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Writing to you from Karachi, this week’s ~5 minute read covers the broader market shift and what it means for our local ecosystem. Scroll to the bottom for a round up of everything you might have missed while we were gone!👇🏾
R.I.P. GOOD TIMES
Yes, it’s been 13 weeks! I knew it was going to be tough to keep a newsletter going but it’s harder than I even imagined. And what a crazy 13 weeks it has been. If you haven’t been following, this piece serves as a quick overview.
To quote Sequoia Capital’s 2008 refrain, R.I.P. good times. Gone are the days of crazy valuations, free money and loose fundamentals. Let’s explore the recent happenings by looking at the global public markets, the regional private markets, and the local macro factors.
1. Public markets have effectively collapsed
The NASDAQ is down almost 25% year to date. Netflix is down 65%, Meta (Facebook) is down 40%, Alphabet (Google) and Microsoft are both down 20%. 2021 was a very frothy year mainly driven by stimulus efforts during COVID. As this money dried up it was always likely that these valuations and the associated multiples would come down. And that’s happened in a big way, across the world.
2. Private markets are feeling the same pressures
When a VC is judging an investment, they are essentially underwriting a set of risks based on their perceived understanding of possible outcomes and likelihoods. If valuations are higher than they should be, investors are likely to underwrite significantly larger risks at higher valuations based on flawed assumptions.
Once public market valuations face corrections, these updated valuations trickle down to earlier and earlier rounds. Eventually this means that early stage valuations come down. As early stage valuations come down, founders willingness to dilute themselves is less affected and therefore, they end up raising much less money.
3. Pakistan’s political position has become more precarious
A big piece of Pakistan’s growth story has been in the first phases of political stability the country has seen in recent memory. A change in government responded to with protests and marches from the former PTI government has put many international investors on high alert.
Couple this with dwindling FX reserves, huge foreign debt, and a struggle to find a source of financial support in this period, Pakistan is seeing both political and financial instability threatening much of the progress so far. That said, Pakistan has been in this position many times before. Political and financial institutions are both becoming more resilient, and while a deal has not been struck yet I’d hazard a guess that something is on the horizon.
So what does this mean for startups in Pakistan?
1. Rounds are still happening but valuations and sizes are much smaller
Appetite for large rounds is much lower than it might have been in 2021. From my experience, pre-seed ventures in the first few months of their business could raise at valuations from 8-12m relatively quickly. In today’s market these numbers are closer to 4-6m. For later stage companies, it’s likely they will take time to grow in to their valuations and some scaled companies are already negotiating down rounds.
Series As and Bs are a difficult sell in these market conditions but undoubtedly they will continue to come. Most of the local funds were raising their second vehicles and it is likely that global LP appetite for venture as an asset class is going to be affected. Emerging markets venture is even more likely to be affected. Overall, funds will take longer to close or close at smaller amounts and therefore investments will be less regular and much smaller across the board.
2. Decisive layoffs and changes in business strategy
Sequoia Capital’s recent presentation to its portfolio founders detailed a difficult set of principles to operate from based on their experience with previous downturns. We have already seen at least three large regional tech companies (SWVL, TruckItIn, and Airlift) make large layoffs (around 30% each) and shift their business strategies to pursue profitability over growth. Airlift for example, has exited multiple cities and is only keeping operations in Karachi, Lahore, and Islamabad. We are likely to see similar shifts across startups with high cash burn and large physical presences. More positively, the strategies developed in these conditions are much more likely to be creating real long-term value in the market.
3. Strategic partnerships, mergers, and acquisitions
In the same vein as changes in business strategies, it is likely that we will see an uptick in M&A across the region. Pakistan remains an exciting market and well-capitalised regional peers may see the opportunity to enter the market inorganically. We have already seen this with Zoodpay’s acquisition of Tez and Sary’s investments in Jugnu.
As well as this, local players who may have seen each others as competitors are much more likely to be responsive to partner up. This might take a little while to pan out but it’s likely we’ll see a couple of these deals in the coming months.
Let builders build
While it’s a difficult period for many involved in the eco-system, it’s important to note that times like this are a key part of economic cycles and venture in particular. These events build resilience in our systems, force innovation in our business models, and make space for talent to cycle through and go on to build the next venture.
This cold market is likely to stay the way it is at least til the end of the year, if not longer, but it’s in periods like this where incumbents can be unseated and upstarts can build from first-principles. With that in mind, as always, it’s time to build.
The Past 13(!) Week in Startups
💰 Funding
B2B marketplace Bazaar raised a huge $70m Series B marking Tiger Global’s return to Pakistan with their second investment and bringing Dragoneer to the country for the first time.
B2B marketplace Jugnu raised a $22.5m Series A round which included Sary as the lead investor, a Saudi Arabia based startup in the same space which has raised $110m+ to date.
Earned-wage access provider Abhi raised $17m Series A led by Speedinvest, their first investment in Pakistan. Speedinvest has invested in similar models in multiple geographies.
Healthtech startup MEDZnMORE raises $11.5m pre-series A.
Consumer fintech Sadapay raises $10.7m seed extension.
Supply chain tech startup OWare raises a $3.3m seed round.
COLABS, a co-working startup, raised a $3m seed round which brought together a host of local investors.
Social commerce platform Markaz raised a $2.4m seed round led by Indus Valley Capital.
Zaraye, a procurement marketplace, raised a $2.1m pre-seed round, Tiger Global’s third investment in Pakistan and their first pre-seed investment in the country.
MediQ, providing healthtech solutions for businesses, raised a $1.8m pre-seed round.
EZBike raised a $1m pre-seed round to bring rented e-bikes to Pakistan.
Metric, an accounting SaaS provider for SMEs raised a $900k pre-seed round.
Daftarkhwan, a co-working startup, raised an undisclosed seed round from EMPG - a unicorn in the classified space.
💰 Exits
Zoodpay, a BNPL player with operations in Central Asia and the Middle East has acquired Tez Financial a micro-loan provider as a means to enter the market in Pakistan.
Retailo, a regional B2B marketplace, agreed to acquire DXBUY, a B2B marketplace for restaurants and grocery stores in the UAE to help expand service lines.
As always, thanks for reading! Know someone raising, building, or just curious? Give this a share! And as always, please subscribe if you’d like to hear more! If you have topics you’d like me to cover, just hit reply :)
Thanks for sharing !