Imagine it’s early 2022. You are scrolling through LinkedIn and looking at all the gurus talking about the unstoppable rise of Pakistan’s startup scene. After all, the country had raised $365 million in investment during 2021, almost 6x the value of the previous year. The optimism is contagious, even if the posts are cringe and cliched.

Fast forward to now, and all of those self-styled gurus have changed gears, having spent the last 12 months or so to become an expert on monetary economics and its history. It’s a milder version of crypto bros becoming AI guys after their decentralised heroes turned out to be frauds.

In Pakistan, too, those who sold the optimism drug while labelling the sceptics as anti-progress are now on the sidelines and talking about how unsustainable and out of touch the good old days really were.

Why this whole rant? Because Pakistan’s startup funding fell to $5.2m in the second quarter of 2023, down 77.5 per cent quarter on quarter and 95pc year on year. Basically, almost all the dollars compared to the last year have evaporated, making it the worst quarter since the first quarter of 2020.

That’s when the country hadn’t had its moment. Meanwhile, the deal count of eight was flat QoQ but almost a third compared to 2023 in the same period of 2022.

High net worth individuals and micro funds who had turned towards relatively cheaper developing countries after being locked out of more expensive deals elsewhere have hit the VC brakes

Frankly, these values are too small even to warrant any analysis, but let’s try to put them in context to whatever extent possible. For starters, the average deal size plunged to just approximately $743,000 in the second quarter of 2023, from $4.7m the year before and the lowest since the first quarter of 2019.

The median value was $500,000, plunging by 60pc over the corresponding quarter of 2022 — the worst since Jan-Mar of 2021. As a result, the difference between the two narrowed to its thinnest level of $243,000.

Put another way, the entire country raised only slightly more than what an average startup managed to get back in the same period of 2022.

To be honest, anything in Pakistan’s recent macroeconomic environment is still a blessing. I mean, there was constant talk of default for almost the entirety of the last 12 months, which is not the kind of environment where anyone would want to invest.

But that’s not the full truth, for our own macros don’t play that big a role in driving venture capital (VC) investments. After all, the economic situation wasn’t as rosy back in 2021 as the funding numbers seem to suggest.

More importantly, though, the extent of adjustment in venture capital has been somewhat extreme and beyond expectations. In the second quarter of 2023, global investment clocked in at $65 billion, a far cry from $127bn in the same period of last year, as per Crunchbase data.

The latest Venture Monitor by Pitchbook-NVCA shows funding in the US dipped to $39.8bn in the second quarter of 2023, the lowest since the second quarter of 2020. In Asia specifically, the decline has been steep, with investment slipping to $12.5bn in the first quarter of 2023, the worst in at least five years.

At the same time, there has been a sharp recalibration in private market valuations, in part triggered by the underwhelming performance of publicly listed VC-backed companies.

As a result, the gulf between capital demand and supply — as measured by a Pitchbook Index — has widened to its highest level in almost 10 years. That basically means deals are now more investor-friendly than back in 2013 when the VC asset class was still not that popular.

Only Africa and parts of GCC have shown resilience, possibly because their sources of capital are a little less cyclical: impact and regional sovereign funds and family offices.

For Pakistan, most of the dollars happened to be extremely cyclical, coming from what were called tourist investors — high net worth individuals and micro funds who turned towards relatively cheaper developing countries after being locked out of more expensive deals elsewhere.

But now that the market has shifted gears, those guys are on the back foot or have even hit the brakes. Unfortunately, local money hasn’t really stepped up because, after all, why invest in potentially productive businesses when you can park all those stacks of cash in real estate?

And that’s probably the biggest takeaway, and problem, of it all: VC, despite all its mindless overvaluations and buzzwords, happened to be the only type of capital available in the country for pursuing somewhat innovative businesses. Now, even that is evaporation, and no one is going to plug in the hole left behind.

The writer is the co-founder of Data Darbar. Email: mutaher@datadarbar.io

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