Pakistan Startup Funding Industry Is Going Through A Tough Phase

Funding for Pakistani startups hit a three-year low during the April-June period, with only eight deals completed, according to recent data. The total funding secured by startups during this quarter amounted to $5.2 million, marking a staggering 95% decline compared to the previous year and a 77.5% decrease compared to the previous quarter.

The figures, compiled by Data Darbar, a website that tracks investment flows in Pakistan’s tech ecosystem, highlight a concerning trend. In the second quarter of 2022, startup funding reached $104.1 million, followed by $23.1 million in the first quarter of 2023. The last time Pakistani startups received less than $5.2 million was in the first quarter of 2020 when they secured $5.025 million across 11 deals, according to Mutaher Khan, co-founder of Data Darbar.

Khan attributes the decline in startup funding to Pakistan’s struggling economy, which has faced the looming fear of default. He explains that in such an uncertain environment, investors are naturally less enthusiastic about making financial commitments. However, this issue is not limited to Pakistan alone. Startup funding has experienced a global decline, particularly in Asia. According to Data Darbar’s report, fundraising worldwide has been gloomy, with venture capital investments in Asia slipping below pre-COVID levels and struggling to recover. Crunchbase reported a 44% year-on-year decrease in global startup funding to $22 billion in May 2023.

The average deal size in Pakistan also witnessed a sharp decline, falling from $4.7 million the previous year to just $743,000 in the recent quarter. This represents the lowest average deal size since the first quarter of 2019.

During the April-June period, fintech dominated the startup landscape, accounting for half of the deals and $4 million of the disclosed funding. However, despite the prominence of fintech, the total startup funding for the first half of 2023 amounted to $28.3 million, a 60% decrease compared to the July-December period of the previous year, which saw $70 million in funding. This decline is even more substantial when compared to the first half of 2022 when $276.9 million was raised, representing a 90% drop.

The number of deals also experienced a significant decrease, with only 16 sales completed in the first half of 2023, compared to 26 in the July-December period and 46 in the January-June period of the previous year. These figures mark the lowest count of deals since the second half of 2020 and the lowest number of sales since the second half of 2019.

Despite the challenging circumstances, some experts remain cautiously optimistic about the future. Khurram Shehzad, CEO of Alpha Beta Core, believes that the second half of the year might see a slight improvement due to the positive news of a $3 billion funding package from the International Monetary Fund (IMF).

However, Shehzad acknowledges the liquidity issues venture capitalists face globally and emphasizes that startups with strong revenue and profitability prospects are more likely to attract funding. He anticipates that it will take over a year for the ecosystem to regain its previous funding levels.

Shehzad also acknowledges the need to address macroeconomic issues in Pakistan to create a favorable investment environment. He highlights the importance of resolving concerns such as political instability, lack of digitization, and the high cost of mobile phones, laptops, and internet access to attract investment, including startup funding, to the country.

Pakistani startups faced a significant decline in funding during the April-June quarter, reaching a three-year low. The global startup ecosystem, particularly in Asia, experienced similar challenges. Despite these obstacles, experts remain hopeful that with improvements in macroeconomic conditions and the resilience of Pakistani entrepreneurs, the startup ecosystem will gradually recover and regain its momentum in attracting funding and driving innovation.

In order to foster a more robust and supportive startup ecosystem in Pakistan, it is essential for the government and relevant stakeholders to take proactive measures. This could involve implementing policies promoting entrepreneurship, providing investors with financial incentives and tax breaks, and improving access to affordable technology and internet infrastructure.

Additionally, fostering collaboration between universities, research institutions, and startups can help nurture a culture of innovation and knowledge-sharing. By addressing these challenges and creating an enabling environment, Pakistan has the potential to unleash the full potential of its startup ecosystem and position itself as a regional hub for innovation and entrepreneurship.