It’s been a landmark year for Pakistani startups who have proved their mettle in terms of fundraising, with total invested capital year-to-date close to $290 million. This is bigger than all previous years combined, and by a margin. Much of the money has obviously been bagged by a handful of players, with around 55 per cent of the dollar value going to five companies.
At the same time, foreign investors — some of the most notable ones — are increasingly taking interest in Pakistan as evidenced by Kleiner Perkins, a giant in the venture capital (VC) world with over 700 exits, leading Tajir’s Series A. The market is so hot these days that not only veteran founders but also financiers are scratching their heads. Maybe there is some change in fundamentals at play behind this shift in sentiment about the country though that doesn’t really seem to be the case if one regularly follows the economic, or even political, news.
What exactly is happening then? Well, for starters, the clichéd, three-pointer pitch, (which has been overdone by the way) based on the population under 30 years of age, broadband connections and smartphone users, is appealing at the surface. And from the looks of it, no one is really interested beneath the surface. This has led to Fomo on the part of investors that it’s time to act or miss a great opportunity.
Forget proper due diligence, are some of the most notable VCs unable (or otherwise uninterested) to do even a few Google searches before writing sizable cheques?
Perhaps the most important factor is that the founders are much more aggressive now and are willing to dream bigger and therefore, seek bigger cheques. This in turn requires painting a rosy picture, which can sometimes be overly optimistic due to the top-down approach. To understand that, let’s do a hypothetical exercise. Say the wedding industry in Pakistan has an annual turnover of $10 billion and a tech-enabled startup planning to streamline it could assume to capture 5pc of the total market share, thus translating into a gross merchandise value (GMV) of $500m, at least on paper. However, the reality is usually at odds with such idealistic scenarios. Going bottoms-up is more grounded in reality, but ambitious people are known to avoid that.
From the looks of it, the current investment frenzy is on the back of not only such simplistic projections but also good old misleading at times. That can take multiple forms, one of which is representing GMV as the annualised run rate or annual recurring revenue (ARR). It’s like Pakistan Stock Exchange pitching to the Chinese that the total traded value is its top line. At early stages, one can understand why a startup would be talking about GMV as it gives an idea of the scale, but continuing to boast that metric, later on, does feel a little disingenuous.
Another common trend is mixing up app installs as “users”, or worse, even suggesting them as active users, which in turn can be very loosely defined. For example, a ledger application talking about serving millions of retailers or having monthly active users (those using the product at least twice) are not the best way to adopt. This bit is more used as a marketing gimmick than making a case to investors though.
The room for manipulation with facts becomes much more liberal within the regulated space since few investors are aware of the nitty-gritty. A classic tactic here is lying about the licensing approvals or the timelines. For example, one well-funded Electronic Money Institution pitched itself as “fully licensed by the State Bank of Pakistan” when in reality it just had the in-principle nod, which is literally the first phase. Based on the evidence, it takes an entity easily eight-10 months to actually graduate to the “pilot operations” stage and from there roughly another year or more to get the green light for “commercial launch”.
Tech startups also have a habit to come up with their own metrics which can be simply meaningless frankly. In the presentation, a ride hailing service reported, “gross revenues” of $29m as the top line with a microscopic footnote on one of the pages that the metric in question is a non-International Financial Reporting Standards term which was arrived at after adding promos, refunds and toll charges.
Basically, the accounting wizardry was something like this: if today the company was doing 100 rides with a ‘fair’ price of Rs150 but due to the discounts, the actual amount received from the customer was just Rs50, the topline recognised Rs15,000 instead of the Rs5,000. The convenient assumption being that even if the rates are brought up by 3x, the volumes will stick — something that was entirely at odds with their own experience. By the way, their total revenues — the lame, widely recognised measure — during the same period was about $14m, meaning less than half of the number they were bragging about.
Now obviously, a lot of these players are working on entirely new business models and they could argue (not too convincingly) that the traditional metrics don’t do justice to them. Fair point, but last I checked, the downward sloping demand and upward supply curves are still alive. As for mixing up the obtained regulatory approvals, calling memoranda of understanding ‘agreements’ or using ARR and GMV interchangeably, either the founders are genuinely not familiar with the differences or they are deliberately misleading. We can have a debate on what’s worse: being ignorant or dishonest. This also raises questions on the aptitude of foreign investors who are throwing in money like crazy. Forget proper due diligence, are some of the most notable VCs unable (or otherwise uninterested) to do even a few Google searches before writing sizable cheques? But shush, it’s unpatriotic to raise questions when dollars are finally flowing into Pakistan.
It’s great that we are on the investment radar at last and the founders are aggressive but chasing those funds by whatever means poses a broader risk to the system and can potentially do great damage to the years of sweat founders have put in to get this far.
Published in Dawn, The Business and Finance Weekly, October 11th, 2021