The writer is a former chairman of the Securities and Exchange Commission of Pakistan
Imagine a marketplace where entrepreneurs can present the riskiest of business ideas, where investors are able to evaluate and fund the right ideas, and creativity and vision get translated into economic growth.
The US is a land of opportunity because it allows this flow of imagination to become a creation. The rhetorical examples of Mark Zuckerberg’s Facebook, Steve Jobs’s Apple and Bill Gates’s Microsoft are some of the multibillion dollar entities, which were created despite initial lack of financial resources at the disposal of these entrepreneurs. They had the willingness to take risks but they also had another advantage — access to means of raising finance.
Globally, economic managers strive to encourage people to take business risks and they create an economic infrastructure, which allows these business risks to bear fruit. Entrepreneurship fuels creativity and nations which encourage it get an edge over their competitors. Such is the significance of encouraging entrepreneurship that Singaporean economic managers, despite having a GDP per capita that is 40 times that of ours, are today concerned about being at the bottom of global entrepreneurship surveys because their current generation is living in a comfort zone and is happier taking up jobs rather than taking business risks.
We, however, are lucky in this respect. Since survival in Pakistan requires constant struggle, risk-taking comes naturally to us. Yet, despite being a nation of risk-takers, we are not a nation of entrepreneurs — primarily because our financial landscape isn’t structured to support entrepreneurship.
Our capital market is still in an infancy stage of development and our banking system is geared towards supporting the already rich, as it relies solely on asset-backed lending for established names, regardless of how brilliant a business idea might be. This has contributed to an income disparity, where the rich are getting richer while the average Pakistani survives on a monthly salary of $120 a month. In the long run, this translates into low economic growth, not to mention the social issues that arise as a consequence.
We do not have the luxury of the “long run” anymore for creating an infrastructure of angel investors, venture capitalists and private equity funds — something created by others over a number of decades. Instead, we are faced with an urgent need to develop a financial system, which supports the “right ideas” and encourages our entrepreneurs by converting their creative ideas into economic well-being.
This can be achieved by establishing a formal market — a licensed and regulated exchange which can bridge the gap between excess liquidity and businesses hungry for finances, and where small-and medium-size companies, including start-ups, can present themselves for raising capital. Instead of replicating the prevalent global models, we will need to think a step ahead of the world by keeping in mind the peculiarities of our own investment environment, and create a model which answers all our problems, or at least most of them, in one go.
To achieve most of our needs “in one go”, businesses can be categorised on the basis of their risk profile and investors on the basis of their risk appetite. High-risk investments, like fresh start-ups or loss-making companies, can only attract investment from institutional or highly sophisticated investors. Ticket size per investment can be high, which will lead to reduced liquidity and in the process, we will be able to create an infrastructure of angel and venture capital investors, who are early entrants in a business having higher risk appetite.
Similarly, small businesses with a history of profitable operations, qualifying as medium-risk investments, can attract investment from institutions, as well as high net worth individuals which will help us create a market for private equity investors, who are entrants during the second phase of fundraising. Only low-risk businesses can be open to the general public with measures ensuring that the interest of inexperienced investors is protected — a primary objective of the regulators.
The groundwork for this exchange has already been done at the Securities and Exchange Commission of Pakistan (SECP). However, the role of our stock exchanges will be crucial in its successful implementation. They will need to improve their functional, operational and managerial capacity. The expected partnership of our exchanges with an international stock exchange, post-demutualisation, can be a possible source of the requisite capacity building. If the exchanges are not able to come up with the required capacity, the SECP needs to consider granting a new licence to an investment group with an understanding and experience of the financial sector, which may include existing exchanges as well as private sector groups. Strong regulatory infrastructure, ensuring adequate disclosure requirements, role of intermediaries and market makers, use of alternative dispute-resolution mechanisms, methodology of risk profiling of investors and businesses, etc. are some of the other challenges involved in the successful launch of this exchange.
To date, knocking doors of potential investors has not helped our entrepreneurs in generating the required financial capital for their businesses. With revived activity and international interest in our capital markets, the time is ripe for the establishment of this competitive marketplace to cover lost ground and nurture our entrepreneurs.
Published in The Express Tribune, July 17th, 2013.
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COMMENTS (15)
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Apart from finances,an aspiring entrepreneur needs knowledge-sharing, hand-holding and mentoring. These days, students should compete for entrepreneurial competitions to have its feeling. A number of such competitions are now being regularly organized. One such challenge, especially promoting innovation is being organized by Pakistan Innovation Foundation, http://www.pif.org.pk/ideas-contest-2013/ , where creative thinking of youngsters will be tested. Government also needs to come forward and support shining young men and women.
We should convert one of the existing three exchanges into an exchange for Small and Medium Companies. May be Islamabad can be converted into this
I don’t think countries have tried this for start ups because the realization that an exchange is needed for start ups is a new and novel concept. It can work if the management of stock exchanges acts professionally and regulations are relaxed. Our stock exchanges have never tried to improve their perception and image. They also don’t catch the companies who don’t share profits with shareholders. Tax department also needs to be fixed of corruption fo this idea to be successful
I am happy that finally someone is thinking about promoting entrepreneurship in Pakistan. This is the only way. There are huge potential in Pakistan for new business opportunities. But for this we need to create a culture of entrepreneurship in our young and exuberant students. I am living in USA and I can see how Pakistanis have made multimillion dollar companies in few years with just one brilliant idea and infrastructure available. Here state and local governments are involved in supporting entrepreneurship. They fund them and promote them. I believe our government, financial sector and businessmen are far too away from supporting and investing in a brilliant idea of a young student.
Perhaps the step can be taken in a short term is to organize an event where young entrepreneurs can present their idea and business models to potential investors. I am a member of executive of OPEN-Chicago. OPEN stands for Organization of Pakistani Entrepreneurs of North America. We will be organizing an event titled "OPEN Pitch Event" in fall this year where young Pakistani entrepreneurs of Greater Chicago Area will get an opportunity to present their ideas to successful and established investors. We are not trying to get any funding or deal for them but just providing them an opportunity to present themselves. Before they present their idea, our team of experts will be mentoring them to for a month or so in order to make their presentation and business model clearer and presentable.
OPEN also has a chapter in Karachi and Lahore. I would strongly encouraged to think on these lines and provide an opportunity to young investors to present themselves. However it is very important to protect their ideas to be copied by some kind of NDA or legal shield.
In Pakistan, first you need infrastructure, security and energy requirements in place, than there is an large issue relating to taxation and policies of whoever is running this Nation. Once you have the basic structure in place, than only one can start dreaming about such grand schemes ! Only, other day I recall reading an article about Sharia based Economy ! Which left me completely baffled and now this grand scheme of things ! Only in this Country can such dreams evolve, as neither dreams mention about basic requirements to operate nor about the ability to deliver ! Get the basics in place first, and that too may take at least a decade, and in that period one really does not know as to who may be running the country nor what their agendas may be, or whether country will exist in its current form, as there are plenty of signs of implosion from within and likelihood of investors queuing up to invest this environment are rather slim. Unfortunately this nation has repeatedly moved backwards while all its neighbours have moved forward, one only has to look at Bangladesh, to realise this fact.
Being an entrepreneur myself, very few countries have a great Venture capital system . Infact, only America and China have very well developed VC structures to help companies grow. This is the reason why many companies grow fast and become very successful.
Rule of law is key to nurturing entrepreneurs. Those who lend money to Bill gates, Steve Jobs etc had good contract and trust in the system or institutions that they will protect them. In Pakistan recent example of Reko Diq mine fiasco and subsequent suit in international arbitration Court suggests that institutions in Pakistan are not sophisticated enough to realize the potential of investment and its impact on job creation. human health quality index, taxation etc etc. Decisions are based on what is in for me and not one what is good for the nation. Schools do not teach critical thinking and that leads to poor quality work getting lots of attention example car running on water..
Article looks nice on paper. What did you do to realize all these things when you were Chairman of SECP ?
Thank you for finally writing on this much needed topic. This is not a technical but psychological issue. Every graduate Pakistani either in Pakistan or overseas wants to work for an employer. You will rarely come across anyone aspiring to take the entrepreneurial leap. Governments do not produce jobs, expecting everything from the government is futile. An attitude of self reliance needs to be promoted.
If the govt and the banks simply work bring in Paypal that would create new breed of entreprenurs by it self.
but then it will never happen
Companies need to reward the small shareholder , then raising capital is not a problem that is the way Reliance(India's largest company grew). However if the promoter only rewards himself he can not hope to raise fresh capital.
Nice article.
Perhaps one of the major factors impeding the development/growth of an entrepreneurial ecosystem is our culture of not sharing. It seems that we, as a nation, do not believe in sharing our knowledge or our resources. Perhaps, what an aspiring entrepreneur needs most is knowledge-sharing, hand-holding and mentoring. The need for funding comes second.
Lately, however, there is some activity in this respect. Many universities have now started to support the entrepreneurship culture by holding business plan competitions and in acting as catalysts in providing/arranging mentor-ship for the aspiring entrepreneur.
Moreover, It is all to well to speak of a 'regulatory framework' but it is felt that there is an element of 'over-regulation' in some areas. An example can be cited of the Private Equity & Venture Capital Rules framed by the Securities and Exchange Commission of Pakistan. It has been over three years that these rules have been notified but not much seems to have changed as far as the establishment of PE or VC funds are concerned. Similarly, the taxation regime is also not very conducive for embarking upon high-risk venture funding.
Yet another impediment in the growth of a conducive ecosystem is the culture and pattern of 'ownership' and 'control' of businesses. There is no concept of divorcing management and ownership. The so called High Net Worth Individuals are not willing to give due credit to the intellectual capital of an aspiring entrepreneur and want to 'own' the business -Shylock-like- on the basis of there financial clout!
Yes, we are a nation of risk-takers. But, unfortunately, we are also a nation that does not accept or forgive failure nor we, as a nation, have the patience for perseverance; both of which are very necessary for an entrepreneurial ecosystem.
Sounds like a good idea, but where has the idea of an exchange for early stage companies and small companies been successful? I think a number of countries tried it and nowhere was it a success. In Pakistan too the OTC market at the existing exchanges was supposed to serve this function but never got off the ground. As long as the cosy little world of KSE and its brokers isn't shaken up radically, our capital markets will serve no useful function. The key question to ask is: how much capital is raised at KSE today by companies? The answer is: neglible amounts. So if the larger established companies find it so hard, how are the smaller companies likely to fare? Not convinced that setting up new exchanges is the right way to go. One issue is the SECP's own poor regulatory capacity.
Creating an exchange for the SMEs may be a good concept on paper, however the idea overlooks the essential business drivers for an Exchange. These are the listing fee and the trading revenue.
In case of SMEs both of the above sources may not justfy the return on investment needed to successfully operate an exchange on long term basis. In Pakistan, we have already tried the idea with a separate Exchange for the commodity futures-the PMEX. This exchange was licensed in 2002 and has only recently started making operating profit. Even after 11 years of its existence, the exchange suffers from the acute shortage of finance and has substantial accumulated losses to deal with. In case of an SME exchange with low listing income and relatively lower liquidity due to restricted trading, the RoI may become more elusive.
Instead of a separate exchange, the establishment of a joint platform for the SMEs by all three exchanges may be the most plausible solution if these exchanges intend to stay relevant to their primary function of providing an avenue of alternate finance to our entrepreneurs.