It takes a lot to get a startup off the ground, but certain factors help

KARACHI: The money investors – both local and international - have poured into Pakistan’s startups has broken records.

Despite the sector being on shaky ground at the moment, experts believe flow is likely to continue to pour in.

Dubai-based entrepreneur Zohare Haider recently told Business Recorder this is because venture capitalists understand the only way a country can have a thriving startup ecosystem is if there continues to be a large injection of capital that will enable more people to pursue their ideas, with the knowledge that not all of them will survive.

Aman Nasir, partner at Venture Capital (VC) firm Sarmayacar, is also positive, although he does think “things got a little bit carried away over the last one or two years” due to which VCs now will be a bit wary of who they fund.

“Ideas that were perhaps not so credible that in the heights of last year got funded … that won’t happen anymore” he told Business Recorder in a recent interview in Lahore.

“There’s a lot more diligence being done, a lot more realism returning to the market, which may not be a bad thing.”

He believes that with a huge youth population and smartphone penetration, all sectors will move to digital first, which means there is plenty of potential for startups especially in spaces like fintech, health tech and B2B ecommerce.

His advice to VCs - “If you take a disciplined investing approach, there are enough credible businesses to be backed”.

But what is his advice to startups?

Step one is solving a “pressing recurring customer need”, not just offering something that would be “nice to have”.

“So it’s the size of the problem and then also what is the startup building to be able to address that custom problem?”.

The second step is putting together a team that is complimentary to each other, understands the problems, and shares the same vision.

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It is also essential that together they are able get the tech right.

Included in this step is deciding where to set up one’s headquarters. Some experts believe being in a city like Dubai can help because of its infrastructure, visa policies and tax structure as well as access to VCs. There are some 295 VC funds in Dubai, including Global Ventures, Iris Capital, Wesley Clover and The Food Fund.

Being in the emirate also gives one access to other markets like Saudi Arabia.

“If startups would like to enter regional markets … they can take their model and expand into Dubai or other Middle Eastern countries as this opens up a larger market for them,” said Nasir.

Step three is getting money.

For this, it is important for companies to know what exactly their capital requirements are and - especially if they are to look for outside support - they must have their financial projections in order.

Options to raise money include self-funding (also known as bootstrapping), asking friends and family for help as well as applying for grants or getting into a business incubator programme.

The other way is to get money from angel investors and venture capitalists.

Fund-raising from VCs and angels

For this, startups must nail their pitch.

“It’s important to come across well in a pitch. I always say if you can’t pitch to an investor, then how would you pitch to a customer?

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“Everyone loves to show a hockey stick” (a graph showing a sharp increase),” says Nasir, “but it’s important to have realistic expectations.

“It’s also important to look at what/who the target market is and whether the product is viable across several verticals or if is there one thing you want to be focused on, that you’re good at.

“And especially in this climate, rather than boil the ocean, you should be focused on your core proposition.”

As for investors, Nasir said in Pakistan it’s good to see a lot of angel level syndicates and angel investors are also starting to invest rather than just the VC funds.

“So there are pockets of capital to get you going.”

Sarmayacar, which started off with a fund size of $25 million in 2018, and has since put money into 14 companies, “typically comes in at a slightly later stage given how we’re set up".

“We would like to do the diligence and see a bit more traction … but there are VCs who are day-zero investors or angel syndicates who will back startups at a much earlier stage.”

When VCs step in they will check to see if there are gaps within the team, and whether they are from a technology, operations or finance side.

They will look at the team’s experience and backgrounds, and what motivates them. They will also look at the integrity of the founders and do due diligence on them.

Once the VC decides to fund a startup, they may choose to give the money in one go or divide it into tranches, which would become available depending on the company achieving certain operational or financial key performance indicators. VCs will also monitor where the money is being spent.

It’s also important for them to see how customers are perceiving the product and how its technology has been developed or the roadmap on how product-tech is going to be built in the future.

“I think that clarity of thinking is essential,” concludes Nasir.

The earlier version of the story, originally published August 26, 2022, said Sarmayacar made its first investment of $25 million in 2018. The error is regretted, and has been rectified.

Copyright Business Recorder, 2022