Venture Capital Investment In Pakistan

The Pakistani company took  3 million from venture capitalist investors, while the company called 'Kast Pay'  15 million. A company called Airlift hit sixes in the Series B round and earned  85 million. Even the Prime Minister of Pakistan Imran Khan tweeted in his praise Venture Capital .

Venture Capital Investment In Pakistan
Venture Capital Investment In Pakistan

According to the research team of I-to-I, an organization that monitors venture capital investment, Pakistani companies had raised aroun 10 million in 2018 from venture capitalists, which is called raising funds in business terms. In 2019, it reached 40 million, while in 2020 it was more than 70 million, but in 2021, this amount became more than 31 million, that is, three hundred and ten million dollars.

The question arises as to what has happened in Pakistan that venture capitalists have started investing in Pakistani companies. Does government policy play a role in this? Or is it an improvement in the security situation in Pakistan? We will talk about all these questions but first we try to understand what is venture capital and how to get investment from it.

What is Venture Capitalism?
What is Venture Capitalism?

What is Venture Capitalism?

Usually when you start a business and if you do not have money to invest in it, one way to invest is to take money from a friend or relative or from a bank. But venture capitalists have a third way.

Meena Salman says that when she started the business, she did not have much money.

"The biggest problem for us was that we didn't have that much money. I put all my savings into this business but to grow any business you need to improve your technology, your methods and it requires money. We also needed money to get our business out to as many people as possible. "

"In the beginning, there weren't many problems in his business, but as his business grew, we didn't have enough money to buy stocks," says Mania.

In addition to stocks, Mina's business faced another challenge. "In any business, it is important that you have good customer service," she says. Whenever a customer places an order, you have a team to handle it. We needed money for that. "

To solve these problems, Meena and Salman venture capitalists started looking for investments.

Meena Salman is a co-founder of a private company, Bag Gallery. She started this company in 2017 with her husband Salman Sattar

Faisal Aftab, managing partner at Zen Capital, explains that "venture capitalist investors are people who usually invest in new businesses." They tend to be more risk averse than the average investor.

"As a venture capitalist, we know that if we invest in ten companies, we know that five or six of them will fail, but the two or three that grow will be billion dollar companies," says Faisal. Also become.

Why is venture Capitalist investment in Pakistan growing so fast?

Faisal Aftab says that there are four reasons for this. Increasing use of internet, global situation after Corona virus epidemic, better security in Pakistan and the phase of money connection with internet.

The first reason is the increasing use of 3G and 4G. The rest of the world launched 3G and 4G licenses in 2006 and 2011. Pakistan had auctioned these licenses around 2014 and 2015 and since 2015 it has been used in the country. If you look at Pakistan six years ago, those who were active internet users, that is, those who used the internet every day, were about 15 to 18 million people, that is, a little small (market). If you look today, the rate of smartphone adoption is fourth in the world. By December 2020, we have reached 100 million Internet users, more than the total population of many other countries. "

Another reason is the corona virus epidemic. During the Corona virus epidemic, the world's three largest central banks, the Bank of England, the Federal Reserve Bank of the United States, and the European Central Bank, all cut interest rates to some extent.

According to Faisal Aftab, lack of interest rates in different countries is also a reason for investment in Pakistan.

"In the aftermath of the financial crisis caused by the Corona virus epidemic in 2020, when all the central banks printed money, the usable cash market became more popular," he said. When you are investing, you look at investing in any country in the context of other markets.

"If you look at India or China, or Southeast Asia or North Africa as a region, investors have already figured out the value in all of them. Pakistan remains the last market that has not yet been digitized. Now that access to the internet has increased, it is having a huge impact and investors are coming.

According to Faisal Aftab, lack of interest rates in different countries is also a reason for investment in Pakistan

Misbah Naqvi, co-founder and partner at I2I Ventures, agrees. "Venture capitalism as a whole is growing in the world," she says. But other markets are a bit more expensive at the moment. People have seen opportunities in Pakistan. This is also happening in other emerging markets and people are seeing that these (emerging) markets have a lot of potential.

According to Faisal Aftab, the third important factor is the transition from security paradigm to health paradigm. "Our perception of the world (in terms of security) has not been good in the last few decades," he said. "But now in the health paradigm, they are a little better than the rest of the world. If we look at the average age of our country, it is about 22.8 years. Because of this, the perceived threat to Pakistan has diminished.

Misbah Naqvi cites another reason for the growing venture capital. He says it has become easier for companies to reach out to investors during the Corona virus epidemic. "It is not necessary for investors to come to Pakistan. People all over the world are doing devotional and communication, zoom, email, and video calls. So the problems for Pakistani entrepreneurs are less than they were before other entrepreneurs.

Misbah Naqvi also gives a very important reason. "Look, such activities are on the rise in the region," she said. Karim is a company created by a Pakistani and for them Pakistan was an important market. When this company owes 3 billion to Uber, other people have come to believe that there are people in the market like Pakistan who have worked in startup companies, who know how to build and grow the company, so this market. I can invest.

Faisal Aftab says another reason for the growing venture capital investment is that "we are currently in the phase of exchange of value of the Internet where for the first time money is being linked to the Internet. This is a very important issue for Pakistan. A large part of the economy in Pakistan is undocumented (ie there is no record of it). All these platforms are becoming, they are capturing economic activities that are not documented. After all, they all have to move towards digital payments. If you look at the FATF or OECD standards, there will be more digital payments in five to six years

Misbah Naqvi says the government also played an important role in raising venture capital

venture Capitalist Did the government have a role in this?

Misbah Naqvi says the government has also played an important role in raising venture capital. "The SBP and the SECP have made some changes to their rules that have not only given startups a chance to grow but also boosted investor confidence."

Misbah Naqvi says that SBP had formed various committees to resolve the issues. "The Foreign Exchange Committee has done a lot of work. We have been doing this for many years and then they sat down and tried to find out from the market what are the problems of startups and to what extent they can be solved and through this effort three or four important things. Have happened On the one hand, Pakistanis have been allowed to set up pabar holding companies, which gives confidence to outside investors that our money will not get stuck in Pakistan.

"Secondly, we have tried to reassure those who are investing directly in Pakistani companies (other than holding companies) that your money will not get stuck in Pakistan. In this regard, some rules have been clarified that you do not need to get special permission from the State Bank to withdraw your money. When you bring money and then you obey the rules, it will not be difficult for you to withdraw.

Misbah says the SECP has also defined a startup company in its Companies Act and provided a sandbox facility for new companies to test policies.

Faisal Aftab says that the government had a very important role in this. This is not usually said in Pakistan but there are strict type of capital controls ie when you invest directly in Pakistan (from abroad) when you try to get the money back it is often difficult. Yes, and it takes time.

"For the last few years, the technology sector has been trying to persuade the government," he said. SBP was not allowing holding companies abroad. Now they have given a special permission that companies can set up their holding companies abroad where foreign investors have confidence and the operating company resides in Pakistan.

There is a need to clarify what a holding venture Capitalist company is.

"When you first set up a company in Pakistan, its shares were only in Pakistan," says Faisal. Now you are allowed to build another company on top of that which owns your Pakistani company. This company is called the holding company.

"Now you have got permission that the ownership of the Pakistani company could be with an outside holding company. This makes it easier for foreign investors to get their money's worth when they sell their shares. The investor who is a tax resident of Pakistan will of course have to bring him back to Pakistan and pay capital gains tax on him according to the law.