Start-up spirit

May 02, 2019

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ENTREPRENEURSHIP and innovation are building blocks for tackling many of the economic and social challenges faced by emerging economies today. Pivoting towards an entrepreneurial-focused economy can help unlock a nation’s potential in the same way that technology has engendered success stories in many markets globally.

Pakistan has many of the same assets its peers enjoy. Home to 130 million people under the age of 30, it is an emerging economy projected to continue growing quickly in the coming years. Data-enabled mobile connections have grown four-fold in the past three years and the country’s e-commerce market beat analysts’ predictions to cross the $1 billion mark in 2018. Between 2015 and 2025, McKinsey’s City Scope database projects that Pakistan will have an additional 700,000 high-income and 2.1m middle-income households.

Start-ups have taken off across the nation in an enhanced business environment, while incubation and incentives from the government have attracted new venture capitalists to Pakistan. But the country still has some distance to go in order to reach its full potential.

Pakistan’s entrepreneurs need private-public partnership to thrive.

Using venture capital investing as a measure, the UAE has $40 in venture capital investing per capita, while Pakistan has $0.10 — lower than its regional peers Sri Lanka and Bangladesh. Yet the ecosystem holds tremendous opportunity. With robust planning, concerted policy action and private-sector initiatives, Pakistan can leverage entrepreneurship for public benefit across three different planks.

The public sector must lay the groundwork. Starting a business in Pakistan requires six steps that involve four different government departments in a process that can take up to two months. This deters most entrepreneurs from formalising their business, in turn slowing their growth by minimising their credibility, cutting off access to credit facilities and forcing them to absorb bureaucratic costs. Pakistan can learn from the experience of more than 80 other countries, where simplified procedures saw business registration rates double as compared to those without these adjustments.

Policy improvements and enhanced infrastructure are two palpable ways that governments can help. Launching single-window entities to expedite incorporation can save time and money for start-ups; such an initiative in Portugal resulted in 17 per cent more registrations the following year. The development of complementary infrastructural mechanisms, such as enabling digital payments or modernising existing institutions, can improve start-ups’ ability to scale. In Nigeria, for example, investing in a centralised data hub to support the credit bureau and allowing small to medium enterprises better credit access resulted in a decrease in the ratio of non-performing loans while increasing the number of borrowers.

The private sector can create access routes to finance. Half of all Pakistanis are without access to formal financial services, according to the World Bank. Of 3.2m small to medium enterprises in the country, banks have only lent to 188,000 enterprises. Pakistan’s formal financial institutions tend to favour established enterprises, and the resulting financing gap prevents entrepreneurs from researching the technical feasibility of new products to build commercial and marketing channels.

This presents a significant opportunity for the nation’s private sector to fuel profitable start-ups and engender greater socioeconomic value. Besides local market knowledge, investors can mitigate their risk by following certain guiding principles, such as following an insight-driven approach, driving core value, or investing along them­atic lines, such as by geography or industry vertical.

Educators can create an inclusive talent ecosystem. A sizeable talent pool of about 600,000 graduates each year from Pakis­tan’s educational institutions. Yet the nation only ranks 109 out of 170 on the Global Talent Competitiveness Index.

But these young people can each be empowered to bring their dreams to fruition with an ecosystem that nudges them to innovate. Pakistani institutions need to launch more programmes that develop talent at scale or team with incubators to cultivate start-up talent. In Pakistan, private-sector economies have taken the lead, but government institutes can do more on this front.

If Pakistan wants to safeguard the future of its youth, it needs to embrace some of these lessons from other markets and establish the networks between private and public sector to nurture the nascent start-up ecosystem and access the benefits of the digital revolution that is helping other countries leapfrog their social development. The nation’s first billion-dollar valuation has yet to be sighted but — with the right encouragement — the day when it shows itself may not be too far away.

The writer is a partner at McKinsey & Company and leads the firm’s regional technology and entrepreneurship work.

Published in Dawn, May 2nd, 2019