Living on the edge

As the business world comes to grips with the change in the global economic cycle, the situation faced by Pakistani start-ups is no different from the rest of the world. At the conference titled “Paklaunch Unconference 23.2”, held last week, in London, this was the major theme that resonated with the attendees, which included the top Pakistani start-ups as well as the venture capital firms who have invested in many of these start-ups.

Things are difficult not only due to the peculiar situation in Pakistan – that holds for everyone in the country and is taken as given by those who manage businesses here. However, start-ups face a particularly difficult situation due to the fact that global venture capital funding has shrunk significantly over the last few years as the interest rate regime has changed globally, driven by the escalation of interest rates in the US and other Western markets.

With free money no longer available, venture capital firms are having to ask start-ups to improve profitability, an unprecedented turn, as the start-up model has historically prioritised revenue and scale!

However, the message this time, for the start-up businesses, was to sit tight, not burn excessive cash and try to survive through these difficult times. 

It was heartening to note that the Venture Capital firms, those represented by successful Pakistani expats as well as international investors, are keen to continue investing in Pakistan and understand that the country has long-term potential. Start-up eco systems as well as the technology infrastructure required for success, take time to build.

The investors mentioned that Pakistan is no different from many other markets, including Egypt, Nigeria and Mexico. In fact, Pakistan’s GDP growth rate for each preceding decade has been 5% per annum, which is better than many countries.

With Pakistan basically being an informal economy, businesses which are able to capture the informal markets are setting themselves up for success. Hence, Venture Capital looks for a business model which has a long-term strategy and would like to invest in category-winning companies, meaning that they want the businesses they fund to lead the particular markets they compete in.

But they normally stay away from capital-intensive businesses as well as ones with thin margins.

Venture Capital funds understand that they operate in the high-risk start-up world where failure is expected. They would like to back ambitious founders who can learn lessons from failures and not worry much about negative public reactions associated with failure. 

As for the founders, there were a number of outstanding entrepreneurs in the room – from retail B2B, and fintech to EV producers to pure information technology and software companies. These founders have exciting ideas, are ambitious and seem to be good leaders with the ability to manage risk.  

The situation they face in Pakistan is not easy. The slide of the Pak rupee has made business goals in terms of USD returns much more challenging as political instability continues to hurt the economy. Expanding overseas may be an option for some but without a stable base in their home market, it would be a bigger challenge. 

Tapping into the domestic market for funding via listing on the PSX is also unlikely in the short term, given the short history and unproven profitability level for most start-ups. However, finding some form of local financing would be a suitable way out for all stakeholders, as mentioned by various participants during the conference.

Despite these issues, it was interesting to note the cultural transformation that many of the founders are implementing within their respective businesses. They hold themselves accountable and believe they can be replaced as leaders if they do not perform well. Sharing success with employees via stock ownership plans is also a positive cultural driver and very much a part of the start-up DNA. 

This is a positive change from the traditional Pakistani family business model where the business owner remains irreplaceable.

However, with most businesses still early in their life cycle, time will tell how many of these founders are able to pivot when the situation demands and display resilience in the face of adversity. 

The sense of camaraderie and good chemistry between the Venture Capital funds and the founders of businesses was evident. VCs support founders in all aspects of the business but mostly provide guidance on governance and strategy. They listen to founders carefully as the founders understand the opportunity much better. 

There was much discussion on founder integrity and how Venture capital funds deal with this subject in an economy like Pakistan. The consensus was that this is no different from managing any business in Pakistan and similar markets. VCs do their due diligence and make sure they understand the founders’ motivation before writing the cheque. But sometimes terrible things do happen which is part of the business risk. 

Having said that, good founders are difficult to find and once VCs find them, they tend to stick by them. Or as one of the VC reps says “It is often that founders pick the VC firm they would like to work with” 

On the sidelines of the event, one got the sense that most Pakistani start-ups are still at an early stage of building their respective toplines. They need time and capital to continue building the business. But they are a bit far from achieving sustainable profitability.  

Given that the global economic cycles can be 10-15 years long, these businesses will struggle to build scale and become viable without the required funding.

Although Venture Capital firms hope for a quicker correction of the global markets and for the correction to also be visible in Pakistan, one dreads to think of this as wishful thinking. For the sake of some savvy investors and capable founders, one can only wish to be wrong in this assessment.

Finally, a word about the conference organizers. 

Originally formed as a WhatsApp group by San Francisco-based Aly Fahad, Paklaunch has grown into a sizeable start-up community focused on Pakistan. It is great to see Aly’s dedication and commitment without which it would not be possible to bring together people from such diverse backgrounds and geographies.

 Kudos to the Paklaunch team!