Are Pakistani startups going to collapse or take off?

Pakistani startups were sizzling like a hot Karachi afternoon last summer, bringing record breaking funding and creating a positive buzz around the country. Fast forward to the summer of 2022 and an icy cold chill is blowing throughout the global startup ecosystem as recession fears loom and the era of easy money and low interest rates come to an end. Startup valuations are beginning to fall dramatically and layoffs are in full swing. The big question now is whether Pakistani startups will sink or swim their way through this turbulent, global macro-economic storm?

At the heart of this paradigm shift in the startup ecosystem is a pivot from growth to profitability. When interest rates were low and liquidity was high, venture capital funds were fixated on growth at all costs, which led to dizzying valuations for startups and the boom that we have all experienced over the last few years. Now that interest rates are rising and liquidity is harder to come by, valuations are coming back down to earth and business models that prioritised growth without a clear pathway to profitability are going out of fashion. A simple way to explain this is when Uber and Careem were initially launched, ride prices were really low because venture capital was subsidising your rides to fuel user growth. Now those ride prices are going up because profitability is being prioritised.

“Profitability is the focus,” shares Aly Fahd, the founder of Pak Launch, a 150,000 people strong global community focused on entrepreneurship, investments and social innovation, which has helped startups raise $70 million since January 2021. Aly argues that VCs are playing a long game and that even though valuations are now more reasonable (back to 2019 levels), deals are still taking place and investments will continue to flow into Pakistan. And this is actually a great time to make deals because valuations are no longer in bubble territory.

This is why a $50 million growth fund was announced at the Pak Launch’s UnConference earlier this month, which brought together 50+ Pakistani startup founders and 70+ global investors and was hosted in the iconic El Prado Hotel in the heart of Silicon Valley. This is a fund led by Dr Naveed Sherwani and a group of high net worth Pakistanis and the objective is to invest in mature Pakistani startups and use the experience of Silicon Valley to accelerate them and add rocket fuel to those companies. Announcing such a large fund on the cusp of a recession shows that investors are still hungry to invest in Pakistani startups but they will raise the bar on the quality of startups that are being invested in and the problems they’re trying to solve. This is actually a good thing.

And there are a few startups and founders who had the vision to build their businesses more sustainably in anticipation of exactly this kind of macroeconomic earthquake. Take Lokal for example, a startup focused on building Pakistan’s first chain of budget hotel rooms with a mission to enable meaningful local experiences. Not only was Lokal timed beautifully in terms of launching just ahead of a post-Covid surge in ‘revenge travel’ i.e. traveling more now to make up for the lack of traveling over the last two years but also because Khurram Kidwai, the founder of Lokal, built a business model anchored in unit positive economics versus growth at all costs.

When Khurram started Lokal in 2021, the reigning trend for startups was to fuel growth at all costs. Khurram ignored the trend and instead tapped into his decade long brand and business building experience at Procter & Gamble to grow Lokal organically and sustainably. Today, as investors prioritise funding startups that grow profitably, he is experiencing such a high level of investor interest that he will leave his high flying corporate gig to pursue his startup full time on the cusp of a recession. These are the kind of startups who will not only weather the macroeconomic storm but also come out strongly on the other side. After all, Uber, AirBnb and Whatsapp are all startups that were born during a recession.

Published in The Express Tribune, June 26^th, 2022.

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