Tech startups are doing reasonably well and look set for growth despite a lack of adequate financing from banks and venture capital outfits.
In 2015, about two dozen tech start-ups, old and new, obtained funds from abroad or from local venture capitals (VC). Some of them are now doing good business.
But industry sources say tech start-ups generally find it too difficult to secure bank credit and that some didn’t even bother to approach banks. They say as the venture capital companies are few in number, tech startups have to rely on foreign sources of funding or look towards regional VC sources.
“Banks generally remain shy of tech startups financing and rarely entertain their credit proposals,” says an official of Pakistan Software Houses Association.
Sometimes, financing tech startups seems just like impact financing, a concept now gaining currency along with the concept of social business. And that is why local banks and some, less-resourceful, local venture companies shy away from it
Banks’ prefer government debt papers which have brought down their advance to deposit ratio below 47pc (as of end-March 2016). They are not even willing to boost their normal private sector lending, let alone talk of financing tech entrepreneurship, something that is more about innovation.
Bankers deny that they purposely ignore tech startup financing. “Banks have been involved in venture financing by creating special purpose vehicles (SPVs) but one must realise that it is far different from our normal private sector lending,” says a senior executive of one of the top five commercial banks.
“The main issue with tech start-ups is that those with sound business proposals are too hasty and can’t stand our procedures. Others need just not money but a lot more: idea development and more advanced research. Naturally then, they turn towards venture capital, local or foreign.”
Some bankers, however, do recognise the need for taking a hard look at what banks are doing to exploit the potential of the growing tech startup market. “We cannot afford to ignore this for long. The corporate sector and developmental agencies of provincial governments are making big gains out of their partnerships in venture capital, which is essentially an area of banking genius, or so it should be,” says a senior executive of a local bank.
The list of tech start-ups that raised sufficient funds in 2015 include both old and new firms like app-based travelling services Careem, shopping portal Daraz.pk, the real estate’s online listing portal Zameen.com, job portal Rozee.com, entrepreneurship programme Interacta, on-demand car maintenance service AuotGenie and 18 others.
A cursory look at their sources of financing shows that it came from abroad, such as $60m in case of Careem from the UAE-based Abraaj Group, or $22m partial-funding from a UK-based DFI in case of Daraz.pk. In some cases, money flowed in from regional VC like $33m partial funding for Daraz.pk from the Asia-Pacific Internet Group.
But in some cases like $9m foreign funds raised by Zameen.com, specific details of the investors remained unknown.
AutoGenie managed to raise $100,000 from PakWheels.com a big local online car-portal that had itself raised $3.5m a year earlier from a Malaysian venture capital firm. Interacta, an entrepreneurship startup of the Lahore University of Management Science secured $220,000 in seed funding from Lahore-based Fatima Ventures.
A sizable fund-raising of tech startups came under spotlight in 2013 when four entities mobilised funds worth less than $10m. In 2014, 10 tech start-ups came up and raised almost the same amount of funds. But in 2015 no less than 24 startups pulled in an estimated $100m from various sources not just in seed capital but, in some cases, for capacity building and outreach.
However, some borrowers do not share details about the amount and sources of their debt. Information trickles in, though, from individual sources and a couple of websites do the much-needed record-keeping for the benefit of their visitors.
The Securities and Exchange Commission of Pakistan (SECP) that regulates venture capital firms monitors activities of tech startups only indirectly; sources in the SECP say the corporate watchdog may soon invite input from all the stakeholders to ensure transparency and growth in this sector.
Nobody can have a fair idea of how many big and small tech startups are currently busy raising funds but industry sources see the pace of fund mobilisation at last year’s level.
Markhor, a shopping portal that sells hand-made leather shoes has already won a unique recognition at Y Combinatory, a three-month incubation programme at Silicon Valley and has also received $120,000 in seed capital.
Plan9, a local venture capital of the Punjab Information Technology Board boasts of having provided incubation training to over 100 startups so far but except for a few, those startups have got additional funds from foreign sources, industry sources say.
Sometimes, financing tech startups seems just like impact financing, a concept now gaining currency along with the concept of social business. And that is why banks and some, less-resourceful, local VCs shy away from it.
But in a majority of cases, tech startups have also proved to be highly profitable businesses with annual growth rates of 100-400pc, industry sources say. The driving factors include tailor-made, time-saving services that these startups provide, growing use of smart phones and the internet, level of innovation offered and expanding e-commerce.
The potential of tech startups to impact the way large businesses are currently being run is immense. Take, for example, the case of EveryCatalog.com.
This two-year old startup has undertaken to showcase catalogues of businesses in such broad categories like textiles, apparel, shoes, jewelry and accessories, interior designs/ furnishing and custom design products/handicrafts. Its mobile applications, it claims, are capable of delivering a full e-commerce platform where sellers can exhibit their products for sale.
Published in Dawn, Business & Finance weekly, June 27th, 2016