Pakistani startups have raised $284mn in first half of 2022, but are expected to close the year at less than 2021

Startups in Pakistan have raked in a total of $284.89 million in disclosed funding across 45 deals in the first six months of 2022, according to Profit’s research of data from insights firms i2i Ventures, DataDarbar, and Crunchbase.

This investment in the first 6 months of the ongoing year is 182% higher than the first six months of the last year. (Note: 24SEVEN’s $6 million pre-Series A raise, which was raised earlier but announced on July 1, has been included in the total number for the first six months of this year)

Despite this, amid a global funding crunch, they are most likely to close the year with less funding collected than in 2021.

Till June 2021, Pakistan’s startups had raised $101 million in funding across 33 deals, according to data from i2i Ventures. The bulk of the funding in the ongoing year has come into B2B startups Bazaar, Dastgyr, Retailo, and Jugnu, which announced raking in $70 million, $37 million, $36 million, and $22.5 million, respectively, contributing more than half (58% or $165.5 million) towards the total funding raised till June this year.

After the B2B startups, sizeable funds have been raised by Abhi Finance ($17 million), NayaPay ($13 million), Truck It In ($13 million), MedznMore ($11.5 million), SadaPay ($10.7 million) and Bykea ($10 million). The remaining 31 deals are all under $10 million.
There are four big deals in this equation, and they are either Series-A or Series-B raises, which are understandably very large in amount because of the scale of operations at these stages. However, most of the seed stage and pre-Series A stage startups from last year have not announced any raise so far.

According to i2i’s deal-flow tracker, 46 startups were at the seed stage last year and five startups were at pre-Series A stage. Out of these 51 startups, only 3 Series A announcements have been made so far of Jugnu, Retailo, and Dastgyr. According to Crunchbase, one out of two (50%) seed-stage startups makes it to Series A stage. The ratio right now is abysmal, with only 5% of the startups from last year making it to the Series A stage. This only confirms that fundraising right now is difficult.

There are still six months to go before the end of the year and the aforementioned startups could be announcing Series A investments but it is almost certain that not most of them would be announcing such raises. The market downturn is actually getting intense and the situation is only going to get worse, which would have prompted startups to wait it out.
Profit has earlier covered at length the funding crunch that has hit global markets, which has also impacted the ability of Pakistani startups to raise funds. Being a frontier market, only crumbs will be reaching startups in Pakistan.

But $284 million in funding in six months is an impressive number. Considering that the expectation in Pakistan’s VC circle was that in 2022, the final tally would hit $750 million mark for the entire year, because of the great momentum and attention from foreign investors last year. So how have the startups been able to raise this funding apparently during a funding crunch?

The answer to the question above is that the funding was not entirely raised during the investment shortfall this year. Fundraising can be a lengthy process, with startups continuously engaging with investors, and closing deals as they come. Investors put money in tranches. An investor could be releasing the funds for a startup in October whereas the next investor would release funds in December. The funding round could be announced when the target for the raise is achieved.

Some of the startups that have announced big rounds this year, we’re in the process of raising new funds since last year. For instance, Dastgyr had reportedly been in talks with Veon Ventures since December last year, and Bazaar, too, reportedly signed the term sheet with Tiger Global sometime in December 2021.

So if startups have announced their fundraising this year, this does not necessarily mean that they raised all of it during this year. They could have been negotiating with investors prior to when things went down south in the US market and announced when it is officially now a bear market, creating a wow moment in the process.
So what is the situation like now?

If a startup like Bykea scraps fundraising efforts because the terms are not favorable for startups right now, things are headed towards the worst. On June 15, 2022, the US Fed increased interest rates by 0.75 basis points, its biggest interest rate hike since 1994, to fight inflation.

The consequence of this would be that more money would be parked in the banks and less would be available for investment. Whatever crumbs were available for investment in Pakistani startups, there is going to be a shortfall of that as well in the days to come, except for Pakistani startup founders.

The equation is simple. There is a lot of dry powder that is waiting to be invested. It’s just that investors would want to invest in less risky assets. So even if a Pakistani startup is able to access investors that are willing to invest, they would offer investment at terms highly unfavorable for the startup. So startups here can either accept harsh terms or wait it out while trying to become sustainable on their own.

Whatever the case, the fundraising is going to go down and by the time this year ends, the overall raise is going to be substantially less than what was expected on the back of strong momentum from last year.

Kalsoom Lakhani, co-founder, and general partner at i2i, expects that startups might close the year at $350 million, which is about $30 million less than what was raised during the last year. Khurram Zafar, the managing partner at 47 Ventures, also predicts that Pakistan will close the year at about $350 million.

According to Faisal Aftab, co-founder and managing partner of Zayn Capital, the funding slowdown is going to get worse. According to his estimates, about $30-50 million can come into Pakistan’s startups in the next 6 months in the current situation. This would bring the final count for 2022 to $300-320 million for the complete year. The amount would be about $60-80 million short compared to last year’s funding, and less than half of what was the expected target for fundraising this year.