For a successful startup ecosystem, Pakistan needs to learn to celebrate failure

Published March 19, 2021
Pakistan's banking rules, regulatory approach, and investment culture desperately needs a radical change to build a tolerance for startup failure. – Shutterstock/File
Pakistan's banking rules, regulatory approach, and investment culture desperately needs a radical change to build a tolerance for startup failure. – Shutterstock/File

Earlier this month, SpaceX's Starship SN9 spacecraft blew itself to pieces around eight minutes after a successful touchdown. The failure must have cost tens of millions of dollars – yet it was celebrated.

That’s because failure is a necessary station on the path to success.

Elon Musk, the founder of SpaceX and now the richest man in the world, said if things are not failing, you are not innovating enough. Every successful entrepreneur will understand the wisdom in this perspective.

But when I look at this approach and its application in Pakistan, one thing becomes very clear: Pakistan lacks a culture of tolerance for failure, which is a necessary precondition to developing a mature startup ecosystem that translates into entrepreneurial success.

Over the last 12 months, Pakistan has started to attract venture capital. Both foreign as well as domestic capital is now searching for entrepreneurs who can leverage digital technologies to challenge incumbent industries.

These initiatives are also getting support from the government through the various National Incubation Centers (NICs). Last week, Saleem Ahmed, chairman of the National Incubation Center in Lahore, kindly added me to their Foundation Council for the Lahore NIC at Lums.

Many local investors, who are also clients of KASB, ask me how and where to invest in startups.

Naturally, they are attracted to these companies for the promise of outsized returns. Yet, it is important to remember that even in the US, more than 95 per cent of startups fail.

So this leads to the important question: Are we ready to accept failures?

The legacy regulatory set up is certainly not. Here’s how.

Firstly, if a business has taken a loan from a bank and it fails to pay it back – i.e. it defaults – the owners of that business and the bank’s directors often end up getting blacklisted. They can't take additional loans and cannot even take any public position. In many cases, the bank would file court cases, which drag on for years, against the directors.

Secondly, it is not uncommon to have inquiries against the operators/directors of companies that fail. This practically means that once you fail, you can never start again.

Thirdly, even as a society, we do not accept failure and if nothing else, those who dared but failed, risk tarring their reputations for eternity.

So the spectrum of outcomes arising from a business failure in Pakistan varies from reputational damage in the best case to NAB inquiries and jail time in the worst case.

Definitely not very encouraging.

It also appears to me that domestic investors and venture capitalists who put money in startups do not fully appreciate the risks.

I tried to explain to a local investor recently about the probability of failure in startups, emphasising that less than 5pc succeed. To my surprise, he believed all of his portfolios were in the 5pc that would succeed. Of course that is not mathematically possible and is merely reflective of his bias and lack of understanding of the risks.

And so, I often find myself pondering over what will happen when 95pc of the startups in Pakistan fail?

I hope their failure is celebrated. I hope their investors reward the entrepreneurs for taking the risks despite knowing that the chance of failure was high. Because that is the necessary precondition for success – especially if the aim is to disrupt and transform industries.

Pakistan's banking rules, regulatory framework, and investment culture desperately needs a radical change to build this tolerance for failure and this is not a small undertaking.

But I am still hopeful. I am hopeful because perhaps the biggest champion for celebrating failure and taking brave risks is the prime minister of Pakistan.

Can he transfer this vision into the country’s startup ecosystem?


Ali Farid Khwaja, CFA, is the Chairman of KASB Securities. He lives in London with his wife and two daughters. He has worked in financial markets in the UK and Europe for over 17 years. He is an alumnus of Lums and was a Rhodes Scholar at University of Oxford.

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