December 28, 2022
By every measure, 2022 has been a pretty tumultuous year for Pakistan. On the political front, it saw the first vote of no confidence being passed in parliament, removing former prime minister Imran Khan’s government. The massive protests that followed seem to have put an irreparable dent in the establishment’s role and status.
However, all those developments pale in comparison to the economic crisis the country has been reeling through over the last year. Peak inflation in almost two generations and the sharp monetary contraction managed to put a major dent in customers’ and businesses’ pockets. All of this was only made worse by the dilly-dallying resumption of the International Monetary Fund (IMF) programme and the constant talk of default.
For tech startups though, it was the changing global macros more than anything that spoiled the party. After a solid 2021 on the back of a capital frenzy that swept away markets the world over, and record investment of $366 million in Pakistan, there was naturally a lot of optimism for the ecosystem in 2022. And it started on a high note too: local startups raised over $174m in the first quarter. But the US Federal Reserve’s contractionary policy amid high inflation soon caught up and slowed down the venture capital activity.
The cracks first began to appear in the second quarter of 2022, when startups started scaling back their operations and laying off people. That included Airlift, which pulled out of all cities other than Karachi, Lahore and Islamabad and let go of 31 per cent of the workforce. Soon after, Swvl, Retailo and Truck It In followed suit. However, the fundraising held up to $104m, still higher compared to the same period last year.
Come the third quarter and it was almost carnage. Investment plunged 47pc QoQ and 68pc YoY to $55.4m — the lowest since Q1-2021. More than that, the period saw the biggest casualty of the new fundraising environment: Airlift, the most funded Pakistani startup, announced it was shutting all operations after its investors backed out. This was the same company that had first unlocked meaningful capital for the country.
In 2019, it announced a $12m Series A, with participation from First Round, one of the backers of Uber. Then in 2021, it bagged Series B of $85m — an eye-popping amount by local standards.
The post-mortem in the press and social media didn’t give a comforting picture. And to make things far worse, around a similar time, news reports of TAG — a regulated fintech with $17.5m in funding — forging its documents appeared. It raised serious question marks over both the underlying governance at startups and investors’ due diligence process. More importantly, it certainly didn’t induce confidence among foreigners who had very recently started exploring Pakistan as an investment destination.
Whether it was for these high-profile shutdowns, the global macros or our own weakening fundamentals, the pullback was hard to miss. The number of unique investors participating in Pakistani startup deals fell to just 52, the lowest since Q1-2021. And while the current quarter is yet to complete, it makes up for a dismal picture.
Only seven investments (excluding M&A) worth $13.9m have been disclosed so far. If it continues this way, it would be the worst quarter in terms of amount since Q1-2022 and joint lowest by deal count since Q2-2020.
Based on all this information, it might seem like doomsday for the startup scene.
But there’s hope.
A number of positives have come out for the ecosystem towards the tail end of the year. For example, JS Group announced a partnership with 500 Startups, one of the biggest investors globally — thus unlocking a mix of local and foreign capital. Similarly, Duraid Qureshi of Hum Network and Naveed Sherwani of US-based RapidSilicon launched a $50m Pakistan-focused Katalytic Fund. Moreover, at least three local VCs are in the process of raising their second investment vehicle. All of it should bring in some much-needed liquidity to the market.
That said, most of Pakistan’s inherent issues remain and have raised the country’s risk premium, which is well beyond the control of any founder. The perennial external account troubles are hitting the fan as forex reserves are now not even enough to cover a month of imports. In this uncertain environment, even the more established businesses are struggling to keep afloat and continue daily operations, let alone early-stage startups.