Indian pop group Bombay Vikings were wrong when they sang “good times are here to stay”. In the tech and venture ecosystem, they are long gone. And for real this time, or so the data seems to suggest.

The slowdown in fundraising activity is quite clear: global funding dipped to $45 billion in April, according to Crunchbase. The lowest since February 2021. To be fair, this is no peanuts either but the idea of what’s big has somewhat been distorted over the last couple of years.

This slowdown is accompanied by a correction in valuations as people who built their entire companies and portfolios around cash burn have suddenly woken up to the fact that profitability is indeed a desirable thing to chase. Tweets from investors and founders on this virtue have begun already, all preaching the need to be quiet and do the sustainable thing, forgetting how their own FOMO (fear of missing out) led to us here in the first place.

With burn rates much higher than what they can continue in the current market and incapable of actually running lean, some startups are turning to that magical formula straight out of the private equity playbook: layoffs. They have already started in the US and rumour mills suggest the coming doom in Pakistan too.

With burn rates much higher than what they can continue at in the current market and incapable of actually running lean, some startups are turning to that magical formula straight out of the private equity playbook: layoffs

Meanwhile, public markets continue their panic mode. Tech-heavy Nasdaq is down over 25 per cent year-to-date (YTD), far lagging behind the S&P 500 and Dow Jones industrial average. And as for crypto, you-know-what is hitting the fan, with dip after dip after dip. The stablecoin delusions have been washed away and the realisation that non-fungible tokens are merely JPEGs is setting in.

Similar sentiments seem to be driving the market in Pakistan where the technology and communication sector has been under serious pressure of late. This became all too clear when Coeus Solutions, an IT company listing itself on the Pakistan Stock Exchange’s Growth Enterprise Market Board, called off its initial public offering because of the lack of demand. Against five million shares on offer, it got subscriptions for only 1.02m from accredited investors during the three-day book building process.

This prompted the management and the investment bank to scrap the process altogether. Not to mention they were originally supposed to do book building in early March but postponed it due to volatility, which this time turned into “unprecedented market conditions”. Contrast that to good ol’ times when Octopus Digital was oversubscribed by 27 times.

Sure, this could be just one company as just days before Coeus, Supernet did manage to complete its book building and get oversubscribed 1.4 times. But that’s not what the numbers seem to suggest. The technology and communication category has declined a major 35.67pc YTD, compared to KSE-100’s 2.49pc loss during the same period.

Pick pretty much any performance period and technology and communication will be lagging behind. From its September 2021 peak of 80,581, the sector has fallen almost 44pc, according to data from Mettis Global. A similar trend plays out across other markets with Bombay Stock Exchange’s IT down over 21pc.

Naturally, this has led to some correction in some of the leading tech scrips, with Avanceon almost halving to Rs73.17 from its peak of Rs134.96 on Sept 13, 2021. NETSOL has tumbled 54pc to Rs86.08 from its June highs of Rs187.38.

It’s not necessarily a bad thing though as valuations had really spiked towards the end of 2021, echoing the high investor appetite. Systems Ltd, the poster boy of the technology outsourcing industry, made the recalibration itself and brought down its price by giving 100pc bonus shares at the last quarterly results. That has taken its price-to-earnings trailing twelve months ratio to hover around 12, from what used to be 40+, as Mettis Global data shows.

However, unlike the Nasdaq scrips or the hyper-growth startups here or elsewhere, there should be little room for worry for the IT services sector. First of all, they are high margin businesses running on profitability, instead of vibes. Secondly, the cooling down of the venture ecosystem should provide some breathing space from the talent perspective as human resource retention had become a serious headache due to the emergence of well-funded startups. And of course, immunity (to an extent) from Pakistan’s macroeconomic environment has never hurt anyone.

Published in Dawn, The Business and Finance Weekly, May 16th, 2022

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