them in the context of just how few Pakistanis have a US education to begin with. According to the Higher Education Commission (HEC) of Pakistan, there were approximately 1.6 million students in all tertiary institutions in the country in 2018, the latest year for which complete data is available. The United Nations Educational, Scientific and Cultural Organization (UNESCO) estimates that the number of Pakistanis studying at universities abroad in 2018 was approximately 59,000.
That means that only about 3.6% of Pakistani students of higher learning are abroad at any given moment in time, which is a useful proxy for what proportion of Pakistanis get a foreign degree by actually studying there (for the purposes of this analysis, we are counting foreign degrees earned through distance learning within Pakistan as being the same as local degrees.)
Of those Pakistani students abroad, only about 7,400 are in the United States, which means that of the Pakistani college student population, those with an American education constitute just about 0.45% of the total. Yet, as we noted, graduates of American universities commanded 46% of all venture capital raised by Pakistani startups over the past six years.
Put that in starker terms: a Pakistani with an American higher education is 93 times more likely to be able to raise venture capital for their startup than a Pakistani with only a Pakistani higher education.
Also, for those of you who think of Canada as “almost America”, no, it is not. At least not when it comes to venture capital funding. Pakistanis with an American education raised $91 million in founder-weighted funding over the past six years for Pakistani startups. Pakistanis with Canadian educations raised just $3.75 million. It is not even remotely close.
The bulk of the remainder is accounted for by the UK, with a couple of highly successful INSEAD graduates ensuring that France somehow manages to sneak into the league tables here.
Here’s one bit of bad news for startup founders with a Pakistan-only education: founders with a foreign education are more likely to raise funding in subsequent rounds and see their startups survive than founders without a foreign education. Of the five startups in the dataset that shut down, four had teams of founders of whom none had a foreign education.
Even if you manage to convince the VCs to bet on you once, getting them to do so again seems to be harder than for those with foreign educational experiences.
Is it unfair, or are the Americans better?
It is too early to say with any definitive sense whether venture capitalists are correct in betting so heavily on Pakistanis with an American education when it comes to Pakistan-focused startups. There simply have not been enough investor exits for us to know with any certainty whether or not there is a pattern in the profile of successful founders in Pakistan.
But some investors are very clearly betting on the returning Pakistani émigré startup founder. (We refuse to use the word Wapistani. It has a distinct “pawry” vibe, but somehow even worse.) Rabeel Warraich of Sarmayacar has talked about the return of such emigres as a catalyst for the Pakistani startup ecosystem. And Aatif Awan of Indus Valley Capital has gone even one step further and actually created a program to help Pakistani expatriates return to the country.
It is also, of course, not a coincidence that many of the most prominent names in Pakistani venture capital all have an American education. Rabeel Warraich went to the Massachusetts Institute of Technology (MIT), Aatif Awan went to the University of Illinois at Urbana-Champaign, Kalsoom Lakhani of i2i Ventures to the University of Virginia, Faisal Aftab of Lakson Investments Venture Capital went to Michigan State, and Ali Mukhtar of Fatima Gobi to the University of Pennsylvania.
So, are these VCs simply playing to their own bias, or is there something inherently more investable about Pakistanis with an American education?
(Take every single one of the next few paragraphs with a bucketful of salt: the author of this story is a Pakistani with an American higher education who just raised venture capital for his fintech startup.)
The likeliest explanation for the strong preference for US graduates is the simplest one: the kind of person who is able to get a US education is also the kind of person who has the financial wherewithal to take the initial risk to prove that they might have a successful startup on their hands, or else the kind of person who has spent years in educational institutions that have honed their natural cognitive abilities to a point where they have a significant advantage over those who may have started off at the same level of ability at birth.
Put another way: there are two possibilities as to why the US graduates take up all the funding. The first is that your parents were rich enough to pay full tuition for an American university – which, by the way, now costs twice as much as a British or Canadian university – and so you had the family resources to be able to quit your job with no need for an income while you worked on your startup idea and gained the kind of early traction that investors like to see before pouring in serious amounts of money.
The second possibility is that your parents were perhaps not rich, but well-off enough – and with the right kind of social capital – to send you to the handful of right schools in Pakistan that are the feeders to an undergraduate education in the United States. Just over 800 Pakistani students leave for the US every year for a bachelors degree, and it is a safe bet that well over half that number comes from a small number of schools: Karachi Grammar School, Aitchison College, Lahore Grammar School, and Beaconhouse Margalla Campus.
Students who attend these schools were not born with more brains than any other part of the population, but they do have something else going for them: a set of parents who are uniquely obsessed with ensuring that their child’s cognitive abilities develop to their maximum potential. Two children born with the same ability at birth would be expected to perform at the same level when they are very young, but give one of those children far more resources and attention over the course of two decades, and by the end of it, that child will be far outpacing those who were their peers at birth.
The students going to America, in other words, are some of Pakistan’s best and brightest. Why do they choose to go to America? At least part of that is the draw of US institutions of higher learning, which command a level of prestige unmatched anywhere. It is not for nothing that they say: “Harvard is Harvard in any language.”
And there is something about America itself: a land of entrepreneurial self-starters, the home of Silicon Valley and almost every major tech company you have ever heard of, the place where the future is invented and exported to the rest of the world. The place that may not have as generous a social safety net as Canada, the UK, or Australia, but whose upper middle class is three times richer than its peers in other high-income countries.
This is not an exaggeration. According to data from Credit Suisse, the average net worth for a European adult is about $150,000, while the average net worth for an American is about $450,000. America is a high-risk, high-reward country, and if you have brains and ambition, that bet starts to look mostly like very high rewards for risks that are not as high for you as they are for others of lesser ability.
There are no two ways to say it: of the students who are able to go abroad for an education, the most talented and most ambitious students from Pakistan and elsewhere generally tend to go to America. In short, Pakistani students in America are not a random sample of Pakistani college students more broadly, and if you are in the business of looking for Pakistanis with talent and ambition, it would be easier to start in Boston than in Lahore.
We should clarify, of course, that not all Pakistani VCs are US-educated. Misbah Naqvi, a partner at i2i Ventures, earned both her undergraduate and graduate degrees from the Institute of Business Administration (IBA) Karachi. And indeed, Kalsoom Lakhani and Misbah Naqvi have both been highly involved in seeking to invest in underestimated founders in Pakistan, through Invest2Innovate, the startup incubator, as well as through i2i Ventures.
Not just Pakistani VCs that do this
The dominance of US-university graduates in startup fundraising is hardly unique to Pakistan. The pattern holds true in most other parts of the world as well.
As Kalsoom Lakhani noted on Twitter in her observations about YCombinator’s most recent Demo Day for startups: “Most emerging markets founders are, unsurprisingly, polished with strong backgrounds at either US institutions or with experience at recognizable tech companies.”
YCombinator is perhaps the world’s best-known startup incubator, based in San Francisco, California, which takes in two batches of startups every year. At the conclusion of its 11-week program is something called Demo Day, where startups pitch themselves to a wide audience of investors, and are frequently able to raise large sums of money and go on to become highly successful companies. Some of the most famous YCombinator companies include Airbnb, Stripe, Coinbase, Twitch, and others.
And incidentally, even within the US, there is a significant bias towards the graduates of some of America’s most prestigious universities. Stanford, MIT, Harvard, and the University of California Berkeley produce more startup founders who are successfully able to raise more than $1 million than any other universities. VCs may routinely denigrate the value of a college education, but they also just as routinely seem to be using it as a credential to help them decide where to deploy capital.
Is there a LUMS exception?
As some of our friends from LUMS never tire of reminding us, LUMS is Pakistan’s finest institution of higher learning and in many ways comparable to an American education. Do graduates of LUMS fare better than those of other universities? And, crucially, do they hit parity, or come close to parity, with those who have foreign degrees?
The answer is yes, LUMS alumni do have an advantage in fundraising over and above any other Pakistani institution of higher learning. LUMS alumni accounted for 21.9% of all venture capital, in founder-weighted terms, raised by Pakistani startups, which you will note is higher than the amount raised by graduates of all Pakistani universities combined.
That is because about 70% of the money raised by LUMS graduates was by those LUMS alumni who then went abroad for a graduate degree. But even LUMS alumni who never leave the country have an advantage: that one university accounts for almost 41% of all venture capital raised by founders who do not have a foreign education.
If you cannot go to America, go to LUMS. It really will pay off.
What does this mean for a Pakistani startup founder?
So does this mean that a Pakistani who wants to create a company should start applying to universities in the United States? Are the odds so stacked against those with local degrees that it is worth adding this extra step? Not entirely.
The foreign graduates simply have a set of attributes that VCs are looking for: the ability to formulate and articulate an idea, and the grit and perseverance to come up with a way to demonstrate that it will work. The foreign degree itself is not a direct factor in the investment decision-making process of any self-respecting venture capitalist.
The best thing a budding entrepreneur can do in order to get venture capitalists to take them seriously and fund their idea is to find a way to demonstrate product-market fit, which is really shorthand for two separate, but related tasks: developing a product people will find useful, and then finding enough people willing to use it to demonstrate that the product will have a sizeable market.
Everything else in terms of credential-hoarding is a waste of time for an entrepreneur who has a clear vision of what they want to build. If you know what you offer the world, the world will find a way to come to your doorstep. At least investors will.
Clarification: An earlier version of this story incorrectly stated that all prominent venture capitalists in Pakistan have a US education. This has been corrected, and the example of Misbah Naqvi has been added. It was also incorrectly implied that i2i Ventures invests mostly in US-educated founders. The world of the partners at i2i in investing and nurturing underestimated founders in Pakistan has been highlighted for the sake of completeness and accuracy.