Start-ups need to learn how to pitch ideas

Turning a technological solution into big business requires funding

KARACHI: The leading factor behind the failure of start-ups in Pakistan is the incapability of such businesses to present their case before investors for raising funds to go commercial.

Pakistan, where millions of people live below the poverty line, can leapfrog in terms of development by embracing emerging technology solutions. However, many of those who come up with remarkable technological solutions do not know how to spread and take their solutions to the masses.

Any solution can reach the wider population if it has a sustainable business model, but to turn the solution into a business it requires funding.

“There are dozens of start-ups in Pakistan, which have come up with good ideas to overcome social and economic challenges; however, they don’t know what they have to do to get the investment to run their start-ups,” said TPL e-Ventures CEO Ali Samir Osman.

He said although many start-ups bring interesting solutions, the problem is that they don’t have financial intelligence, or in other words they don’t know how to make their solutions sustainable by adopting an appropriate business model.

The government of Pakistan has built five National Incubation Centres (NICs) to nurture start-ups. There are other private incubators and accelerators as well that train start-ups so that they could turn their ideas into successful businesses.

But there is a basic problem with these institutions as they do not have a uniform curriculum and most incubation centres fail to teach students financial intelligence. Therefore, when they present their idea, they do not know what the investor is looking for. First and foremost, the investors look for potential growth of a start-up. Investors can invest their money in real estate and get a return on investment without the trouble of taking a big risk.

According to the World Bank, nine out of every ten start-ups fail so unless a start-up offers a significantly higher return on investment, it cannot grab the attention of an investor.

“Start-up revolves around the word growth,” said Osman. A start-up should have a clear vision of how far it wants to go, how many people will use its product or service, what will it take to reach that goal, and then how much investment it needs and in how many rounds.

“The only reason venture capital funds are formed worldwide is to invest in start-ups, which if succeed can offer a return on investment (ROI) that no other conventional business can offer,” he said.

In the United States, less than 1% of the start-ups get financing from venture capital funds, which is 0.2% of gross domestic product (GDP). However, results of those investments disproportionately profile the entire economy.

Venture capital-backed companies in the US create 11% of all private-sector jobs and generate annual revenues equivalent to an astounding 21% of GDP.

Most start-up founders in Pakistan look for quick money to get one or two rounds of investment and then exit the start-up by selling it, after which the investor loses confidence in the founder and decides not to invest.

“Exit should be the goal of investor not the founder,” he said, adding, “the founder should aim to remain in the start-up to take it to the peak.”

“Every round of money raising means you have to give a share in your pie,” he said.

Moreover, a mistake that investors make is that they ask for 51% of the share. An investor should not be asking for more than 25% as with time a start-up needs to bring more investors, suggested the TPL e-ventures CEO.

When an investor first has up to 25% share in the pie, it means the start-up will have enough portion left to share with other investors, when it goes to the next round of fund-raising.

In Pakistan, regulations for venture capital funds are not friendly that is why many people go abroad to register their funds and then come back to invest here, he said. However, here is another problem which is that Pakistani laws are very strict on repatriation. If investors are not assured of getting return on their investments, they will not invest in the country, therefore, the government needs to soften the regulations for venture capital funds. 

Published in The Express Tribune, June 5^th, 2019.

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