No home grown Uber or Amazon
Most of the foreign investors are not into the game of potentially high risk, high returns at least for now. They perceive Pakistan as a geo politically and economically unsafe country yet
There has been a lot of buzz in town about the Pakistani Startup eco system; startup incubators, accelerators and emerging startups but we have seen in the recent past. Pakistani startups have failed to leave any mark on the local market other than a notable few. Instead, international startups like daraz.pk or Uber are taking the front seat in the Pakistani start up scene. Before the German firm rocket internet (parent company of daraz.pk and kaymu.pk) made its debut in the Pakistani e-commerce market, there were two main companies operating here namely shophive.com andhomeshopping.pk, but now you do not see any of them in the main stream or digital media. According to alexa.com, a website which gives ranking of websites based on number of visits and popularity, daraz.pk is the 11th most popular website in Pakistan while shophive.com is the 122nd most popular site and home shopping is the 180th most popular. Similarly when Savaree, a ride sharing app, was launched a lot of hype was created around it as the next Pakistani Uber but now it stands nowhere as it has been purchased by Careem, the Dubai based on-demand car riding giant. Now the hype in the market belongs to Uber and Careem both of which are big guys from the international market. Other than B2B (Business to Business) tech companies, we have just a few B2C (Business to Consumer) companies from these incubators who have been able to create a disruption in their respective sectors. So, what is the problem with the Pakistani startups? Are young Pakistanis not capable of running and managing a company or is there some other problem?
The problem surely lies somewhere else as Pakistanis are just like their Indian counterparts — hardworking, diligent and have got enormous capability. The basic problem in Pakistan for the new ventures is the lack of venture funding which is the primary mode of getting capital for IT startups. According to the LCE (LUMS Centre for Entrepreneurship) website, 70 start ups have been incubated yet while only 16 got funded. International investors are not very willing to invest in Pakistan because they think of it as an insecure place. Secondly, international investors are looking for markets where they can play safe risk, there are a lot of companies out of which they can choose the best and reduce their portfolio risk, the market is big enough to scale the startup to an international level and the legal environment is protective for an exit. Most of the foreign investors are not into the game of potentially high risk, high returns at least for now. They perceive Pakistan as a geo politically and economically unsafe country yet, so few are willing to make a bet on Pakistani startups, especially the ones from the developed world. They also have a lack of trust on Pakistani judicial system in case of any dispute with the companies in which they are investing. Many of the big names of the venture capital industry from the developed world e.g., Sequoia Capital, Khosla Ventures and others are investing in other regional countries e.g. India and China but as of now, they are not ready to invest in the Pakistani market. Sequoia Capital, a global leader in the venture capital industry, has backed firms which now hold $1.4 trillion of stock market value. It has already invested more than $1 billion in Indian Startups.
When it comes to local investors they are more interested in investing in real estate, sugar mills, textile mills, pharmaceuticals or other more conventional sectors of the industry. One primary reason is their lack of knowledge of high returns which IT startups can give them. The second reason is that they want safer investments in property for their idle money rather than putting it in a high risk environment. The third reason is that they are usually seeking an early return on their investments usually of 2–3 years while many of the IT startups usually take more time than that to reach even the break-even point. Amazon, which was founded in 1994, reached its break even in 2002 after a time period of eight years.
There are few people in Pakistan who have worked in Google, Amazon or other big names and are available to give their advice to Pakistani startups
What they do not know is that the IT startups can give them much higher returns than the traditional sectors of the economy. According to Khurram Zafar, executive director of the LUMS center for entrepreneurship, one mobile gaming company in Finland gives more profit before tax than combined profit before tax of 10 of the largest cement companies in Pakistan. If compared to other industries, then one mobile gaming company gives more profit before tax than the two companies which distribute natural gas to entire Pakistan and it makes more profit than five sugar mills, five automotive companies and nine of the top textile mills of Pakistan combined. Ram Shri Ram, an Indian American who was an early investor in Google, is now valued at roughly $2 billion, largely in part not because of any business but because he recognised Google’ s potential, a small company at that time and invested in it as an early bird. Similarly Uber, the global on-demand car ride app, which is the best example of the modern sharing economy, is now valued at $66 billion, just in a time period of seven years. You never know that the geeky guys sitting next to your apartment may be building the next Facebook or Uber. What they need is just investment and trust on them with a proper guidance by industry veterans. In the past we have seen that only those guys succeeded who had their own money and could bootstrap their startups. Eat Oye, zameen.com to name a few are the manifestations of such startups. This means that the Pakistani market and people, both have the capacity to sustain and manage good profitable investments in the IT sector. What they only need is the capital which many brilliant minds in Pakistan lack.
Another reason is the lack of mentorship. There are few people in Pakistan who have worked in Google, Amazon or other big names and are available to give their advice to Pakistani startups. Rocket internet, Uber and other global companies already have the experience of working in emerging markets which have completely different dynamics compared to the developed markets. Compared to mature markets, the people here are less adaptive to technology, the early adopters are usually less in number and it takes usually a little more effort and investment to the get to the product market fit. International ventures have already learnt these experiences while Pakistani startups have to learn by burning their own sweat.
The fear of failure is another reason impending the growth of our own home grown startups. In the emerging markets, we have a culture of fear from diving into the unknown and entrepreneurship exactly fits this description. People usually fear boot strapping new ventures from their own or their parents money because they fear that if they failed then what his or her family will say, what the relatives will say, social labels of a failed person and many other social pressures are there to stop an otherwise ambitious and risk taking person. In the Silicon Valley, it’s exactly the opposite. There, they encourage failures as they know that this failure is not the end of the world and valuable lessons gained from this failure can be applied to new ventures. Most importantly, despite failure in one product, investors will still trust them and they have will have the necessary funds to launch a new product.
But the situation will not be too gloomy as it seems to be right now. There’s a lot going on behind the curtains. The startup scene is now changing rapidly. Local big fish are now forming venture companies and international investors from the region eg Middle East, Turkey and south east Asia are now investing in promising Pakistani startups but still it’s just a tiny ripple in the pond compared to other regional countries like China, India or the UAE. What the government can do is to build and promote a soft image of Pakistan as an investment friendly country. Along with that, these are the local investors and Pakistani diaspora in the developed countries who can build trust for the foreign venture capital firms by investing first in the Pakistani companies.