The fact that the drive of individuals with brilliant business plans can convince them to plunge headfirst into projects with slightly less than everything at stake is a testament to either the boldness of our local businessmen or the opportunity that this land holds.
Unfortunately, within these turbulent economic waters, the entrepreneur might become an endangered member of our society.
Kamil Aziz Khan, Managing Director of Espresso, a rapidly growing and immensely popular chain of coffee houses, bemoans the economic turmoil and social unrest that has gripped the country recently.
“Inflation,” he says, “is the biggest challenge right now.” With electricity tariffs soaring and prices of ingredients rising, Khan says profit margins have been squeezed to almost nothing. An increase in import duties has not helped input costs either and points out several product lines that the coffee house has had to shut down over the past few years.
Espresso, however, has fared much better than its counterparts which sprang up across the country less than a decade ago. Khan manages to list more than five which have either recently shut down or condensed operations.
He cites the franchise business model as the reason for failure. “Franchises normally have very little room to manoeuvre due to the restrictions imposed on them. The repatriation of royalties is a painfully redundant process.”
Social unrest and days of anarchy do little to improve profitability. “Of the 30 days in a month, we make a profit from only the last few days since the major chunk of the month goes towards recouping employees’ salaries and electricity and food costs,” says Khan. “If there are strikes or gun battles for two days in a month, our bottom line is reduced to nothing.”
Abdul Samad, Managing Partner at SynerTech Pakistan, a firm dealing with industrial fine chemicals, analytical solvents, research chemicals and reagents, says that another problem with launching a start-up is the lack of reliable information and market statistics.
Samad adds that the extortion mafia has become more active recently and the cost of business has increased manifold. He asserts that it is not only political parties but also government agencies that have resorted to fleecing entrepreneurs. “The lack of proper regulations and enforcement also hampers businesses.”
He concurs with Khan that remaining ethical and within the legal framework does squeeze margins. However, he says that it is possible to make a decent living staying within personal moral boundaries and adds that it is only when businessmen start getting greedy do they cross boundaries to earn the extra buck.
What about capital?
The lack of capital sources is cited by Samad as another major problem. Apart from relatives, friends, parents and conventional banks, there are few forums for the entrepreneur to raise capital for a venture.
High interest rates have managed to dry up capital pools in the country for business owners who do not have the backing of a conglomerate’s assets.
Although sources of capital for entrepreneurs appear few and far between, there seems to be no shortage of money circulating in the economy. Except for the stock market, the concept of leverage seems lost on financiers as well. The problem in the economy right now seems to be one of willingness and not ability. Successful enterprises backed by international venture capital firms are not alien concepts in Pakistan. Rozee.pk, an online job portal, was the culmination of a venture backed by Silicon Valley firms.
Interestingly, there seems no dearth of finance available for either large industrialists or cottage enterprises. Banks have never balked at extending loans when the collateral in question is a textile mill.
Similarly, specialised microfinance banks and lending institutions have enjoyed rapid growth and have been backed by a relatively robust regulatory framework formulated by the State Bank of Pakistan. The Acumen Fund and the Kashf Foundation have dispensed micro-loans cumulatively worth more than $100 million in several communities across the country.
Ultimately, business owners at the middle of the wealth spectrum find it difficult to raise finances. Lenders are most probably wary of this market opportunity and a robust regulatory framework needs to be formulated for the provision of venture capital to such entrepreneurs.
A nation that prides itself on its ability to ‘jugaar’ (colloquial: shortcut) is symptomatic of the entrepreneurial energy contained in the country. That energy desperately needs to be channelled into more responsible ventures.
Published in The Express Tribune, November 28th, 2010.
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