The landscape for startups in Pakistan has evolved over the past 15 years, yet the journey has been far from smooth. Despite a burgeoning tech-driven population, growing mobile penetration, and an increasingly digital economy, Pakistani startups have collectively raised a relatively modest $750 million in funding during this period. This amount, when compared to the potential the country holds, paints a picture of missed opportunities, signaling that many challenges still impede the growth and scalability of these enterprises.
The Funding Dilemma
One of the primary reasons for this funding gap lies in the challenges Pakistani startups face in scaling their operations. The lack of a standardized definition for what constitutes a “startup” in Pakistan has contributed to this uncertainty in the startup ecosystem. The absence of a clear regulatory framework has created difficulties for investors and financial institutions when deciding which businesses to support. In many cases, there is ambiguity over which businesses qualify as startups, and this uncertainty further discourages potential investors.
Another significant barrier is Pakistan’s ongoing economic volatility, which adds a layer of risk for both domestic and international investors. Factors such as inflation, currency fluctuations, and economic instability often make it difficult to predict returns, which, in turn, hampers funding opportunities. Consequently, Pakistani startups have had to operate within a constrained financial environment, limiting their ability to scale effectively and compete in the global marketplace.
Despite these hurdles, Pakistan’s startup ecosystem still follows global trends in terms of success rates. On a global scale, the vast majority of startups (around 90%) tend to shut down within their first two years of operation. In Pakistan, a similar pattern is observed, with only around 10% of startups managing to push through to the commercial level. This high failure rate is typical of any startup environment, but it underscores the deep-seated challenges faced by local entrepreneurs when attempting to grow their businesses.
Seed and Early-Stage Funding Dominate
Nadeem Hussain, founder of Telenor Microfinance Bank (easypaisa) and an active investor in Pakistani startups, recently addressed the issue at the Pakistan Startup Summit 2024, organized by the Securities and Exchange Commission of Pakistan (SECP). Hussain pointed out that the $750 million raised by startups over 15 years is far below what could be expected given Pakistan’s demographic advantage. He described this amount as “not a great number,” emphasizing the mismatch between the country’s potential and the funding it has secured.
The figures that Hussain shared were even more revealing. Approximately 95% of the $750 million raised by Pakistani startups has been allocated to early-stage funding—seed and pre-seed rounds. Only a handful of startups have made it to the next stages of funding, with only five or six startups securing Series A funding and just one making it to Series B over the past 15 years. This highlights a significant gap in the venture capital pipeline, where many startups struggle to move past the initial stages of development.
Furthermore, the lack of later-stage funding makes it difficult for these businesses to scale and reach the global markets. The dearth of Series A and Series B investments is a critical issue for Pakistan’s startup ecosystem, as it limits the capacity of promising startups to grow into large, commercial enterprises.
Challenges in Securing International Investment
Hussain also pointed to several other reasons why international investors remain hesitant to invest in Pakistani startups. Despite Pakistan’s large youth population, a high mobile penetration rate, and a growing demand for improved customer experiences, global investors are often reluctant to take risks in the country due to economic instability. International investors tend to prefer countries with more predictable returns, and Pakistan’s economic risks make it a challenging market to tap into.
Hussain also discussed how international investors often exhibit a form of bias against Pakistan, primarily due to a lack of understanding of the local market. As a result, they are unlikely to invest unless they see significant opportunities that could provide them with substantial returns. This bias creates a feedback loop, where the lack of investment stifles the growth of local startups, preventing them from developing and scaling to the level needed to attract international attention.
The Role of Commercial Banks
One potential solution to the startup funding dilemma, as proposed by Hussain, is for commercial banks to be mandated to allocate a portion of their earnings from government securities (such as T-bills) to startup financing. This would help ensure that funds are available for high-risk investments, even when banks are unable to use depositors’ money for such purposes.
However, commercial banks in Pakistan are reluctant to fund startups due to their high-risk nature. Sima Kamil, the former Deputy Governor of the State Bank of Pakistan (SBP), pointed out that banks are unable to use depositor funds for such high-risk investments, especially when the failure rate of startups is as high as 90%. Instead, banks in Pakistan have predominantly focused on investing in relatively safe assets, such as government securities, which has limited the amount of financing available for the private sector.
Policy and Regulatory Challenges
A key issue that hinders the growth of Pakistani startups is the lack of a standardized definition for what constitutes a startup. Different organizations, including the SBP and the Federal Board of Revenue (FBR), define the term differently. For instance, while SBP defines a startup as a business with a maximum age of five years, the FBR allows up to 10 years. This inconsistency creates confusion, making it difficult for startups to access funding and for investors to determine which businesses are eligible for support.
The absence of a clear definition also affects the ability of businesses to attract venture capital, as investors prefer to back companies that fall within specific parameters. Additionally, a lack of clarity on what constitutes a startup can result in regulatory and tax challenges, which further complicates the funding process.
Government Support for Startups
Despite these challenges, the Pakistani government has taken steps to foster a more supportive environment for startups. At the Pakistan Startup Summit 2024, Finance and Revenue Minister Muhammad Aurangzeb emphasized the role of startups as “game changers” in spurring economic activity. He highlighted that startups could play a critical role in promoting sustainable growth, digitalization, and financial inclusion in the country.
Aurangzeb also stressed that the government’s role is to provide a stable policy framework that creates a conducive environment for startups to thrive. He urged commercial banks to take an active role in building a supportive ecosystem for startups and helping them access the necessary funding. The minister also commended the SECP for its progressive regulatory measures, such as the Regulatory Sandbox and streamlined company incorporation processes, which have been instrumental in making it easier for startups to operate in Pakistan.
SECP’s Role in Fostering Innovation
The SECP, under the leadership of Chairman Akif Saeed, has been working to create a more supportive environment for innovation. Saeed highlighted the SECP’s initiatives, such as the Regulatory Sandbox and LEAP, aimed at establishing Pakistan as a regional innovation hub. These programs focus on unlocking potential in high-growth sectors like fintech and embedded finance, which have the potential to transform Pakistan’s national economy.
Saeed’s vision for the future of Pakistan’s startup ecosystem is one of empowerment. He emphasized the need to build systems that not only adapt to change but drive it, ensuring a stable yet dynamic environment for growth. The SECP’s efforts to support innovation and foster a more transparent regulatory framework are expected to help attract further international interest and investment in Pakistan’s startups.
Conclusion: A Path Forward for Pakistan’s Startups
Pakistan’s startup ecosystem has made progress over the last 15 years, but it remains clear that significant challenges persist. Low funding levels, inconsistent definitions, and economic instability are just a few of the hurdles that Pakistani startups must overcome to thrive. However, with the right regulatory framework, increased participation from commercial banks, and greater support from both the public and private sectors, there is hope that the country’s startup ecosystem can reach its full potential. For Pakistan to become a hub for innovation, it will require a concerted effort from all stakeholders, including the government, financial institutions, and entrepreneurs themselves. The future of Pakistan’s startups lies in bridging the funding gap, creating a stable and clear regulatory environment, and leveraging the country’s demographic advantages. Only then will Pakistani startups be able to scale, compete globally, and contribute meaningfully to the country’s economic growth
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