Writing for Dawn, author Mutaher Khan explains that the startup ecosystem in Pakistan was thriving just over a year ago, with investment surging more than 5 times in 2021.
This led to optimism all around whenever people from the startup ecosystem were asked about their outlook for the industry. The ecosystem was flush with a high and it seemed like the moment was here to stay. However, by the second quarter of 2022, there were glaring signs of trouble.
Layoffs began to appear in the industry, with Airlift announcing layoffs just nine months after announcing an $85 million round. Other well-funded players such as Retailo and Truck It In also cut their workforces significantly. Funding also began to decline, falling below pre-Covid levels by Q4-2022.
While the deal flow has somewhat recovered from those lows in the first quarter of 2023, the outlook is still quite bleak. Daraz and Foodpanda, two of the biggest platform-based tech companies operating in Pakistan, recently laid off more than 10% of their staff. Market reports suggest that there might be more layoffs in the offing.
Things aren’t any better at relatively smaller startups, as Jabberwock Ventures reportedly fired five to six people, including a change of guard at its Swyft Logistics, while Byte slashed its workforce by 30%. The situation is not unique to Pakistan, as the US has also experienced mass job cuts and declining venture capital for five consecutive quarters.
According to Crunchbase tracker, around 131,000 workers in US-based tech companies have been laid off in mass job cuts in 2023. Pitchbook data shows that venture capital (VC) in the United States fell for the fifth quarter straight. This slowdown could have serious consequences for Pakistan’s nascent VC-backed startup ecosystem. If Asian economies with consistently high growth rates and far better risk profiles are seeing massive declines in investments, what chance does Pakistan stand, considering that most of the funding into the country was from foreigners?
This slowdown is concerning because venture capital was practically the only form of capital available to new businesses. Banks are not likely to lend to small and medium enterprises, and even if they do, the markups can exceed 25%. All is quiet on the subsidized Kamyab Jawan Programme because the country is sleepwalking into sovereign default.
Meanwhile, net foreign direct investment during 8MFY22 was just $784 million, down 40.4% compared to $1.32 billion in the same period of the previous fiscal year. Similarly, both equities and debts have seen outflows from international investors. Even the Gulf money is becoming hard to come by now.
In this bleak scenario, local businesses have few options at their disposal. Amid all this doom and gloom, the only solace could potentially be sought in some signs of mergers and acquisitions. For example, Portugal-based S4 Digital bought stakes in two local companies — Bramerz and HR Ways while fintech Abhi raked up 20% of logistics player BlueEx. More importantly, two Pakistani software bigwigs, 10Pearls and Arbisoft, have also recently announced acquisitions of foreign entities. This is an encouraging sign and is part of the growing shift in the home-grown IT services industry to show some ambition for scale.
However, in a pit of uncertainty and worsening economic indicators, these feel-good stories may not be enough to keep the top talent from moving abroad, even the ones who were staunchly against the idea a year ago. The industry needs a fundamental change in order to thrive in the current economic climate.
To read the full article visit www.dawn.com
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