Boom to bust: Pakistan’s startup story


PUBLISHED
January 15, 2023


KARACHI:

Starting a business is much more complicated than people think it is. Many young, fresh graduates or mid-career level professionals who opt for creating their small-scale companies and are called entrepreneurs. They see a demand or a problem to be solved in the market and develop their business model around it. Sometimes, they copy other successful business models or create new ideas. The initial cost of these companies is relatively high, and resources are minimal. The ones who get enough funding from ventures and make up a good team with solid business models survive, whereas the rest fail midway. The failures have a more significant chunk, which is 90 per cent.

Entrepreneurship is a great way to build your future, but it requires specific planning, resources, facilities, and a belief to keep going. But Pakistan may need more of these areas, which is why 90 per cent of the startups fail. According to a figure, around 300 startups are launched every year, but only 10 per cent of them sustain. In Pakistan, the startup market grew before COVID struck, but then the investments dried up. This resulted in a closure of a startup en route to becoming a unicorn in the country.

Now, as 2023 has started and the world, especially Pakistan, is going through financial difficulties, what does our country hold for the future of startups? To know about the reasons for the failures and the future of startups, The Express Tribune talked experts from one of the leading incubators of Pakistan – the National Incubation Centre – and a startup that was launched at the time four big competitors were in the market – Krave Mart.

The period of 2018-2019 is known to be the best for startups in Pakistan. The success ratio was high, and many good ideas came up. The startup industry was growing in all areas. Ideas were coming up, the number of ventures and angels were increasing, and incubators were helping small-scale startups sustain. All of this went awry when COVID struck the world. There was a global recession due to the pandemic; dozens of startups and other companies hit rock bottom.

But was COVID the only reason for the downfall of the startup market in Pakistan? Is this the only reason that Pakistani startups were or are still failing? Well, no. This is just one of many, and there are multiple issues that explain why startups make mistakes and end up failing.

Lack of knowledge

Many of the well-written proposals with brilliant ideas never proceed to a higher stage and fail in the beginning. This is because they people behind them need to educate themselves on all areas and aspects of running a startup. Many entrepreneurs in Pakistan need more knowledge and skills to start and run a successful business. They may need to understand market research, business planning, financial management and other critical business tools and processes. This can make it difficult for them to make informed decisions and navigate the complex startup process.

Haziq Ahmed, the Co-Founder and Chief Operating Officer of Qcommerce startup Krave Mart, explained that the startups in Pakistan don’t do much research on the market they are entering. “You must do thorough research before putting the first brick of your startup. Having no knowledge of the area you are about to step into and then relying on a small size of research can end up in failure. Especially in Pakistan, where the market is full of challenges for newcomers, you need to talk to every person that is related to your startup or who you will be dealing with in the future so that you know what is about to come and prepare yourself accordingly. If you cannot see the future of the steps you are taking, then failure waits ahead,” he said.

“Additionally, many entrepreneurs in Pakistan may need a solid understanding of the industry they are entering, making it difficult to identify opportunities and develop effective strategies. This can lead to a lack of focus and direction, resulting in the startup’s failure.”

Giving an example of Swvl and other international startups that entered the Pakistani market with a lack of research, Haziq said that the lack of understanding of the legal and regulatory environment could also pose a significant challenge for startups in Pakistan. “Entrepreneurs may not be aware of the laws and regulations that apply to their business, which can lead to costly mistakes and penalties. Additionally, the players and mafia in the market won’t let you easily operate. So you have to be prepared. This was one of the reasons why Swvl had to shut down its operation in Pakistan,” he added.

Project Director at National Incubation Center Parvez Abbasi explained the mistake that fresh startups make: “The failure ratio of startups in Pakistan compared to international startups is relatively high. It simply comes down to the nature of startups here that makes them drop below. About 90 per cent of all startups in the country tend to fail or not make it past a definite stage. Usually, it is because of the lack of technical and marketing knowledge, which explains the amount of failure present. In addition to individual blunders, most startups fail to generate the required capital to sustain themselves, thus not making it very far,” said Abbasi.

Innovation vs experience

Another critical factor contributing to the failure of startups in Pakistan is the need for more innovation and market differentiation. Many startups in Pakistan tend to copy existing business models and ideas from other countries rather than developing unique and innovative products or services that can stand out in the market. This makes it difficult for them to compete with established players and attract customers.

One of the main reasons for the lack of innovation in Pakistan is the need for more research and development (R&D) activities. Many startups in Pakistan need more resources and facilities to conduct R&D activities, which can be critical for developing new products and services and staying ahead of the competition.

Additionally, the lack of education and training in innovation and entrepreneurship contributes to Pakistan’s need for more innovation. Many entrepreneurs in Pakistan need more knowledge and skills to develop and implement innovative business models and ideas.

Haziq, who entered the market when there were already four players, said that although they had a similar business model to the other four players who were already established in the market, Haziq knew where he had the edge over others due to having an experience in logistics, and so kept focus on that.

“Many Qcommerce startups focus on gaining more and more orders, which their warehouses cannot accommodate. The claim is that delivering the order in 10 minutes is not easy, and you have to focus on the more active areas. The others focused on making more than 2,000 orders per day from each store without considering the limitation of the store. We kept in mind the limitation and focused on delivering 200 to 250 orders. Not just this we kept on relocating our store according to the need. The size and the location matter a lot,” he said.

Many startups that rely on the margins that the companies have for them and the delivery fees face challenges in sustaining. These margins are tiny at the beginning and swell as the company grows and sells good volumes to convince manufacturers to give them better margins. According to a source in the FMCG industry, the margins from Unilever for retail stores can go as high as 15 to 18 per cent, but more than that is not possible.

“We not only focused on the margins, but now, as we are growing, we are focusing on Krave Mart-labelled products that will have a higher margin, and we will be able to sustain financially. The discounts we offer are aimed at cultivating strong returning customers, as they will come and buy a discounted item and more products with that,” he said.

He further added that the quality of service also matters. At Krave Mart, all the items are checked when delivered to the warehouse and again before going out for delivery to the customer. Even then, if there is some issue, they offer refunds and replacements considering the history of the customer.

Abbasi said that every startup has real people at the helm and every individual belonging to the startup is different. “The gross impact on the outlook of businesses could vary. Similar ideas can still produce different outcomes. However, it can become repetitive, meaning there’s no disruption in innovation. Sadly, collaboration is looked down upon here, and you’re always someone else’s competitor rather than a companion. Thankfully, organisations such as the NIC are there for small startups, and they cater to the ones who are lagging,” he added.

To overcome this challenge, it is essential to increase access to education and training programmes for entrepreneurs, provide resources and support for startups to help them conduct R&D activities, and create a more conducive cultural mindset that encourages innovation and entrepreneurship.

Dearth of resources and facilities

Another major issue contributing to the failure of startups in Pakistan is the need for proper infrastructure. Many areas of Pakistan need more basic facilities such as reliable electricity, fast Internet connectivity and suitable office spaces, which are essential for the smooth functioning of any business. This makes it difficult for startups to operate and compete with companies in more developed regions.

Abbasi, while explaining the available resources, said that the overall aptitude of the Pakistani public is a big hurdle for startups. “The general acceptability is minimal as few are willing to support businesses from the ground up. Secondly, in terms of finance, there are no established options available for startups. The government makes it hard for traditional, let alone startups, to operate conveniently,” he said.

He added that many brilliant, unique and worthy ideas form from multiple startups, but unfortunately, these big-time ideas can’t work on that sort of revolutionary scale in Pakistan due to a lack of resources. Different from startups, traditional businesses face various obstacles.

Another area for improvement is the need for more access to experienced mentors and advisors who can provide guidance and support. Lack of them can make it difficult for startups to overcome obstacles and make critical business decisions.

The need for incubation and acceleration programmes is also a reason. While incubation centres and accelerators exist in Pakistan, they are few and far between, and most of them are based in major cities like Karachi and Lahore, leaving the rest of the country with little to no support.

Incubation and acceleration programmes are critical for providing startups with the resources and support they need to grow and succeed. These programmes give startups access to funding, mentorship, education, and networking opportunities, which are essential for a successful business.

NIC is one of the largest government-owned incubators. Abbasi shared that the NIC enables startups and creates an environment through networking, coaching, and mentorship to help develop a sense of awareness and acceptability for innovation in the startup landscape of Pakistan. To date, the NIC has helped enable more than 700 founders to fulfill their dreams and, in hindsight, contribute to the flourishing startup ecosystem in Pakistan.

Haziq, however, has a different opinion. For him, most incubators and accelerators are focused on the freelance market. “They are increasing the IT export of the country, which is also a good thing to do. But the type of startups we are talking about are the ones that turn into companies, and for them, there is a lack of opportunities,” he said.

“One of the main reasons for the lack of incubation and acceleration programmes in Pakistan is the lack of government support and funding. Many government-funded incubation and acceleration programmes are limited in scope and reach. The lack of private sector investment in incubation and acceleration programmes also contributes to the problem. Many private sector organisations are hesitant to invest in incubation and acceleration programmes due to the perceived high risk and lack of return on investment,” said Haziq, whose startup has recently joined the Y Combinator at Silicon Valley and has gained support in upscaling the business.

The need for more awareness and understanding of the value of incubation and acceleration programmes among entrepreneurs in Pakistan also contributes to the problem. Many entrepreneurs need to be aware of these programmes’ benefits and learn how to access them.

Limited venture capitalism

Pakistan has a limited venture capital ecosystem, which makes it difficult for startups to secure funding. This can make it difficult for startups to scale their operations and grow their businesses. Some startups were able to obtain the highest seed fund in the history of Pakistan but due to the investors’ lack of confidence and unclear vision of the startup, ultimately walked the path to failure.

Many investors view Pakistan as a high-risk investment destination and hesitate to invest in startups. Additionally, many startups in Pakistan need more financial and business management skills to help attract investors and secure funding.

For example, Airlift. It started its operations as a ride-hailing service with a vast gap in the Pakistani market but faced financial challenges due to COVID. They then shifted their business model from ride-hailing to Q-commerce. During this period, they secured $85 billion in funding, which was the highest in the history of Pakistani startups. After gaining further success, the announcement was made that the startup had managed to raise another successful round of $350 million. This took the startup to a $1 billion valuation. But in reality, these were all tall claims made to the investors, and the startup could not generate enough revenue to work without the funding, and eventually, they had to shut their operations.

Abbasi said that the venture market in Pakistan is tranquil. “There aren’t too many players, nor have the game’s rules been set yet. The funding business is not very large when referring to startups. Unfortunately, the market size of venture capital is not very big; investors don’t find plausible interest in the opportunity to fund startups,” said Abbasi.

He added that Airlift hit the ground hard despite being one of Pakistan’s most promising startups. “They raised $85 million in funding only to blow it all. The company came out with a statement saying the shutdown was due to the global recession and recent downturns in the market. On the other hand, venture capitalists and indecent cash flow could also have been the problem,” he explained.

The lack of proper exit strategies also contributes to the failure of startups in Pakistan. Many entrepreneurs focus on the initial stages of starting a business but need to plan for the future, which makes it difficult for them to exit the market and move on to new projects.

Skilled workforce shortage

The need for a more skilled workforce is one of the major hindrances to the growth of startups in Pakistan. Many startups need help finding and retaining talented employees, making it challenging to build and scale a business.

Abbasi explains that a team that needs more diversity is headed toward difficulty. “One dimensional teams, like a group of engineers running a business, will lack marketing expertise. Likewise, the same would happen the other way around. Variety is critical in the management setup because, after a particular scale, it might not be possible for the founders to run their businesses alone. They will need to call upon seasoned professionals from different fields. Of course, institutions like the NIC can handhold startups and help them with aspects of HR, marketing, and even training their interns to retain them,” he said.

Meanwhile, Haziq believes that a professional can be hired. When Krave Mart was to launch, they already had players in the market they had to compete with. “We didn’t have time to test or train people, and we needed to be experienced professionals. The founders came from different experiences but to do the job, we had to have the experienced professional we hired. It is because of the team that we are progressing toward our goal.

Regulatory barriers

Startups in Pakistan face several regulatory obstacles, such as bureaucratic red tape and a need for clear regulations around business operations. These barriers can make it difficult for startups to navigate the legal and regulatory landscape.

Moreover, the lack of a proper legal framework and intellectual property rights also poses a significant problem for startups in Pakistan. The current laws are not adequate enough to protect the rights of entrepreneurs and their innovations, which can lead to exploitation and discourage innovation.

For Haziq, the ease of doing business in Pakistan is more than in other countries. He explains by giving an example of a company planning to launch in Pakistan. “The number of legal documents and approvals required in Pakistan is far less than in other counties. So it is easy to operate in Pakistan as far as the regulations are concerned. But yes, there are many more barriers created by the competitors and mafia which need to be controlled to give a safe and secure environment for the startups to operate,” he said.

Future for startups

The future for startups in Pakistan looks promising, as the country has a large and growing population of young, educated people who are increasingly turning to entrepreneurship as a career path. Additionally, the government is taking steps to support the startup ecosystem by establishing technology parks and incubators and providing funding and other resources to help startups get off the ground.

However, challenges still need to be addressed, such as limited access to funding, a need for experienced mentors, and a need for improved infrastructure and regulations. Despite these challenges, the future for startups in Pakistan is expected to be positive as long as the government supports the ecosystem and entrepreneurs take advantage of the opportunities available to them.

Abbasi also believes that startups are on the rise globally, and startups’ stability is rising again. “Due to Pakistan being a new space for startups, the recent uprising and success are evident because of all the opportunities in this brand-new area. As a result of being in an underdeveloped ecosystem, opportunities are not scarce. There are many challenges in a country where government and private businesses need to align like Pakistan. However, along with these challenges, multiple opportunities arise for business owners to bridge.”

“For these unique ideas to flourish, the general public must participate at a larger scale. For example, a startup company working on organic plastic faces challenges due to the import of required raw materials, the lack of equipment in the country, and the low amount of facilities, which results in the company only working in labs rather than making it commercial.”

In conclusion, the startup ecosystem in Pakistan faces several challenges that can lead to failure. To overcome these challenges and increase the chances of success for startups in Pakistan, developing a more supportive ecosystem that includes access to funding, mentorship, and a skilled workforce is essential. Additionally, the government must work to address regulatory barriers, create a more conducive environment for business growth, and increase the number of incubation and acceleration programmes.



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