Startups in misery?

Pakistan’s startup landscape largely led by tech startups in terms of both funding and growth has made significant strides over the last 4-5 years. Increased venture capital interestsince2020-21 has brought noticeable funding to early-stage startups. But has the boom turned into bust lately? It seems that the increased VC interest in the tech startup space was short-lived; the funding and deal activity has taken a nose-dive in 2023-24.

Invest2innovate in its End of Year Report 2023 finds that 2023 was a slower year than 2022 in terms of investment activity primarily due to uncertain macroeconomic environment and political unrest. The startups in Pakistan raised $74 million in 2023 versus $350 million plus raised in 2022 according to i2i report. This decline was accompanied by global geopolitical impediments that affected the overall investment by VCs worldwide. Data Darbar’s report, Tech and VC Landscape Pakistan 2023 suggests that the correction in funding activity was witnessed across the world when the total funding dropped to the lowest since 2019 - by around 35 percent year-on-year in 2023. Data Darbar research also shows that $76 million worth of total funding was raised by the startups in 2023 – down by 77 percent and number of deals falling from 67 in 2022 to 39 in 2023.

The heat from the contracting funding by the VC can now also be felt in 2024. The first quarter of 2023 (Jan-Mar) attracted zero funding from investors in the tech startup space. According to Techshaw, a blog that covers startup funding and startup ecosystem trends in Pakistan backed by data and research has revealed that the Pakistani startups raised $0 in 1Q of 2024, which is a steep fall from the last quarter of 2023 where most of the recovery for 2023 was witnessed.

After a dull and dreary quarter, what could 2024 look like for the startup space? Where many big names announced a shutdown in 2023 and 2024 so far, hopes are pinned to PSF and what it will achieve for the ecosystem. The government’s recently announced Pakistan Startup Fund (PSF) is particularly targeted to offset this challenging fundraising environment. Introduced to bolster venture capital investment in the startup ecosystem, the government has set aside Rs2 billion for the PSF annually. The fund is designed to aid startups in raising their first external investment where it will contribute 30 percent of the financing required, with 70 percent being brought in by the VCs.

This and then the recent developments around IMF package could help address the financing challenges of the startup ecosystem. However, space has other challenges too, especially in the sustainability, profitability and regulatory realm that need to be addressed to build an encouraging and resilient ecosystem.