Ecosystem Deep Dives #8: Pakistan - Hockey Stick Growth
Ecosystem Deep Dives #8: Pakistan - Hockey Stick Growth
Having long lagged between regional behemoth Indonesia, Pakistan's start-up scene is catching up fast.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!
VC Tsunami
Despite having characteristics similar to other highly "start-up active" countries such as Nigeria and Indonesia, the Pakistani start-up scene had so far lagged behind as a result of a multitude of factors, from outdated legislation, lower GDP per capita, and a rough security situation. In very recent years however, the Pakistani start-up ecosystem has embarked on a so-called "hockey stick growth", a type of fictitious growth pre-revenue start-ups promise their seed investors. The difference is that in Pakistan's case, the hockey-stick growth is real.
Consider this: in the first three quarters of 2021, Pakistani start-ups have raised $244 million, more money than the six previous years combined. While the Pakistani start-up ecosystem has been around since around 2012, with companies such as Daraz leading the charge back in the day, it is only recently that Pakistan has started making a place for itself in the "explosively hot emerging markets" category. The recent Pakistani start-up craze and subsequent growth can be attributed to three main factors: a demographic goldmine, grossly under-tapped opportunities in almost all sectors, as well as an already relatively diverse and internationally-focused fundraising ecosystem.
Ready for innovation
Pakistan's demographic makeup, combined with an improving national economic situation, have been opening a flood of opportunities for the country's entrepreneurs. Pakistan is the world's fifth most populous country, just behind Indonesia, with approximately 220 million inhabitants. With 2/3rds of the population below the age of 30, a large part of the Pakistani population is growing up to be tech-savvy and demands digital solutions to their everyday problems. This trend is exacerbated by the exponential growth of internet and mobile penetration in the country. While the country had around 3-5 million internet users in 2014, that number now stands around 100 million as of today. The rise in mobile phone ownership is similarly impressive:
"The number of mobile phone users in Pakistan has ballooned from 114 million in 2014 to over 180 million today, with more than 80% of Pakistan’s 215 million people now mobile users. More importantly, of these mobile users, almost 100 million have access to 3G or 4G data."
This young, connected and digitally-oriented potential consumer is also bolstered by another factor: the rise of the middle class, which in turn brings with them more disposable income and more advanced digital literacy. Pakistan's "Gen-Z" middle class population will probably expect and demand much of their banking, health, and education to happen online, which is where the opportunity for Pakistani entrepreneurs lies. By 2027, Pakistani consumer spending is projected to reach $360B, with e-commerce still taking the lion's share.
Sectors of interest
As with most emerging market ecosystems, early Pakistani entrepreneurs were successful in digitalizing inefficiencies in a variety of local sectors, using business models proven elsewhere. A TechCrunch article did a great job of curating a list of these:
B2B wholesale marketplaces: Bazaar, Tajir, Dastgyr, Retailo, Jugnu
SMB accounting products: CreditBook, Easy Khata (by Bazaar), DigiKhata, Mkhata
Ride-hailing and travel: Bykea (competes with Careem and Uber)
Digital banking: SadaPay, Tag, Oraan, Abhi Finance, Finja
Fintech remains a massively undertapped sector, with Pakistan being one of the most unbanked countries in the world, as 71% of the population lacks a bank account. The digitalization of SME's (especially small convenience stores) will likely accelerate the rise of digital banking in remote areas (dukan.pk is a good Pakistani example of this), a trend that is booming from Indonesia with Warung Pitar to Morocco with Chari.co. A new fintech regulatory sandbox passed by the Pakistani SEC should help spur that innovation.
Edtech is another massive opportunity as a result of two main considerations: the abysmal 60% literacy rate for Pakistani adults over 15 as well as the serious lag between what the traditional educational sector teaches and the actual needs of the 21st century's job market. In the continuation of edtech, start-ups helping Pakistanis find jobs are also having a big, tangible impact on society with companies such as Rosee.pk chipping away at the problem for more than a decade.
Funding anomaly
One of the reasons for Pakistan's meteoric start-up rise has been an extremely active, and very international, funding scene. For a very-early stage ecosystem, with no impressive exit numbers (yet), Pakistani start-ups are attracting capital from some of the most renown investors worldwide. In my opinion, this is due to three main factors:
The similarity investors must see between an early-stage Pakistan and a later-stage Indonesia, and the potential that lies in a country with a young, and digitally-underserved yet digitally hungry population.
The good international image the ecosystem enjoys, fueled in part by extremely impactful diaspora initiatives such as Indus Valley Ventures and i2i Ventures, both founded by Pakistanis abroad, which act as a bridge between American VC money and local Pakistani start-ups on the ground.
New legislation allowing Pakistani start-ups to raise money through a foreign holding company, enabling international investors to invest through jurisdictions they are more comfortable with.
I also think a large part of it is FOMO (fear of missing out), not in a bad way, but in the traditional VC sense. As most founders know, getting a lead VC to give you a term sheet is the best way to get others to do so as well. Pakistan managed to attract the first couple international VC's, which evidently got the flywheel going considering the sheer amount of big names that are now investing in the ecosystem. Today, more than 80% of investors in the Pakistani ecosystem are foreign, mostly from the USA. And funding numbers are starting to match the trend; recently, Airlift has raised Pakistan's largest-ever series B, with $85 million raised on a $275 million valuation.
Initiatives such as Paklaunch, which aim to connect Pakistanis in the diaspora to Pakistani start-ups are also key in the ecosystem's development and the building of its international stature.
The ecosystem itself
While much of the focus of this article has been put on why Pakistani start-ups are attractive to international investors, I'd like to zoom in on what the ecosystem's players on the ground look like, and how they are laying the conditions for start-ups to flourish. Compared to other ecosystems, Pakistan seems to place a large emphasis on start-up events and competition such as Disrupt 021, Startup Grind Pakistan, Paklaunch and Momentum. Diasporas have also been launching impactful initiatives such as Omar Shah launching CoLabs, Pakistan’s largest co-working space. An interesting component of the Pakistani ecosystem is the Ignite network of incubators, launched by the government across the country, which can act as a good way to distribute the social and economic impact of the growing start-up scene throughout the country.
This growing network of start-up accelerators, incubators and co-working spaces is also starting to make its way into Pakistani universities, an important part of one of the hidden battles of emerging market start-up ecosystems: social stigma. Indeed, being a start-up founder is inevitably linked with extremely high risk of failure, a culture with which local mentalities are not yet accustomed to. This continues to be a problem in other early stage ecosystems such as Palestine, where being a start-up founder is slowly but surely starting to become more socially acceptable as a career path. This reluctance to embrace failure might also explain why most start-up funding in Pakistan comes from abroad, as local investors might not yet accept the reality that around 80% of their portfolio will fail (on a good day).
Conclusion
This was one of my favorite articles to write, not only because of the palpable excitement within the Pakistani start-up ecosystem, but also because I feel Pakistan made the best of the initial delay its ecosystem experienced. The success of similar markets such as Indonesia actually paved the way for Pakistani start-ups to prove the viability of their products by using already established solutions in another emerging market as a solution.
The recent governmental regulatory changes, whether in fintech regulations, fundraising requirements or tax reliefs are welcome. The extremely pioneering and very tangible role the Pakistani diaspora played by setting up funding channels for start-ups back home is testament to the power diaspora communities have to kickstart start-up ecosystems in their home country. I can't wait to see what awaits for Pakistan, and how its population will be impacted by the incredible innovations Pakistani entrepreneurs are working on everyday.
You can find the sources for this article here.
See you next week, for an in-depth analysis about the Portuguese start-up ecosystem!
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