The first half of 2024 presented a challenging environment for Pakistan’s startup ecosystem, mirroring global trends. According to S&P Global Market Intelligence, global VC funding declined in Q2 2024, an 8.3% drop from the previous year in deal value, and the number of transactions falling by 14.3%, influenced by high interest rates and geopolitical uncertainty, which prompted cautious investor behavior, worldwide.
Pakistan, as a frontier market, faced extra scrutiny due to its own economic and political challenges, further deterring investors from deploying funds in the region. However, entering the second half of the year, several positive indicators suggest a more optimistic outlook. Inflation eased to 11.8% in May 2024, marking a 30-month low, followed by a 150 basis points cut in the policy rate by the central bank, aiming to stimulate economic activity and enhance credit accessibility. The stability of the Pak Rupee against the US Dollar also contributed positively, rendering Pak Rupee as one of the best-performing currencies in the world in the last one year.
A key area of growth is Pakistan’s IT exports, which have seen a significant rise, reaching US$2.9 billion from July-May 2024. The country recorded the highest-ever monthly IT exports of $332 million in May, posting a 41% rise over the corresponding month last year. The sector holds potential for multi-fold expansion, with unchanged tax codes on exports that continue to encourage growth. The government’s focus on supporting IT/Tech exports can lead to further advancements in the field, providing new opportunities for startups.
After a challenging first half, the startup ecosystem saw some positive development in Q2 as Turkey-based unicorn, Papara, acquired Pakistan’s leading fintech, SadaPay, for approximately US$50 million, and pledged an additional US$10 million investment, highlighting sustained interest in Pakistan’s fintech potential. Shortly after, DealCart, an e-commerce platform, secured a US$3 million funding round from foreign venture capital firms, Shorooq Partners and Sturgeon Capital, signaling renewed investor confidence.
In a substantial support to economic prospects, government authorities reached a staff-level agreement with the IMF worth US$7 billion, which is expected to enhance funding opportunities from other global bilateral and multilateral partners. The agreement has bolstered confidence in ongoing macroeconomic recovery, stability and reform efforts aimed at sustainable growth, as reflected in the country’s benchmark equity index, KSE100, nearly doubling over the past year, in anticipation, becoming one of the world’s best-performing equity markets.
After periods marked by dry quarters, the entrepreneurial spirit often dampens and revitalizing it is equally important. Looking ahead, Pakistan’s startup ecosystem is expected to benefit from the economic reforms and developments, alongside government initiatives like the Pakistan Startup Fund and specialized training programs.
However, more needs to be done to reignite the entrepreneurial landscape that had been subdued recently due to a host of economic challenges including high taxes, expensive energy and very high cost of capital. Factors such as inspirational role models, evolving social norms favoring innovation, and supportive entrepreneurial ecosystems all play pivotal roles. These elements are increasingly vital as evidenced by business-centric entertainment shows, for example, Shark Tank – an investor-startup reality show worldwide, has made a mark globally, thereby uplifting and supporting new startups and business showcasing their potential. The franchise, with its 51st adaptation, has now reportedly entered Pakistan. Such reality shows have the potential to spark investors’ interest in startup ecosystem, leading to more potential investments into the new tech and knowledge economy.
In conclusion, while challenges persisted in the first half of 2024, they also paved the way for a more hopeful second half, offering valuation attractions and timely investment calls for investors. With a focus and a required supportive framework, Pakistan’s startup ecosystem can unlock country’s true economic and investment potential for high sustainable growth and resilience ahead. The country’s demographics and expanding technology penetration offer substantial disruption opportunities in fintech, healthtech, edtech, and retail sectors. Embracing AI and other emerging technologies is crucial for enhancing efficiency and competitiveness in this evolving market.
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Sarwat carries a diverse portfolio, skills and knowledge expertise of both Technology and Finance.