Barely a year ago, there was optimism all around whenever you talked to people from the startup ecosystem. Coming on the back of a stellar 2021 — that saw investment surge more than 5x — the ecosystem was flush with a high. It continued into the first quarter of 2022, giving the impression that our moment is here to stay. Only to become what seems like a blip now.

There were already glaring signs of trouble by the second quarter, beginning with layoffs at Airlift — barely nine months after they had announced an $85 million round — and subsequently shutting off operations. Other well-funded players, including Retailo and Truck It In, cut their workforces significantly. Meanwhile, the funding continued to decline — falling below pre-Covid levels by Q4-2022.

While the deal flow recovered from those lows during the first quarter of 2023, the outlook is still quite bleak. Two of the biggest platform-based tech companies operating in Pakistan — Daraz and Foodpanda — recently laid off more than 10 per cent of their staff, with the latter doing it much more discretely. Market reports suggest that there might be more in the offing.

Things aren’t any better at relatively smaller startups, as Jabberwock Ventures also reportedly fired five to six people, including a change of guard at its Swyft Logistics, while Byte slashed its workforce by 30pc. The situation is so bad across the globe that even insanely profitable companies like Microsoft, Google, Meta and Amazon have made tens of thousands redundant.

With a spate of layoffs, Pakistan’s nascent startup ecosystem is in a pit of uncertainty

Around 131,000 workers in US-based tech companies have been laid off in mass job cuts in 2023, according to Crunchbase tracker. Pitchbook data shows that venture capital (VC) in the United States fell for the fifth quarter straight. Even the few glimmers of hope seem to be vanishing now.

For example, the much-cited dry power and its pipeline are also drying up, with few investors looking to take exposure to VC. In fact, with just $11.7 billion raised across 99 funds in the US, this year is on pace to be the slowest since 2017 for fundraising. Being a major provider of liquidity across the globe, this will have a significant international impact.

Actually, it already is, especially in Asia, where funding dipped 57pc year-on-year and 33pc quarter-on-quarter between January and March. This was again the fifth straight quarter of consistent decline and the second time when dollar value has returned to at least 2018 levels. Basically, all the gains from the post-Covid era seem to have been pared.

This slowdown could have serious consequences for Pakistan’s nascent VC-backed startup ecosystem. Because if Asian economies with consistently high growth rates and far better risk profiles are seeing massive declines in investments, what chance do we stand, considering that most of the funding into the country was from foreigners?

That’s concerning, despite all the flaws of the asset class, its philosophy and a lack of applicability to Pakistani realities. For one very simple reason: it was practically the only form of capital available to new businesses. Hardly anything else is out there: banks aren’t going to lend to small and medium enterprises and even if they do, who can even pay markups exceeding 25pc? All is quiet on the subsidised Kamyab Jawan Programme because, well, we are sleepwalking into sovereign default.

Meanwhile, net foreign direct investment during 8MFY22 was just $784 million, down 40.4pc compared to $1.32bn in the same period of last fiscal year. Similarly, both equities and debts have seen outflows from international investors. Even the Gulf money is becoming hard to come by now.

What options do local businesses have at their disposal then? At least the ones that don’t completely screw them over by taking a majority stake and all decision-making power? Barely any. Amid all this doom and gloom, the only solace could potentially be sought in some signs of mergers and acquisitions.

In the last quarter, Portugal-based S4 Digital bought stakes in two local companies — Bramerz and HR Ways while fintech Abhi raked up 20pc of logistics player BlueEx. More importantly, two Pakistani software bigwigs, 10Pearls and Arbisoft, have also recently announced acquisitions of foreign entities. This is an encouraging sign and is part of the growing shift in the home-grown IT services industry to show some ambition for scale.

However, in a pit of uncertainty and worsening economic indicators, these feel-good stories can’t go too far and probably won’t be enough to keep the top talent from moving abroad, even the ones who were staunchly against the idea a year ago.

The writer is the co-founder of Data Darbar. He can be reached at
mutaher@datadarbar.io

Published in Dawn, The Business and Finance Weekly, April 10th, 2023

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