Pakistani Startups Have Arrived. What's Ahead?

In Dec 2019, I wrote a post titled “Why Pakistani Startups are The Next Big Thing”, predicting the rise of Pakistani startups. It’s time to do a follow-up.

Pakistani startups have (finally) arrived??

2021 is the year Pakistani startups arrived on the global stage. Over 50 startups have raised a combined $325M+ in venture capital already this year from some of the top investors and operators in the world.?

What used to take years, is now happening in weeks. In Q3, within a period of 4 weeks Pakistani startups raised more than they had in the prior 4 years (2016-2020).?

And 2021 has now surpassed venture capital raised in all prior years combined (h/t: Monis Rahman).

What a difference A Couple of Years Make

When I first started exploring Pakistani startups in 2019, the country was attracting just under $10m in annual VC funding (2016-2018 average), about 5 cents per capita. That didn’t make any sense given the market fundamentals and quality of talent. This led me to start Indus Valley Capital, an early stage VC fund, with a mission to help founders build the most transformational and impactful companies in Pakistan.?

In 2021, VC funding has crossed $325M. Pakistani startup ecosystem has come a long way, thanks to hundreds of incredible founders and thousands of early team members, angel and VC investors, incubators/accelerators, regulators and everyone else supporting the ecosystem.

I have been fortunate to get a front row seat to this exponential growth, having spoken with hundreds of Pakistani founders and backing some of the best, including the two top-funded Pakistani startups of this wave, Airlift and Bazaar. These were Indus Valley’s first two investments. Serving on the boards of startups that have raised ~40% of all funding in Pakistan in the last 2 years and ~55% in the last 6 months has given me a unique look into what has drawn so many notable investors to Pakistan and how some of them went from skeptics to believers.

The Case for Pakistani Startups

The case for Pakistani startups is a straight-forward one and remains essentially the same as I outlined in the 2019 post and have made at several conferences (more here: PakLaunch conference, 500 PreMoney, OPEN Forum, Google Kantar event on Pakisan's Digital Journey, Disrupt 021) and Pakistani diaspora gatherings in Silicon Valley, Boston, Seattle, Dubai and Singapore.

• 220M population, 5th largest population
• 22 year median age -> demographic dividends creating higher productivity, consumption
• Growing middle class -> 7th largest consumption class by 2030, creating several multi-billion markets in different verticals
• Strong tech talent -> 360K+ tech professionals, talent base for several unicorns
• Massively underserved by venture capital

What I would add is that there are a few structural advantages compared to Indonesia or India. Pakistan is geographically smaller and well-connected, fewer provinces/states, has lower regulatory barriers and doesn’t have strong incumbents (compared to Reliance in India). This allows Pakistani startups to scale faster throughout the country and potentially expand to other markets. On top of this, a late start for the ecosystem means there’s a lot to learn from other markets, lowering the business model risk.?

Countering this is the macroeconomic risk for Pakistan's economy, ranging from currency depreciation to current account deficits to reliance on IMF. However, the venture bet is not as much about the economy growing as it’s about it transitioning from offline to online. There are also geopolitical risks unique to Pakistan that one should take into account.

Why Now? Internet-Startups-VC Flywheel

Startup ecosystems don’t develop in a vacuum. It takes many years (decades?) of effort by lots of people and institutions. Pakistani universities have been producing top tech talent for a long time. Incubators and accelerators like Invest 2 Innovate, the National Incubation Centers (NICs), Nest IO, Plan 9 and Plan X and coworking places like COLABS, Daftarkhawan and The Hive have made it easier for people to start. Early startups like Daraz, EasyPaisa, PakWheels, Rozee and Zameen showed that it was possible to build startups from the ground up despite much more difficult circumstances. Early angel syndicates and VC funds like CresVentures, DotZero, Fatima Ventures, Lakson Investments, Planet N, and Sarmayacar helped grow the ecosystem. They have since been joined by many other local funds like 47 Ventures, Deosai Ventures, HBL ventures, i2i Ventures, Indus Valley Capital, Karavan, Virtual Force, Walled City Co and Zayn Capital who together have played a crucial role. Conferences like Disrupt 021, Momentum, PakLaunch and Startup Grind have brought founders, operators and investors together and enabled investments. i2i insights have done an excellent job of tracking the ecosystem development and sharing trends and insights over the years. Regulating authorities like SECP, SBP and STZA have been quite forward-looking and enablers of the ecosystem.

While these are all important, I believe it also takes a flywheel for a startup ecosystem to really take off. This flywheel consists of three things: critical mass of internet users, quality startups and smart venture capital.

1. Critical Mass of Internet Users:

The catalyst for the flywheel is a critical mass of internet users. This is what attracts ambitious founders to go after outsized opportunities. It also attracts the earliest venture capital funds and angel investors to take a bet on a market.

Startup ecosystem couldn't have taken off in Pakistan in 2013 because there were only 3M broadband subscribers. It crossed 50M in 2018 and then 70M in 2019, creating a critical mass of internet users. We're now at 110M broadband subscribers. This growth has been driven by increasingly affordable internet, now averaging $0.59/GB.

2. Quality Startups

Around the same time as Pakistan hit a critical mass of internet users, it saw its first material exits in tech - Daraz was bought by AliBaba and EasyPaisa sold a 45% stake to Ant Financial. But the exit that mattered the most was Careem, a MENAP startup with strong Pakistani DNA, acquired by Uber for $3B. This was a pivotal moment as Careem had become a training ground for future founders and operators in Pakistan and the region, even earning the 'Careem mafia' moniker similar to PayPal mafia in the Silicon Valley.

Broad internet adoption attracted some exceptional founders to launch startups like Airlift, Bykea and Cheetay. These startups saw much faster traction than those in the prior wave, and were able to attract capital faster too. The brightly colored helmets, uniforms and shuttles made their rapid growth hard to miss.

Seeing the early momentum of these startups and growing investor interest, more founders joined the party. Now, more than 50 startups have raised $1M+ in funding (shown below). There are hundreds more which are earlier in their journey.

These startups are now raising substantial rounds, demonstrating sufficient availability of capital. Here are the ten largest recent rounds raised in Pakistan.

Particularly notable are:

• Airlift's $85M Series B round (among the largest 5% of series B rounds globally in a decade) with many of the top Silicon Valley operators investing,
• Bazaar's $30M Series A round, raised when the startup was just 15 months old,
• Bykea's $13M Series B round bringing Prosus to lead its first investment in Pakistan
• Tajir's $17M Series A bringing Kleiner Perkins to lead its first round in Pakistan, and
• Creditbook's $11M pre-Series A round, Tiger Global leading first investment in Pakistan

A few Pakistani startups have even been quickly snapped up by MENA players looking to expand to Pakistan. Jordan-based Abwaab bought EdMatrix and UAE-based Trukker acquired TruckSher.

3. Smart Venture Capital

The final component of the flywheel is smart venture capital. The more quality startups there are in a market the more capital that market attracts and the more smart venture capital coming to a market, the more it pulls potential founders from the sidelines to join the playing field. We’re seeing this play out in full force in Pakistan right now.

In parallel with this new wave of startups kicking off, local VC funds started to scale up too. What was still missing though was top tier global capital. Early on, it wasn't clear where the follow-on capital for Pakistani startups will come from. Many of the MENA startups had relied on local or regional capital. With my network mostly in the US, I had a strong desire for the top US VCs to invest in Pakistan but thought it might take 2-3 years. Turns out I was being too conservative.

Just 7 months after Airlift's seed round, First Round Capital (early investor in Uber, Square, Notion, Roblox) led their $12M series A round in Q4 2019, largest in Pakistan at the time. This was remarkable as First Round Capital had not invested in Asia in over a decade. Them investing in Pakistan made everyone pay attention.

Bykea's $13M series B in 2020 led by Prosus, the largest investor in Tencent, was another big validation for Pakistani startups. YC started accepting Pakistani startups on a regular basis. Investments from Kleiner, Defy, GFC, Acrew, Addition, Tiger Global and many others followed. Rising VC funds from smart operators like Harry Stebbings and Josh Buckley joined in. Stripe, Visa and Flexport also started investing in Pakistan.

Given how nascent Pakistani startup ecosystem is, it's remarkable how many top VCs have already invested in Pakistan, demonstrating the caliber of Pakistani founders and the strength of Pakistani diaspora's collective networks.

What's equally exciting is that founders and operators from some of the top startups like Twitter, DoorDash, Plaid, Coinbase, Stripe, Uber, Facebook, LinkedIn, Shopify and many more have recently invested in Pakistani startups. These include some of the best growth and product leaders who've helped grow startups to hundreds of millions of users and I know are really excited about Pakistani startup ecosystem.

Pakistan's Internet-Startups-VC Flywheel is Spinning Faster Than Early Indonesia

I used to compare Pakistani startup ecosystem in 2019 to Indonesia's in 2009, saying there was a gap of 10 years. Today Pakistani startup ecosystem already looks like Indonesia's in 2014. So we have traveled five years equivalent of Indonesia's early journey in just two years. This is because mobile adoption is already in place and global capital flows faster today than it did a decade ago.

What’s Ahead?

It’s been fun watching the predictions from the 2019 post play out well. So let’s give it another go.

1. Momentum Will Continue

The momentum that Pakistani startups picked up in the 2nd half of 2021 will continue into the first half of 2022. As awareness of the market increases further, we should see more top investors, from traditional VCs to cross-over funds to solo GPs invest in Pakistan. Accelerators like Y Combinator and 500 Global will also double down on Pakistani startups.

We should also see more startups in a variety of new areas, going beyond the obvious large markets of ecommerce, logistics and fintech.

2. There Will Be Some Failures. And Possibly a Series A Crunch

As more and more startups get early stage funding, the founders will realize that capital isn’t the hardest part of building a great company. Finding product-market fit is hard. Building a world-class team is hard. Competing with multiple well-funded startups going after the same market is hard.?

We’ll see some startups scale to a certain level but then fail to go past that due to any of the above reasons. That’s not a bad thing and happens everywhere. In fact, it’s a positive for the ecosystem in the long run as people will learn from these experiences and go on to building something bigger and better. What’s important is that founders not tie their identity to their startup’s success and be open in sharing the lessons learned. And for the ecosystem to celebrate the fact that they tried rather than view it with a negative lens.?

The dramatic rise in pre-seed and seed valuations also means that VCs might see lower returns if every deal they're investing in is expensive for stage and market. For foreign VCs, it's best to build partnerships with local investors to better calibrate the risk/reward.

As the early excitement tapers down and we start to see some failures, it might lead to a funding crunch at the series A stage, similar to what India saw in 2013. It would be smart for the local corporate VCs to be ready to invest should this occur as there will be good opportunities for them in such a market.

3. Talent Wars

Capital is no longer the bottleneck for startup success, talent is. While Pakistan has a strong talent profile, the fast rise in the startup funding is creating a ton of competition for the best. On top of this, global companies are increasingly hiring remote employees in Pakistan. RemoteBase, a portfolio company, is enabling international companies to hire engineering teams in 24 hours. Due to all this competition, things will get worse before they get better.?

The best founders are managing this by focusing on mission and culture as a competitive advantage and by going beyond KLI (Karachi/Lahore/Islamabad) for talent.

Parting Thought: It’s Day 1?

Pakistani startup ecosystem has arrived on the global stage. But we're just getting started. There are so many problems to solve, and many opportunities to be realized.

Only 2-3% of consumer spending is estimated to be online today. Over the next decade, this will likely go to 15-20%, creating tens of billions of dollars in online spending. Most of it will be won by startups.

The most transformational and impactful companies in Pakistan are being built today or are yet to be started. It's Day 1.

--

[Full disclosure: Several startups mentioned in the post are portfolio companies of Indus Valley and I serve on their boards. These include: AimFit, Airlift, Bazaar, BridgeLinx, Maqsad, Marham, RemoteBase.]