Why are VCs finally paying attention to Pakistan?
Macroeconomics, local signals, and a compelling narrative
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This Week in Startups
💰 Funding
Very slow start to the year as we saw a heated December and a global market slowdown, will be interesting to see how this pans out over the coming year.
Taro, a new BNPL player, has raised a $3.5m pre-seed round, investors have not been disclosed.
Retailo, one of the region’s leading B2B fulfillment players, announced a massive $36m Series A funding round led by Graphene Ventures.
Retailo has been across markets from day 1 and has operations across Pakistan, the UAE, and KSA.
📚 Reading
Ali Jumabhoy, former Venture Fellow at Zayn Capital, on his Medium blog running through some of the factors impacting growth of the ecosystem in 2021.
Ozair Ali, co-founder at Alter Global, on his Substack newsletter, explores the true size of the market in Pakistan.
🎧 Listening
Misbah Naqvi, Founder and GP at i2i Ventures on the Desi VC Podcast covering a range of topics and thoroughly covering the case for why Pakistan is such an exciting market.
Zahid Lilani’s Misaal podcast has had four awesome guests this month:
Bilal Sheikh, CEO of Lettus Kitchens, a cloud-kitchen concept.
Ariba Shahid, reporting on business and economy for Profit and startups and venture in Pakistan for Deal Street Asia.
Kalsoom Lakhani, Co-founder and GP at i2i Ventures.
Usama Khalid, an indie hacker building SaaS products.
📺 Watching
Aatif Awan, Founder and GP at Indus Valley Capital at the annual investor roundtable for emerging venture markets run by Magnitt, especially cool discussions of later stage investing in Pakistan we can expect to see in 2022.
Why are VCs finally paying attention to Pakistan?
An inflection point is an event or period that results in a significant change in the progress of an industry or sector, it is a point after which a dramatic change is expected to result.
2021 was truly an inflection point for startups and venture in Pakistan with more total VC funding in this year than all prior years combined. $350m+ raised with 50+ venture-backed companies, Pakistan’s startup and venture ecosystem is thriving.
To recap from last week, top global funds and incubators have started to take notice and are actively incorporating Pakistan into their strategies from the likes of Y Combinator, Global Founders’ Capital, First Round Capital, Kleiner Perkins, 20VC, Antler Global, and most recently Tiger Global. The year also saw the largest Pre-seed, Seed, Series A, and Series B rounds the country has ever seen.
Why is the venture ecosystem in Pakistan maturing so quickly? Undoubtedly hundreds of people have been hard at work for the past 10 years+ but only in 2021 have these efforts really begun to break out to the world.
Mikal Khoso in this piece on the Emergent newsletter argued that improved stability, mobile connectivity, and the rise of regulatory processes have been the key drivers of Pakistan’s sudden ecosystem development. Overall, he shows the key structural changes which have driven the new ecosystem.
I’d like to focus on the VC element today and ask what other factors are driving investors to take a bet on Pakistan? I see three additional factors driving funds to increase participation in Pakistan.
Seeking Alpha - Macroeconomic Environment
Local signals - The Careem Effect
Compelling Story - Demographics and multi-market plays
Seeking Alpha - Macroeconomic Environment
This is a global phenomenon that largely speaks for itself. The low-interest rate environment and the influx of investors chasing crazy multiples has led them to ‘untapped markets’ where they might be able to enter deals at a discount (debatable whether this is actually the case as the best deals are often as expensive if not more). Experiences in the public markets and in the crypto world have recalibrated the concept of healthy returns, but recent corrections are likely to be instilling price discipline within global private markets. Ultimately, international investors are looking to outperform the crowds by investing in largely untapped markets with technology-enabled businesses seeking to win regional markets.
Emerging market investing has recently become quite hot with success stories throughout LATAM, India and SEA reaching maturity and with some of the first IPOs in these regions. There are expectations that Pakistan might follow this pattern and investors really do not want to miss out. Those that were burnt from passing on early deals in other emerging markets are especially interested. This is reflected in the fact that many international investors are entering the market relatively opportunistically. We have seen numerous global funds make one or two investments in the region to enable them to keep track of happenings but no clear strategy emerging from them. Whether this is reflective of their understanding of the size of the market or just the beginning of a broader set of investments, only time will tell.
Local signals - The Careem Effect
Historically, venture funds investing in emerging markets like Pakistan struggled to assess founders in their local market contexts. The rise of regional tech players like Daraz, Careem, and SWVL have helped funds in their process. Where in the U.S. they were looking for Stanford grads with experience at FAANG companies, in Pakistan they now often look for internationally educated founders with experience in the aforementioned companies.
While these aren’t hard and fast criteria they often provide local signals for international funds to better understand founders and their experiences. Especially at the seed stage, when backing just a team and a dream, funds often feel more comfortable underwriting associated risks that they are better able to quantify. This has been a strong driver of funding in the region going so far as to lead to the popularisation of the term ‘Careem Mafia’ to refer to the strong network of ex-Careem founders in the region.
Of course, this phenomenon isn’t all positive. It brings with it many of the exclusionary practises prevalent in venture capital globally: the requirement of a strong network in the space for a seat at the table, a privilege often reserved for rich white males. Nonetheless, upstart founders do have an in with funds who can no longer easily dismiss the market as a whole. In the process, the hope is that a broader range of founders are funded to solve local problems with local solutions.
Compelling Story - Demographics and multi-market plays
Pakistan is often seen as the last ‘untapped market’ which is of a big enough size that it can maintain homegrown unicorns or be the volume-driver cornerstone of a broader multi-country strategy including MENA. I don’t fully buy the idea that Pakistan is the ‘last market’, there’s another market with very similar potential and level of underinvestment just on the side of India. But the story for Bangladesh is one for another day and one I am still exploring.
Demographic factors in Pakistan are highly favourable. With a population of 220m people of which 64% are younger than 30 and 29% are 15-30. In other words, Pakistan has over 60m youth. And these youth are overwhelmingly educated, skilled and employable. A perfect audience for technology companies.
Yawn.
You’ve heard it all before, market evangelists have been recycling these statistics for the past two years. The reality is that true addressable markets are a lot smaller with challenging spending power and disposable income statistics, Ozair Ali does a thorough job of digging into the numbers here. It is however important to note that growth rates are in the right direction and the formalisation of the economy itself will likely boost these numbers.
Nevertheless, it is highly unlikely that companies with operations only in Pakistan can become $1B companies in the short term which explains why going multi-country is a core part of many of the region’s startup success stories. Pakistan, therefore, continues to play a leading role in the venture story in the region.
In the pursuit of outsized returns, investors finally feel more comfortable assessing opportunities in Pakistan and sharing their stories with their stakeholders. At each stage, naysayers suggest we won’t make it any further e.g. no growth investors, weak capital markets, etc.
Ultimately, however, it is the optimists who become founders, investors, and join startups. I for one am confident that in the long-term, each of these factors will further drive investor interest and participation in Pakistan. Many are betting their careers that Pakistan’s huge year in venture and startups will continue in 2022 and beyond.
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