For the better part of the last 15 years, Pakistan has faced serious economic troubles. Even during the supposedly good times, the alarm bells were quite clear.

Lately, we have truly learned the meaning of rock bottom through a series of ‘firsts’. Be it the highest inflation in our history, interest payments exceeding federal revenues or another indicator of your choice.

Briefly, the startup ecosystem appeared to be immune from the entire mess — at least to the flag bearers — as capital was pouring in regardless. Once that stopped, everyone became an expert on monetary economics and asset allocation.

Nevertheless, rounds were still being announced, albeit far less frequently. However, we have found a new rock bottom: in the first quarter of fiscal year 2024, Pakistani startups raised a grand sum of zero dollars. It goes without saying that this was the lowest total in over five years, at minimum, possibly even 10.

Of course, announcements don’t necessarily mean no dollars came in, but based on anecdotal evidence from within the small ecosystem, the lack of funding avenues is becoming a little too clear. Its effects are already showing in the uptake of startup shutdowns. While we are hitting rock bottom, there are early signs of the global venture market recovering.

Venture capital funding recovers by 14.2pc compared to Q4FY23 while the actual number of deals drops by 36.9pc

According to the latest data from Pitchbook, global venture capital (VC) funding reached $95.7 billion across 7,520 deals in Q1FY24. While the amount is flat compared to the same period of 2023, it’s an improvement compared to the seven straight quarters of sequential decline.

There was a recovery of 14.2 per cent compared to Q4FY23. Volumes-wise, there was less to cheer for as total deals plunged 36.9pc to 7,520 — the lowest figure since Q3FY16. Even if you add the estimated undisclosed transactions, which take the number to 10,222, it’d still be the worst since Q3FY20.

While the headline figures may be comforting, a deeper look suggests there is still a way to go before recovery as the biggest drivers of deal value continue to struggle. In VC, North America and Asia account for the largest share of investments — more than three-fourths historically. Therefore, in order to truly bounce back, these two need to be standing on their feet.

So far, this hasn’t happened. North America has only once managed to avert a decline in Q4FY23, when the deal value edged up 1.1pc year-on-year but was down again 30pc to $37.3bn. On the other hand, Asia has had nine straight quarters of sequential decline now.

In fact, its funding value of $18.5bn was the worst since Q2FY17. While both Latin America and Europe experienced some respite, only the latter’s numbers were meaningful enough to have an impact on the global totals.

Things were a lot worse by a number of deals, as North America’s 29.5pc decline was the lowest for any region while Latin America plunged 55.4pc sequentially in Q1FY24. Since Q3FY22, there hasn’t been a single quarter in which even one region saw an increase in deal count. More importantly, the reason why venture may still take time to recover lies elsewhere.

As an asset class, VC is centred around exit events — the big bumper initial public offerings and mergers and acquisitions. This is how general partners multiply their stakes, earn actual cash instead of paper markup, and distribute earnings back to investors.

For now, such liquidity events are rare — at least ones that could offer a return on the valuations VC originally came in at. In Q1FY24, the exit value of VC was just $30.7bn globally. This is the lowest figure since Q2FY15 and not even 10pc of the peak of $397.1bn in Q4FY21. Similarly, the number of exits remains muted at 559, having fallen sequentially for nine straight quarters.

Asia was particularly hit hard, with exit value receding to just $9.9bn, whereas North America bounced back yearly and quarterly, albeit off a terribly low base. Meanwhile, Europe hasn’t crossed double digits in seven quarters in yet another instance of its secular stagnation.

In theory, what happens in the world of global VC should have an impact on Pakistan’s own trajectory, considering that it’s the only asset class still somewhat available for entrepreneurial finance. And it may have an impact, at least to the extent that local investors can close their subsequent funds and keep the market steady.

But anything beyond that will ultimately be driven by headline numbers and flashy stories — where we have a lot of damage control to do.

Published in Dawn, The Business and Finance Weekly, April 15th, 2024

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