The Pakistani startup ecosystem is picking up steam but at the same time it is facing basic challenges of outmoded regulations and lack of support by the government. The Truth International (TTI) Magazine asked few questions to Amina Baig who is an aspiring data scientist and working with the Invest2Innovate, a business incubation centre providing business support services to startups in the ecosystem since 2012.
The following are the few excerpts from the conversation.
TTI: What is a startup in Pakistan?
AB: We do not have a consensus on the definition of startup even globally. In Pakistan too, there are different definitions of startups used by different agencies. FBR has its own definition and SBP uses a different definition.
If you look at the traditional businessman of Pakistan who has spent lot of time in family business, I think the concept of startup is often misunderstood. There is a gap in understanding of startup and a traditional business – which can be an SME.
People in traditional business do not understand this difference. A lot of time they do not even have the capacity to blitzscale, which is often enabled by technology, and these are some key components of what we call a startup in Pakistan.
TTI: How has the startup industry grown over the years in Pakistan?
AB: Fintech, e-commerce, healthtech, and edutech have been mushrooming over the past few years but specifically since 2020 we have seen a huge jump. Some 41 deals have already been done this year, a huge improvement over the last year. Deal sizes are also bigger than past. We have a USD 85-millions deal which was done by Airlift and it was announced a couple of days ago.
Then there was another round by Bazzar which was USD 30 million. The regulator such as NADRA, SBP, PTA, SECP have been much more sensitive towards the needs of the startup sector in Pakistan and they have started designing policy reforms which are very responsive to the needs of the key stakeholders in the ecosystem of Pakistan.
They are coming up with RAAST which is a micro payment gateway. Entrepreneur support organizations have seen a lot of growth. A lot of international investors have also entered the market, which clearly means they see Pakistan as a lucrative market.
TTI: What are some of the major regulatory challenges facing startups?
AB: Every sector has different challenges. For example, fintech regulatory challenges are different from e-commerce. There is a lot of overlap between fintech and ecommerce. Fintech is integral to every other sector, because a startup actually does not have any other option to process payments.
Overarching regulatory challenges are taxation. Startups think that they do not have clarity on regulatory elements they need to comply that is unfriendliness of entire regulatory ecosystem. We do not have a one-window solution in Pakistan. What we call a one-window solution is not a one-window solution at all. We are long way from getting there in terms of regulation.
Investors have complained that the documentation is not at par, and using stamp papers and other outdated instruments. Digital solutions are not available for such things in Pakistan. Moving money in and out from Pakistan is also a huge challenge for investors. Although lot of work has been done to improve the regulatory framework, a lot more needs to be done.
TTI: Which startup sectors are receiving most investments?
AB: Ecommerce is leading – it claimed
61 percent of all investments, while fintech raised 14 percent. USD 85 million raised by Airlift Company is actually an ecommerce investment. This has been the biggest round of funding to take place in the Pakistani ecosystem. Deal sizes are rising and we see even bigger rounds of funding coming in the next few years.
All of the startups are looking for investments. A lot of fintech and ecommerce are looking for investments. One problem is that a lot of time, startups do not understand what kind of investment they need to raise, how much they need, and how they will be using it. This is a stumbling block in the way of a more vibrant ecosystem but this problem is inherent to all nascent ecosystems.
TTI: To what extent does the Pakistani financial system support startups?
AB: The financial landscape are improving. International investors are coming into Pakistani market and lot of them are actually looking at Pakistan as well. One major issue for international investors is lack of data and information about Pakistani startups. For someone not on the ground, it can be very tough to understand the workings of the market. I2I is here to help bridge that data gap.
TTI: Why are Pakistani investors not keen on startups?
AB: We need local investments as well. Local money going into startups can actually encourage international money coming as well. Local investors have been coinvesting with international investors which is a great sign. Typically we have seen that international investors are investing more than local investors in startups. Bigger round of B2C and C2C are from international investors.
TTI: Does the government has any startups scheme and action plan?
AB: Government has an action plan for startups previously it has R&D fund which is now called Ignite. Ignite is also funding international incubation centres
in five cities of Pakistan. They are also working on its expansion plan to 15 other cities. National Incubation centres are also providing business support to startups. They also hold an investors summit.
A government-funded initiative, the Offices of Research, Innovation and Commercialization (ORICs) carry out research innovation and commercialisation. Business incubation centres have also been established in Pakistan. Both of these need to support budding entrepreneurs.
TTI: What are your suggestions to promote startups in Pakistan?
AB: I think government needs to take a step study what kind of startups they need to encourage. We have heard from our surveys that startups are not satisfied with the services being provided. Governance issues such as staff is not available in these business incubation centres, and attitude towards startups is not very friendly.
Teachers and trainers in universities and centres have actually been advising students against considering entrepreneurship as a career path. The government is putting so much money in BICs but if they are not even interested in idea of entrepreneurship, what good is all of that money.
There are problems in terms of scoping and type of interventions that are being designed. A lot of things need to be done at regulatory level making investment easier for international investors, moving money in and out of Pakistan. Sectors wise regulations need to be improved. Above all, human capital needs to be improved and academia needs to be in touch with the industry. Fintech regulations need to be improved. There is a need to relax minimum paid capital requirements for startups compared to other financial institutions.