THE start-up ecosystem in Pakistan has largely been a case of missed opportunities.

While other regional countries were able to kick-start their digitisation journeys and build scaling tech giants by attracting global investments, we are nowhere to be found on that map.

But things seem to have changed of late, beginning with a number of incubators and accelerators that have surfaced with the entry of both local and foreign institutional investors. This year, over $30 million has been pumped into domestic start-ups, including a $12m Series A financing — a significant round in any part of the world.

Leaving aside the mobility space, the picture is more or less the same though, marked by few significant blips and limited scaling beyond the three big cities.

In the backdrop of countries churning out unicorns (valuation of $1 billion or above) and multi-million-dollar companies, it surely leads to a fear of missing out. However, keeping in mind the recent developments, perhaps there is a light flickering at the end of the tunnel.

Wait a second, I don’t mean the sheer lack of scaling tech companies but rather the absence of venture capital — funded top-line growth — oriented ones. What does that mean? For a while now, start-ups, especially in the Valley, have been raising mega rounds at steep valuations, led by big-shot investors pumping in their stacks of dollars, with Saudis often sponsoring a significant chunk.

The idea is to pump revenue growth and scale operations while disregarding profitability for some time in order to establish market leadership. It calls for more rapidly growing start-ups, necessitating the need to raise fresh money at a higher valuation to ensure smooth operations.

Should we tread the beaten path to discover the obvious?

Those not familiar with all this and wondering: how do investors make money if the company keeps registering losses? Start-ups are risky investments given they are testing out a new business model in a novel way, with the potential of disrupting a traditional industry. Venture capitalists and angels invest early for a greater share of equity owing to the risk involved and, at subsequent rounds, dilute their stake to make attractive returns. There doesn’t have to be any profitability: the start-up just has to multiply its initial value to be lucrative to the investor.

Take the familiar case of Careem, which was injected with $1m for 6.4 per cent equity by Saudi Telecom Company (STC) in 2013. When the ride-hailing start-up was acquired by Uber earlier this year for $3.1bn, STC’s initial stake came in at around $200m, giving a return of almost 200 times.

Recent developments in the United States, however, have made investors and founders reassess their metrics. Cracks first showed when Uber and Lyft (another ride-hailing giant in the United States) decided to go public. The former in its S-1 filing had indicated that the company might not become profitable in the near future, raising serious question marks over the sustainability of its growth. But the magnitude of the problem wasn’t realised until the WeWork fiasco.

The much-hyped co-working space with a presence in over 30 countries and almost $13bn in venture funding was a star company, blessed by Japanese Softbank money and lofty valuations.

Before filing for its initial public offering (IPO), the company boasted a private market value of a staggering $45bn, fairly high by even the usual Valley standards. However, developments over the next few weeks saw a different story altogether as the S-1 document revealed a troubling picture of the enterprise, with not only losses showing a steep rise but also serious question marks about corporate governance practices.

The public perception wasn’t as kind though. In the next two months, not only the IPO plans were shelved, but also the CEO stepped down (later his stake divested with a $1.7bn package) and the company was injected with a nearly $10bn bailout from its mega investor for a controlling stake to put things in order.

Surely a hefty price, but this entire saga finally sparked a debate on this very model driven by top-line growth, with utter disregard to profitability. After all, the point of business was to make money, not expand operations on someone else’s money and then dump the stocks to public markets through IPOs.

Perhaps this debate is not as relevant in the case of Pakistan where both growth and funding of local tech start-ups have been rather limited. But if current events were to give an indication, there does seem to be a tilt towards taking that Valley road, which makes sense to the extent that it is the original hotbed of innovation and disruption.

Furthermore, many successful start-ups here are run by founders who have studied and/or worked in the United States or the United Kingdom and are naturally more inclined towards that model. Even the locally bred ones naturally look up to the success stories of the United States and wish to replicate that growth in the local context.

However, when the very basis of that growth is proving unsustainable, it warrants the question: should we tread the beaten path to discover the now obvious? Or would we be better off taking a different trajectory from the beginning where the focus is on building robust, profitable businesses with solid and scalable products?

A good starting point would be the B2B upstarts, which have done reasonably well based on underlying fundamentals, both locally and abroad, even if their valuations are not nearly as impressive.

Published in Dawn, The Business and Finance Weekly, November 25th, 2019

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