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Dodging illicit cash, Pakistan startups hunt for angel funds

Updated May 10, 2017 10:48am


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TWO and a half years ago Jehan Ara started The Nest i/o in Karachi after taking inspiration from visits to incubation centres in the US and Europe.—Bloomberg
TWO and a half years ago Jehan Ara started The Nest i/o in Karachi after taking inspiration from visits to incubation centres in the US and Europe.—Bloomberg

After banks in Pakistan turned down loan applications for his fledgling advertising company seven years ago, Faraz Khan found plenty of private investors willing to back his vision — with a catch.

Much of the cash was illicit, and accepting it would have turned his Gizelle Communication into a money launderer.

“There were investors with blank cheques and investors who were like ‘take as much money as you want,’” Khan, 42, said over coffee at the Movenpick Hotel in Karachi. “You have to sift through very carefully, the ones that are dirty money.”

Khan instead turned to other businesses and an international bank to build the company, which he is considering listing on the Pakistan Stock Exchange this year, what would be a first for a startup in the country. Stung by the banks’ reluctance, he’s taking on an angel-investor role to get hundreds of other businesses off the ground across Pakistan as he seeks to replicate his success with Gizelle through his Seed Ventures incubator. It’s not an easy task.

India has long had a vibrant venture capital and startup scene. But Pakistan is looked at cautiously by foreign investors concerned about its power shortages and security concerns. With unemployment remaining high even as China finances more than $55 billion of infrastructure and energy projects, Pakistan is struggling to create enough jobs for its young workforce.

To boost entrepreneurship, Prime Minister Nawaz Sharif set up a loan programme for those under age 45 to set up businesses, providing interest-free loans to more than 260,000 people since his election in 2013. That’s critical in a country where nearly two-thirds of the population is under 30, according to the Jinnah Institute, an Islamabad-based think tank.

Home-grown organisations like Seed Ventures and Planet N Pvt. are attempting to change the status quo. Young Pakistanis that Khan meets at university road-shows are often resistant to becoming entrepreneurs.

They say “it’s risky, there’s a chance of failure, there’s a lack of access to finance and we’ve got great expectations from our parents to actually become doctors, engineers, lawyers and that is a safer option,” said Khan, whose firm, Seed Ventures, has invested $745,000 (Rs78 million) supporting 135 startups.

According to Planet N, 67 per cent of the more than 700 startups established since 2010 are still active and 68 have managed to increase funding by about $20 million. At least 24 incubators, accelerators and co-working spaces supporting startups have popped up across the country in the past seven years.

Despite the growth of incubators and accelerators, the startups will continue to stumble without wider access to seed finance, Planet N founder Nadeem Hussain said. While his firm has invested $8 million in 41 companies, most of them startups, he estimates that at least $1 billion of seed money is needed in Pakistan to help new businesses take the next step.

“They teach you, they mentor you, but when you come out there’s no capital,” said Hussain, 61, a financier who built Tameer Microfinance Bank Ltd, before selling it to Telenor ASA last year. “Unless we can address that, people are going to turn away from entrepreneurship because of the high failure rate.”

The old way of thinking is being challenged at centres that are popping up across Pakistan. The Nest i/o, which opened in Karachi about two and a half years ago, looks just like the incubators found in Silicon Valley.

Founder Jehan Ara took inspiration from visits to incubation centres in Germany, the UK and the US. Gaining about $1.4 million in grants from Alphabet Inc.’s Google, Samsung Electronics Co and the US State Department, about 100 startups have come through the centre’s four-month cycle. About 85 per cent of those are continuing to survive.

Among the businesses that have been through The Nest are a provider of flat-pack homes for refugee camps and one that makes engraving machines that are a fraction of the price of imported ones, Ara said. Social Champ, a mobile app that posts on different social media platforms simultaneously, caught the eye of venture capitalist Guy Kawasaki, who has invited the founder to Silicon Valley, she said.

“A lot of kids have started thinking startups, which is a good thing,” Ara, who calls herself the Nest’s “Big Bird,” said in her office decorated with toys, candy, and entrepreneurial and motivational text books. “It’s a shift. It started three to four years ago when kids started taking work online.”

Google has just renewed Nest’s grant for another three years and is now looking to open an accelerator programme and enter the race with Seed Ventures and Planet N for Pakistan’s first unicorn, a startup with a value of more than $1 billion.

To get there, more will have to be done.

“It’s sad if I’m the largest angel investor in Pakistan because I know groups sitting with half a billion dollars of liquidity which aren’t coming in this space,” said Planet N’s Hussain.

— By arrangement with Bloomberg-The Washington Post

Published in Dawn, May 10th, 2017


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Comments (10) Closed

Asim ali May 10, 2017 11:27am

Start up is a the latest buzz in the country. The intellectual capacity which is built by this country in technology migrates to the West. And this has been the trend for the past 25 years. And many Pakistanis have built great companies there. Unfortunately most of those companies have not even established a sales office here. Picking up a few dollars here and investing a few dollars there without a vision coupled with a lack of quality technical intellect will keep this country building websites at best. People who can make a difference are in West but will never find space in local newspapers for what they can do. And we will be stuck with loose change in a global economy dominated by tech giants

jamal May 10, 2017 11:59am

So how can you verify the angel investors are offering white money? Startup scene is quite hyped up here, most of such are consisting of few kids fresh out of school thinking of creating the new Facebook. Also, the role of incubators and "mentors" should be put under scrutiny. What's in there for them and how are they funded?

kuNAL MAJUMDAR May 10, 2017 01:26pm

Unfortunately, the Indo-Pak relationship is at its worst. Otherwise, there could have been many synergies and many success stories.

weq May 10, 2017 02:30pm

That lady in the picture has been ruling the IT authority in Pakistan and it has gone downhill badly, please remove her, two decades is a lot of time, we make everybody an icon. She has no credibility at all.

weq May 10, 2017 02:30pm

@jamal The mentors on top of having no solid industry experience, doe snot even have any skill, this is the fate.

nikus May 10, 2017 04:59pm

@weq passion and skill is everything; and you need some founders offerred their search engine to Yahoo for 5million USD, but Yahoo refused to buy it. Now you know .........

weq May 10, 2017 05:32pm

@nikus Try a bit harder to understand my comment that was in English, that lady does not have any Skill, the question mark I put was in Skills.

Sameer May 10, 2017 07:31pm

True, its risky, no clear investment and zero guidance. i remember a friend applying for Honey extraction project via the silly PM loan scheme. He was computer engineer.

Sameer May 10, 2017 07:32pm

@kuNAL MAJUMDAR Being from Pakistan I absolutely second that. Not sure what went wrong. Our politicians have done much harm to us neighbours for power.

abDullah May 10, 2017 08:10pm

@nikus not 5 million but 5 billion before google went public; I think it was typo on your part. Regardless that was a small change!