A new breed of incubators is gaining popularity among business and engineering graduates – tech incubators. This phenomenon is part of the global wave of shared office spaces, accelerators, incubators and university labs that cultivate entrepreneurship and innovation in the hopes of kick-starting their local ecosystems and becoming their region’s next ‘Silicon Valley’.
Like all trends, entrepreneurship is a buzzword that's thrown around too often and hyped beyond what the market fundamentals can support. It’s encouraging to see people get excited about running their own companies and becoming the next Mark Zuckerberg, but it’s critical to provide them the tools and most importantly, the mindset to achieve extraordinary success on a global scale, rather than ending up as an ordinary local company.
Most tech graduates swept away in the entrepreneurship fever follow the familiar path of two or three friends moonlighting on freelance work and then finishing their Computer Science degree to start a "company", which basically means the three of them sitting at someone’s home and making websites for random clients on Odesk, Elance or their cousin in Toronto. Once the money starts flowing in, they get a small office and hire three more people to start app development services for iOS and Android. There might be Macbooks and iPhones on the table and a Steve Jobs poster on the wall but it’s a slow, linear slog of adding “seats” and surviving between rock bottom hourly rates and the Pakistani problem in terms of image and offshore client’s expectations.
This service model offers low hanging fruit which helps in getting a foothold in the market, but it also sucks away the time and energy needed to work on your own products. If services do well, you get more work and more money, and the decision to risk all that for a fantasy product with no guarantee of success seems harder with every passing year. It’s a bit like painting walls on daily wages and wishing that one day you’ll create the next Mona Lisa.
Even the largest tech companies in Pakistan are primarily providing services or earning from consulting focused on the typical ERP, CRM, HR, BPO solutions that a thousand other providers are vying for. Only a handful have been able to make standalone products that are profitable, let alone become leaders in their segments or globally known brands.
For any ecosystem to succeed, we need four elements: i) an ample supply of skilled teams with unique, viable ideas, ii) a large marketplace that’s hungry for those products and services, iii) multiple sources of funding those teams, and iv) bigger companies that support and ultimately acquire those startups, providing investors and founders a lucrative exit, so that the whole cycle can start again.
In Pakistan's IT industry, two of those key elements have been missing. We've always had teams with ideas as well as access to local and some global markets, but we’ve never had any major funding sources or any solid M&A activity and exit options. Add to that an absence of supporting legal frameworks and a dismal R&D culture, and it seems impossible to establish a self sustaining loop.
There’s a reason Silicon Valley has not been replicated anywhere in the world, not in Japan, Europe or any emerging market with petrodollars. Even if we ignore the secret sauce and the history of how that ecosystem came to be, just the sheer volume and frequency of the deals makes it an unbeatable Mecca of the tech universe.
In 2012 alone, 27 billion dollars were invested by 530 venture capitalists in 3,826 technology sector deals. There were 49 IPOs and 487 M&A deals. To put that in perspective, that’s more money than Pakistan made through all its exports last year.
We have a habit of overhyping every minor success as the next step to becoming a South Asian Silicon Valley or feeding our favourite day dream of catching up with India’s tech sector. While encouraging our local companies is critical and spreading the good news is always beneficial, we must plan with a realistic view of our capabilities.
Our IT industry has over 100,000 people. India’s largest tech firm, Tata Consulting alone has 250,000 employees and makes 11 billion dollars in revenue, almost matching Pakistan’s entire textile sector exports. Our IT exports are under a billion dollars, while India is crossing the 80 billion dollar mark. Given this imbalance, our world class companies and milestones are few and far between. The product landscape is barren and although we provide services to Fortune 500 companies, we’ve been unable to scale that significantly like other countries.
Top companies like Techlogix, TRG, Systems Ltd, LMKR and TPS, all have services revenue in tens of millions, but somehow have failed to grow beyond two thousand employees, the glass ceiling that no company has broken yet. Netsol is the only Pakistani company that managed an IPO on the NASDAQ in 1998. Its share price is below par and while its revenues touch 50 million dollars, they have not scaled to their true potential.
Foreign acquisitions are almost unheard of, the rare exception being Mixit’s recent acquisition for 28 million dollars in 2011. The last major local acquisition was in 2005 on the hardware side, with Inbox being acquired by Dawood Group, which was one of the original investors in the company. Mobilink’s acquisition of LinkDotNet and the recent merger of Wateen and Qubee are promising examples, but such companies are perceived as telecommunications and infrastructure entities rather than software success stories.
The missing elements
If we stop comparing ourselves to the Valley and Bangalore for a second and assume that we still have solid teams with interesting ideas, why hasn’t there been a supply of local funds to support them?
In most markets, the funding circles starts from the tech sector itself, since they understand the huge upside of their industry. Large companies and their sponsors are first in line to invest in new ideas and young start-ups, and as those success stories go public, other mainstream investors also want a piece of the pie and jump in with larger funds. This core is supplemented by bank loans, government and non-profit grants and if nothing else, the founders’ personal credit cards. For a variety of reasons, it hasn’t happened this way in Pakistan.
Firstly, our tech sector has not produced the sort of millionaires we’re used to reading about on TechCrunch. They’ve done moderately well but they do not possess enough “smart money” to aggressively kick start a culture. The next tier of mainstream investors have a lot of “dumb money”, which means they end up comparing tech startup ROI’s with buying gold, a Bahria plot or opening a burger chain. Other sources such as bank loans require collateral and government grants are a painful tunnel to enter.
Another key mitigating factor is that our legal structure does not protect minority shareholders too well, so both corporate and private investors ask for a majority stake right away. This either kills the deal or stifles the startup in most cases. On the flip side, companies seeking funding prefer to grow slowly rather than cede control.
The first venture capitalist to invest in a diverse portfolio was TMT Ventures, backed by a few mainstream banks in 2001. They invested in an animation studio, call centre platforms, game development tools etcetera. Although giving 10-30 per cent to founders in sweat equity seems very restrictive, it was still a groundbreaking effort for that time.
Venture capital is about making multiple bets with one success wiping out the other losses. Just a single venture capitalist, no matter how diverse, cannot kick start a sustainable ecosystem. Out of eight portfolio companies, TMT had only one successful exit of 3 million dollars, which although historic, was not enough to encourage the investors to continue the fund aggressively.
Another key player missing in action is the Pakistani expats who have done well in the tech sector abroad. They should ideally have the kind of smart money we need and should also be comfortable working and investing in Pakistan.
Sadly, organisations like TIE and OPEN have done little in terms of structured institutional funding. There have been random angel investments over the years but most of these remained below the radar and did not achieve any substantial results. Our local products may be weak but the expat community has also been risk averse and shied away from solid long term commitments and meaningful mentoring.
May you live in interesting times
Given the absolute lack of venture capital or private angel funds, the current trend of tech incubators is definitely a valuable and permanent addition to the ecosystem. Their funding offers of a few thousand dollars might be comparable to what one can gather from family and friends, but their true value lies in providing a platform for startups to network with industry leaders, gain access to foreign markets and get a crash course in becoming true commercial successes.
The silver lining however is how quickly things are transforming. A software startup doesn’t need much more than two people with an idea, laptops and an internet connection. If anyone has a genuinely solid product, attracting the right global audience is very doable. Whether startups look at local options or international platforms, the variety of choices is increasing rapidly.
Besides the mobile app stores’ revolutionary access to global markets, Pakistan itself is on the cusp of a drastic change. Over the next three to five years, e-commerce, mobile payments, broadband and mobile content will explode. For once, our local markets will become more relevant than the foreign ones and we’ll be better positioned for that gold rush than any outsider.
A Variety of Incubators, Funds and Accelerators:
1) Pasha Fund for Social Innovation - In partnership with Google. Rs 50,000 to 850,000 for ideas with social impact. 12 companies awarded. Starting a new incubator in 2014.
2) Seed Ventures - Mentoring, incubation, funding. 13 portfolio companies.
4) Arpatech - Tech company + Early stage fund, 2-3 deals a year in US / Pakistan. Prefer majority stake and operational control. Portfolio includes Eatoye.pk.
6) DYL Ventures - Mentoring and funding. No public portfolio companies.
7) DotZero - Industry events + Commercial co-working space for hire. Possible funding between $5,000-$250,000. No public portfolio companies.
8) Mini Ventures: Industry events + early stage mentoring and funding. No public portfolio companies.
9) MIT Enterprise Forum Pakistan - Industry events + BAP (Biz Acceleration Program) with cash awards and exposure to US investors/market.
10) IBA CED Accelerator Program (CEDAP) - Entrepreneurship Development and Accelerator Programs. 5 portfolio companies.
2) Venexel - Early stage mentoring and funding. Match-making with Technical Co-founders. No public portfolio companies.
3) LUMS - Incubator starting in 2014.
4) Business Incubation Centre, University of Veterinary and Animal Sciences - Space and mentoring. No public portfolio companies.
5) SMEDA - Commercial loans up to Rs. 2 mn.
1) NUST Technology Incubation Center - Subsidised office space and business support. 13 incubatees including Tunacode.com.
3) The Indus Entrepreneurs - Islamabad Chapter - Industry events + access to angel investor network. No public portfolio.
4) Invest2Innovate - Virtual Accelerator for Social Enterprises. $100k-$250k funding range. Equity/Profit mix, averaging 3% to 5% for-profit enterprises. Five portfolio companies.
5) ICT RnD Fund - Research and Development related grants for industry-academia partnerships. Several million rupees available depending on project type. Over 80 projects funded.
6) Jumpstart Pakistan - Incubation space and see funding + mentoring. 1-2 companies per year. No public portfolio companies.
1) KPK Incubation Center, Peshawar - Incubation space and business support. Funding up to Rs. 1 mn. No public portfolio companies.
3) Business Incubation Center University of Agriculture, Faisalabad - Incubation space and business support. No public portfolio companies.
4) The Center for Entrepreneurial Leadership & Incubation, IBA, Sukkur - Incubation space and business support. One incubatee; Pakistan News Cloud.
Shehryar is an Advisor to Eyedeus.com/Groopic.com. He is Director Marketing & Operations at Convo.com. You can follow him at @sheryhydri.