Despite rise in IT players, seed funding in Pakistan drops

Lack of good quality start-ups primary reason behind slowdown in financing

KARACHI: In spite of a gradual increase in the number of players in the information technology landscape, foreign and domestic funding for new ventures has dropped over the past couple of years, according to a report published by invest2innovate (i2i) recently.

The search for financing has always been a tough task for start-ups and 84% of entrepreneurs, who participated in a survey conducted in 2016 for drawing up Pakistan Entrepreneurship Ecosystem Report, have shared that they found it difficult or somewhat difficult to tap required funding.

Formal start-up funding began in 2013 in Pakistan with inflows of $4 million, which grew to $9 million in 2014 and touched the peak at $39.75 million in 2015. Since then, the flow of seed money has been slowing down.



In 2016, the overall funding slumped to $8.58 million and fell further to $4.32 million in 2017. However, it has increased to $4.8 million so far this year.

The number of seed funding deals hit the highest in 2016 at 18, which had started from four in 2013. Year 2014 recorded five deals while in 2017 there were 10 deals. So far in 2018, eight deals have been inked.

“Interestingly, the emergence of new players has not encouraged financiers to deploy more capital in the ecosystem over time,” wrote i2i Head of Insights Anusheh Naveed Ashraf in the report.

Invest2innovate is an incubator for nascent start-ups that also undertakes research work to provide data, insights and analysis in order to help stakeholders navigate and understand growth markets.

It used data of recorded and reported financing deals for the start-ups, but excluded big deals of $9 million and above like those of zameen.com, Daraz, Naseeb Networks and Careem as it focused only on the start-ups.



Though funding has decreased, development finance institutions like the US Agency for International Development (USAID) have declared entrepreneurship as their priority.

Jaan Pakistan, a clean cookstove providing start-up, got funding of $100,000 at Dubai’s Expo 2020, but i2i did not include it in its report perhaps because the investment did not come through Pakistan.

The decline in investment flow has been primarily tagged to a lack of quality start-ups. “The popular narrative within the ecosystem is that the lack of deals can be attributed to a lack of good quality start-ups,” said the report.

On the other hand, in Pakistan’s market, which does not have any liquidity problem as it has lots of money, early stage domestic investors do not offer financing on founder-friendly terms. Instead, they take or demand a majority stake in the start-up that turns the founder into an employee and discourages the new venture from accepting funds from these investors.



Though new players like Sarmayacar, 47 Ventures and i2i itself intend to provide funding, some foreign investors are also looking to enter the market.

However, initial financing is going to remain a challenge for the new ventures as seed funding is risky and the investors scout for mature start-ups.

From the macro perspective, things remain uncertain as general elections are around the corner, Pakistani rupee has weakened excessively over the past seven months and country has been placed on the Financial Action Task Force’s grey list for alleged failure to curb terrorism financing.

These factors may act as a further deterrent to the flow of funds from international investors, when combined especially with an opaque business environment and a lack of available data and information about the market, said the report.

In a bid to promote information technology, the government is putting a lot of focus on the sector that has the capacity to give a big push to the national economy.

Ignite, formerly called the National ICT R&D Fund, has established five National Incubation Centres in Islamabad, Lahore, Peshawar, Karachi and Quetta.

Separately, the Punjab government and the Planning Commission have announced new investments in the start-ups. The i2i report called it silver lining on the clouds.

Published in The Express Tribune, July 8^th, 2018.

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