Here’s an interesting statistic for you: In the past one month, Pakistani startups have raised six times more funding than they managed to in the first six months of 2024. While the statement is true, it becomes far less impressive when you see its scale. In the first six months of 2024, startups only managed to raise about $1 million. In the past month, they have raised $6 million more off the back of a few successful rounds.
This isn’t the first time there has been a glimmer of hope for the startups this year. Back in April, there were murmurings that tech funding was noting some recovery in America and many began to wonder when the ripple effect would reach Pakistan. But in the midst of this, Profit predicted the funding drought in Pakistan’s tech sector is likely to persist for at least another half decade.
The $6 million raised now is hardly a moment of respite let alone a revival. But in the bearish days we live in, feeling a little less miserable is a good thing. So it is worth looking at where this small bump has come from.
Four startups have announced successful financing rounds this summer, combined with a prominent venture capital firm closing its first fund. In the wake of this, what are VC expectations and predictions for the market? And are there any lessons we can learn from companies securing some small measure of capital during these trying times.
A risky bet or an opportune market?
Despite some positive news in many months, Pakistan’s startup sector remains a lumpy one at best. It would be a stretch to call these announcements, which are nowhere near the valuations of 2021 and 2022, a market recovery.
Startups that have raised an accumulative $6m capital this summer have been endeavouring for this small win since last year. But when the baseline is as low as a million dollars in over six months, even these numbers look attractive.
That being said; some funding is always better than no funding at all.
The most salient feature of funding noted by VCs this year is down rounds.
Shorooq Partners, a leading tech VC firm in the MENA region, told Profit, “We’ve seen valuations adjust across the region, including Pakistan. We are seeing companies being open to restructuring, including flat or down rounds. However, there continue to be companies that are growing rapidly and are dictating price upticks in their current fund raises.”
Echoing this assertion, Kalsoom Lakhani, co-founder and general partner at i2i Ventures, said, “Given the funding scarcity, we have observed static rounds and down rounds this year.”
Globally, recent funding can hardly be classified as a recovery, considering most of the “funding revival” has gone to AI companies, says William Chu, co-founder of SparkLabs Fintech.
In agreement with Chu’s claim, Shorooq Partners add, “Although the funding situation has started to incrementally improve, it cannot be called a recovery. We would have to see both the interest rates coming down globally and also a considerable time with political stability before sizable foreign investment makes its way into the country.”
Lakhani added to this, saying, “I cannot confidently assert that the situation is improving; however, founders must exercise creativity in navigating the current scarcity of resources. The fundraising process is significantly more protracted than in the past, and we are witnessing an increase in mergers and acquisitions as a strategy for accelerating growth.”
Lakhani’s comment can be verified by the recent acquisition of Sadapay by Turkish fintech Papara, which caused havoc at the company in less than a month after the acquisition, with a massive layoff spree. Another event supporting this claim is the acquisition of CallCourier by PostEx.
The global investment landscape has undergone a dynamic shift, which previously marked by very low interest rates, is now facing tough macroeconomic conditions. Unfortunately for startups, VC investors, who stood out as having the highest risk appetite have now become quite risk averse and careful with their investments. While interest rates are unlikely to drop soon, investors have ceased taking the same risks they did in a low-rate environment.
So, what does it take now for a VC to bet on your startup?
Shorooq Partners say the answer is sustainable economics, “We’re looking at strong founding teams that deeply understand the space they’re building in. It is of course necessary to have sizable market opportunities and a pathway to sustainable economics for the business.”
Investment trends have changed, whereby investors now seek strong fundamentals and unit economics, ahead of huge growth potential. “It’s essential to have a strong product market fit (PMF), including demonstrated ability to have healthy economics at scale,” read the statement issued by Shorooq Partners.
Commenting on the matter, Lakhani said, I can’t speak on behalf of all investors, but the majority are inclined toward businesses that are not capital intensive. Companies solely based in Pakistan are encountering greater difficulties in securing funding compared to those with diversified geographic operations. However, we continue to observe significant interest in fintech as well as SaaS and product-first companies.”
On the other hand, Chu added, “For investors, the challenge is to identify the sub-segments of AI that still offer attractive return profiles, i.e., the shovels in this proverbial AI gold rush.”
One glaring question remains unanswered in all of this.
Is Pakistan still a hotbed for investment despite its political and economic challenges and a weakened currency?
According to Shorooq Partners, Pakistan is one of the most challenging states once we look over the past decade. Nevertheless, founders are leveraging the unique cost advantages available in this environment, particularly as they cater to clients outside of Pakistan. “We remain optimistic about Pakistan’s mid- to long-term prospects and continue to seek out strong founders,” they said.
While Lakhani believes, “The macroeconomic situation is undoubtedly impacting investment in the country. We have always struggled to promote the Pakistan story, but current market conditions are now preventing conversations with international investors from even beginning.”
However, on a more positive note, Lakhani and Misbah Naqvi’s VC firm i2i recently closed their Fund 1, with a capital injection of $3 million from the International Finance Corporation (IFC) under its Startup Catalyst Program, joined by the Women Entrepreneurs Finance Initiative (We-Fi). Even though the full size of the fund wasn’t disclosed, this announcement makes us hopeful that the female-led VC fund will (soon or later) be making some investments, bettering the capital situation in the sector.
Founder’s lessons from financing amidst a drought
After five months of zero funding announcements, BNPL fintech platform KalPay announced that they had raised a million dollars in early stage funding. Social commerce platform DealCart shortly followed suit, announcing that they had closed a $3 million round as the first tranche of a two-part funding round.
A month after that electric mobility startup Zyp Technologies raised $1.5 million in Series Pre-A funding round, led by Shorooq Partners. Along with these, two lesser known tech startups Kodifly and Kollegio both raised $750,000 each.
Unlike last year, when some startups were raised north of $6 million in a single round, this year the total value of all raised amounts to $6 million.
Profit spoke to two founders who are looking to raise capital, in order to understand how difficult it is to secure funding in the current climate and what strategies they believe are needed to make a good pitch to investors.
After Zyp Technologies recent Series Pre-A round, we asked their closed competitor in the local market whether they are also seeking investment.
Ali Moeen, co-founder of ezBike, told Profit that they are indeed looking for investment. The company raised $1 million in a pre-seed round in 2022. Moeen divulged that ezBike’s last investment came almost a year ago, most of which was used for its inventory.
When asked about his experience with trying to raise during a capital crunch, he said, “The current investment climate for emerging markets has markedly worsened compared to three years ago. Factors such as heightened geopolitical tensions, economic instability, fluctuating exchange rates, and the enduring impacts of the global pandemic and recession have led to increased investor caution.”
He added, “This has made it more challenging for businesses in these regions to attract the necessary capital for growth, innovation, and global competitiveness. Consequently, the reduced investment affects both individual business development and the broader economic advancement of emerging markets.”
On the same front, agritech startup Farmdar’s co-founder Muzaffar Mangi shared that Farmdar will not be raising capital before early next year when they reach the growth stage, adding that funding is determined by whether you need the money or not, rather than the time elapsed since your last funding round. Their last $1.25 million round was closed around two years ago.
Mangi pointed out that the world is changing and money is no longer easy or free, like startups thought it was. “There was a time when a lot of money was poured into dreams, a risk VCs willingly took but investor sentiments have changed over the years. The conversations we are now having with investors are quite fact and evidence based, involving questions like ‘where do you see your company ten years from now’, ‘how do you plan to get there’ and ‘based on your experience and trajectory over the last two years, how can you substantiate your projected standing?’”
So, according to Mangi, the era of betting on ideas is in the past and investors are now looking for substantial metrics that mean something in the real world, such as concrete traction and promising revenue streams.
He believes that. “The era of dumb money is over. It is not funding that has dried up, rather investors have become more sensible, and now seek startups that compliment their thesis and overall portfolio.”
We also asked Mangi whether the lack of ‘dumb money’ as he puts it, has caused a shift towards smart spending. His answer was a resounding yes.
“It is typical human thinking that if funds are easily available, let’s spend more freely. I don’t think startups can now afford to spend the way they used to. There was a lot of unnecessary expenditure and wastage, which has now been trimmed because startups know now that the money they have is not only limited, but also that they have to get its worth before another investor funds them, “ Mangi concluded.
Concurring with Mangi, Moeen said, “Although I cannot speak for every startup, the prevailing trend I have observed is that startups are adopting a more conservative approach to spending, focusing on reducing their burn rate. Many are turning to international markets to counteract currency depreciation and diversify their revenue streams.”
Moeez says that this strategic shift enables companies to mitigate local economic uncertainties and access new global growth opportunities, as well.
Shifting VC expectations have brought a significantly greater emphasis on unit economics compared to a few years ago, causing startups to prioritise profitability and sustainable growth over rapid expansion.
