Rabeel Warraich is the founder and CEO at Sarmayacar, which is an early-stage venture-capital fund focused on Pakistani startups. Rabeel is a young Pakistani professional with prestigious academics and work experience overseas. He obtained his B.S. in Economics from MIT before starting his career at Morgan Stanley’s Investment Banking Division in 2008. Rabeel then went on to work for GIC, Singapore’s sovereign wealth fund, as a Vice President between 2011 and 2017. In late 2016, Rabeel founded Sarmayacar, which he started running full-time in September 2017. He is currently board member at ProCheck and Patari. Rabeel is currently also heading Patari as an interim CEO.
BR Research recently sat down with the startup financier in Islamabad to discuss his VC fund, in particular, and the local startup funding scene, in general. Selected, edited excerpts are produced below.
BR Research: A high-flying private-equity professional abroad suddenly decides to become a startup financier in Pakistan. How do you explain this transition to fishing in a small pond?
Rabeel Warraich: I have always believed my competitive advantage to be in Pakistan. When the opportunity opened up to transplant the knowledge and experience gained over years of working in a global financial hub such as London, I did not want to miss out on it. For an investment professional such as myself - in the role that I had - moving back to Pakistan does not make purely financial sense, but when I accounted for the social impact that I could contribute towards, the decision to move back became much easier.
The thesis behind moving back was to leverage the education, experience and network developed over my professional career to bridge smart risk capital, best practices and domain expertise from more mature ecosystems into Pakistan. If I am successful in doing that, the finances will hopefully sort themselves out.
BRR: Now it has been almost two years that Sarmayacar began wetting its feet in this market. How has the fund evolved over this time?
RW: Sarmayacar’s structure has evolved since it started. Initially, together with some like-minded friends and family, I started by investing my own savings into the Pakistani start-up space. The idea at the time was to set up a deal-by-deal syndicate structure that enabled international investors to receive exposure to Pakistani startups. There were opportunities that were largely inaccessible to foreign investors previously, especially in the earliest stage startups.
Over most of 2016, I traveled to Pakistan from London on every single holiday to meet stakeholders – ranging from government officials and people running incubators, to entrepreneurs and investors. The learning was that a lot of the building blocks were in place – but what was missing was early-stage capital providers, and specifically, value-add capital or smart capital providers. Having been trained institutionally as investors, we realized it was an opportunity to plug this gap by bringing together like-minded folks. That didn’t require fund raising or specific government permissions.
Initially, Sarmayacar was structurally modeled as a syndicate, based and registered in the United Kingdom. It worked such that each of our investments in Pakistan would have its own holding company. For instance, for our Patari investment, we have a holding company called Sarmayacar Patari Limited, which is the minority owner in Patari. The same is the case for ProCheck and SimPaisa, the two other investments that we have made by using this deal-by-deal investment model.
All of those investments – which, by the way, are all minority interests, as we don’t believe in slicing the founders’ share too much – are then rolled into the main fund. So, that’s how we really started: five of us making investments up to $200,000 per startup in a quest to build a portfolio of 8-10 companies. This created a lot of interest not only among startups, but also among investors who wanted to invest in tech-based businesses but had to wait on the sidelines.
BRR: Is the deal-by-deal investment model still in place?
RW: This deal-by-deal model worked until the middle of last year. Around June last year, I made the call to move back to Pakistan and start a formal fund. Why did I do that? There was a realization that the way early-stage investments were being made in Pakistan, no one was taking an institutional approach to portfolio construction. For instance, even if an angel investor had invested in five, six different companies, limited or no work was being done to explore cross-selling possibilities or joint business development opportunities within the portfolio.
Venture capital is all about avoiding mistakes and therefore increasing the odds of success of every investment. But cross-startup learning was largely absent in Pakistan, along with real mentorship and guidance from investors. So, I decided to roll up my sleeves and do this as a full-time role. Over the last year and a few months, I have been championing the opportunity in Pakistan, finding investors who can bring their dollars into the startup space and partner with us on a formal fund.
The aim from the beginning has been to properly introduce venture capital in Pakistan and hopefully become the country’s Sequoia – or better! I believe we have the relevant network and the investment experience to be successful, and sometimes financial sacrifices are needed in the short-term to achieve something greater in the longer term. We believe we are well on our way to doing what we set out to achieve, and need to continue with focused hard work and a collaborative approach. The rest, as they say, is up to God’s will.
BRR: How successful have you been at selling that future to foreign investors?
RW: On one level, the perception-reality gap is bridged when you manage to get investors to visit Pakistan. We have brought in many investors, who have met the entrepreneurs, saw the landscape and in the end left Pakistan convinced of the opportunity. That opportunity is driven by demographics and consumption patterns that require localized solutions.
On a different level, the investors we do have are not so concerned about winners/losers or whether their investments would go to zero. They are concerned about our ethics, transparency, and accountability as a fund. There is no compromise on that. Our investors trust our judgment and conduct because we have our skin in the game. And we are more than investors – we take a board position in our investees and take responsibility going forward. We are building our portfolios and also guiding the startups that we invest in.
BRR: Explain your investment approach and the target market.
RW: One of the things we are interested in is the ‘scalability’ of the business model. We have been looking for opportunities for value-creation through asset-lite business models, instead of searching for a big, innovative breakthrough. We are interested in a large enough market requiring an enterprising solution for a material, large-scale problem.
The other element is international expansion. We, as investors, provide a bridge to overseas markets through our knowledge and experience. With those two elements in mind, we have made three investments so far. There is another one coming up shortly, which will be a million-dollar investment.
BRR: It appears that digital startups are more in the spotlight, with little to no focus around startups in the real economy where things actually get done and value created. Would you agree?
RW: It’s a correct impression, but before addressing that, there is one thing that I want to highlight– and it is somewhat related to what you are referring to – that the KPIs set up by a number of local incubators and accelerators for startups are not the right ones, and often the alignment towards the long-term success of a company is not always there. Those institutions are more interested in whether their startups are able to raise funding – rather than focus on value-creation. There is also a tendency of companies to do incubator-hopping, which defeats the whole purpose of incubation which is to get a company off the ground in the very early stages. I don’t think that the incentives at the incubators are aligned properly. A lot of the spending that goes in there is for show and tell.
If I take even a more macro view, the first IPO exit of the most-famous seed accelerator – Y Combinator – happened a few months ago when Dropbox went public. So, it’s not a foregone conclusion that the incubator model itself results in success. On the other hand, some of the startups trying to build companies targeting real challenges don’t even consider going through an incubator.
We are trying to create a new model in Pakistan. Our fund, Sarmayacar Ventures, will set up an in-house venture lab of sorts, called the Sarmayacar Studio. This house will provide arm’s length consulting for both existing portfolio in addition to testing and validating new thematic opportunities, with the aim of spinning those off as independent companies.
BRR: Budding entrepreneurs tell us that it is the financier’s market. They feel squeezed by investors. Is that impression correct?
RW: I think that the shark mentality is present in this market. There is scarcity of capital, so the bargaining power rests with the handful of investors that do invest in this space. While everyone is talking about entrepreneur education, I feel that we need to also educate investors. Just because an investor has a chance to squeeze someone does not position the company better for success. I would argue it worsens the odds. VC is all about increasing the odds for success. An investor is hurting his or her investment if the aim is to grab a larger stake in the startup to the extent that it ends up alienating the founder(s).
I admit that in private equity, ‘control’ is a big element. But we view control very differently. We have, in every investment, a board-seat requirement as well as clauses that require directors’ consent in major financing decisions. That is short of a veto, but keeps a check on decisions such as attracting new funding, selling equity, etc. We rarely get to have a say in operating decisions. The point is: we can have a certain degree of control without owning, say, 70 percent of a company.
People who are acting like sharks will not find the right opportunities. In a way, an entry of something like Sarmayacar into this market has been long overdue. We have heard that we are ‘spoiling’ the market. But that is fine.
BRR: For startups, what in your view are the critical success factors while operating in this market?
RW: Number one is the resilience of the founding team to get through short-term challenges such as obtaining financing. Pakistan’s startup ecosystem is at a nascent stage where not everything is fully defined. Second is to be constantly testing and learning. Entrepreneurs shouldn’t find excuse for why things didn’t work out in their startup. That mindset looks for a confirmation bias in decision-making. And third, build relationships with a long-term view. That’s where the role of ethics becomes significant.
BRR: Corporates in the formal sector alone cannot create the one-million-plus jobs required every year for the graduating youth. How seriously should the new government look at the startup scene?
RW: In this space, Pakistan needs experienced capital investors that bring knowledge of a particular space and experience of company building. That will take care of funding as well as knowledge requirements. In that context, the number-one thing for the new government to do is to make it easier to bring risk capital into the country. There is a need to facilitate investors to travel to Pakistan, through measures as simple as streamlining visa approvals and marketing Pakistan’s potential overseas.
BRR: You don’t seem to be in favour of direct government interventions in the startup space.
RW: This is an important point. I believe the government has a key role to play in moving the entrepreneurial ecosystem forward, but any intervention needs to be carefully considered so it doesn’t give rise to adverse behaviours or side-effects.
For example, building a network of incubators such as the NICs is universally considered to be a positive initiative by industry participants; however, direct capital injection into startups is not only cheap (and free, in some cases) but also seldom accounted for. This makes such an intervention controversial because it starts competing with the capital provided by a fund like ours – since our proposition includes value-add in addition to just capital.
As an aside, the government absolutely needs to spend on infrastructure relating to areas such as broadband connectivity to bring the quality and speeds up to par, which not only benefit the startup ecosystem but the country at large.
The role that people like me are playing – and I don’t mean to toot my own horn – is that we are bringing Pakistani opportunities to international, institutional investors.
Their knowledge and capital are going to be among the key determinants of how successful the local startup ecosystem will become. I would, therefore, suggest the government to work with people like us and leverage our networks to figure out how to bring this capital home. I think it is futile to keep relying on the same-old bureaucracy that has been unable to bring in significant FDI into the country.