Entrepreneurship ecosystem in transition

Entrepreneurship has become a hot topic in Pakistan; and the digital startup progress particularly in the last 6-7 years has been visible and vibrant. From rising middle income group to rising 3G/4G subscriber base to growing digitization and e-commerce, the potential is well acknowledged. The landscape has transitioned with the emergence and growth in not only the startups, but also the supporting players, events, activities, and funders.

While the absence of any official data on entrepreneurship and startups has hampered the analysis of the sector’s progress, key findings have been brought to fore recently by various support international and local players.

Invest2innovate’s startup ecosystem report highlights the progress of digital startup and entrepreneurship space that shows rising numbers of all kinds of players: “In 2012, there were just two major business incubators and accelerators in the country, with almost no investors and funding sources… In 2019, there are now over 24 incubators and accelerators, 80 co-working spaces, and approximately 20 formal investors who are players in Pakistan”.

Efforts by the government such as building national and provincial incubators have played a key role in developing the landscape in the last 3-4 years. Whereas, recently it has introduced a three-year tax relief and has created regulations to allow local venture capital (VC) firms and investors to operate in the country.  The private sector has also shown significant interest in the sector as evidenced by the rising incubators/accelerators, foreign funded as well as local VCs etc.

The i2i report also shows the progress made on the funding side. It highlights the overall increase in the number of deals and investment funds since 2015 as well as the growing local venture capital landscape.

However, the growth story of the country’s startup ecosystem is bumpy and is not without the impediments. The startup ecosystem remains nascent, and has its gaps and challenges that need to be addressed.  The country lags behind its peers, which can be seen from its relative position on Global Competitiveness, Global Entrepreneurship Index, Ease of Doing Business Rankings etc.

A key challenge for Pakistan’s startups is funding. According to McKinsey & Company’s report on Pakistan’s startup ecosystem, Pakistan also lags far behind in funding in comparison to its peers. As per the study, the country received around 6 cents per capita of VC funding between 2016-18; whereas Nigeria’s VC funding during the same period was thrice what Pakistan received. Whereas invest2innovate in its report finds that startups in the country are still mainly raising pre-seed and seed investment, with lower funding for later stages of the businesses.

Then there are challenges on the technical and non-technical, non-financial side. While the supporting entities have been aiding startups in areas such as skill development, mentorship, regulatory compliance, company restructuring etc., there is need for customized and tailored advice - support and training that is bespoke to the industry and phase business is in.

Similarly, there is a need for support entities to help businesses and startups find real markets, improve networking and develop business plans and scalable models – areas that are still missing but crucial for the survival and sustainability of the businesses and also eventually necessary to attain further funding.

This is also shown in the finding of the study by i2i, which says that there is room for more quality angel investors at the pre-seed and seed-level in order to address increasing demand from startups and for there to be a smooth capital curve.

On the policy side, startups face the challenges of business registration – whether the awareness about its usefulness or the process itself, cumbersome taxation regime, capital requirements for outside investors, and regulatory hurdles in IT sector payments from abroad. Multiply all these challenges when it comes to startups by women, where social and cultural barriers still play a huge role. Addressing some of these issues can unleash growth for the startup space.