Pakistani Startups Will Have A Hard Time Raising Funds In 2023

Pakistan does not have the best startup culture and the investors do not share the enthusiasm for investing in new startups led by young people. Pakistani startups will have to make more effort to raise funds in 2023 in view of slow global investment, higher interest rates, and economic uncertainty in the country. Pakistani startups’ funding declined in the third quarter (July-Sept) of CY2022, as just $65.5 million funds could be raised compared with $177m in the corresponding period of 2021.

Syed Azfar Hussain, Project Director National Incubation Centre (NIC), Hyderabad, said

“The slowdown in funding [in Pakistani startups] was caused by the global scenario as well as the unfavorable local conditions. It is evident that startups raised decent funds during the first half of the year.”

According to Data Darbar despite the global economy slowing down, and the challenges brought on by the high costs of doing business, Pakistan has remained an attractive market for investors in innovative business models – with overall startup funding hitting $350 million by November 2022.

TechShaw, a research site, said data showed that investment received by Pakistani startups stands slightly higher at $5 million or 1.4% – reaching $345 million by November 2022, as compared to startup funding of $340 million received in a similar period last year. However, data from different sources varies due to the fact that there is no centralized government system tracking the deals.

Although Pakistani startups attracted a significant amount of investment in the 11 months of 2022, the investments took a downtrend with the passing of every quarter due to uncertain macroeconomic conditions and increasing political turmoil in the country.

The start-up industry, just like all other industries has been immensely affected by increasing gasoline prices, the economic downturn, local unpredictability, limited foreign direct investment, and the challenge of finding sponsors, prompting businesses to scale back operations, fire employees, and roll back services.

“The latest financial upheaval has compelled SWVL to stop operating its intercity transportation services in Pakistan’s metropolitan areas. SWVL confirmed in a confirmation that it is ending intercity service in Multan, Faisalabad, Islamabad, Lahore, and Karachi.”

Pakistani startups have been working to adapt to a changing economic environment by scaling back some of their offerings and cutting headcount as these businesses look to look more cohesive and resilient to draw additional investment.

Following Swvl and VavaCars, the bus company Airlift, which later shifted its focus to last-mile deliveries, has confirmed the permanent shutdown of its services in Pakistan, upsetting the already shaky startup sector of the nation.

Several start-ups were unable to raise funding or find a feasible revenue model. Some faced the hard impact of lockdowns and the resultant change in consumer behaviors. Others, meanwhile, allegedly mismanaged their funds or faced problems unrelated to the pandemic which led to their failure.

Another reason for the failure of startups in Pakistan is that the majority of Pakistani start-up fundraising is concentrated within B2B or B2C e-commerce, fintech, and logistics. This is a trend that can be observed in a lot of emerging markets as the ecosystem starts to grow. With increased digital adoption and a growing consumer class, these verticals have demonstrated a high growth rate, often in correlation with each other.

Investors also feel more comfortable in taking exposure to tried and tested models in comparable countries. This is because they understand the business model better after seeing it successfully work in other markets. Syed Azfar Hussain also said:

“Pakistan is an attractive economy for foreign, and local, investors who have continued to explore its potential through funding in startups in multiple sectors. However, the expected inflows of funds from various Venture Capitalists (VCs) remained slow in the second half of 2022 due to the economy slowing down globally and the clamor witnessed in the domestic political circle – which is likely to continue in the next year too.”

“Startup founders should work consistently on innovation, maintaining the quality of their service by adopting technology and good business practices to remain viable and sustainable in the local market,” he added.