Only about 5 out of 300 startups launched every year in Pakistan survive in the medium term. This is a success rate of less than 2%. Abysmal outlook of digital entrepreneurship as it seems, Pakistan has a long way to before it becomes an stable entrepreneurial economy.
Jazz conducted this research with help of partners to explore the entrepreneurial landscape in Pakistan and see where they can play their role while being the largest telecom cellular service provider and one of the biggest digital financial services provider in the country.
A look at startup scene in Pakistan
Study suggests that in Pakistan, most startups are launched by people who are over the age of 30 and have a professional background. 80% of digital startups founders have professional work experience. Market experts say many founders lack business and management skills and an entrepreneurial mindset while 50% of the startups have only IT engineers in the founding team.
Market experts are of the view that half of the 300 digital start-ups launched each year are promising. Out of these, 10% secure funding from friends and family or investors. An additional 3% go abroad for funding. Out of the 15 or so Pakistan-funded startups that remain in the country, up to 5% prove to be sustainable.
About 50 percent of the startups launched in Pakistan since 2013 are in popular consumer segments such as e-commerce and delivery, marketplaces, communications, social media and content. Many of these companies which tend to focus on domestic market, seek to replicate digital business models that have been successful in other parts of the world.
Most of the startups (21%) launched since 2013 fall under e-commerce and delivery services category followed by software development at 15%, marketplaces at 13%, e-learning (9%), communication platforms (9%) and content based startups at 8%. There is lot of space to play in healthcare, e-learning, e-finance, and other categories. Startups should get away from marketplaces and delivery services and explore other categories.
Why failure rate is so high in Pakistan?
Low investment in new businesses
Lack of venture capital is one of the main reasons for early life failure of startups in Pakistan. We do not have early stage investment skills. At the same time legal framework does not support local venture deals. Half of the startups we surveyed applied for foreign venture capital funds. However, to have funding above $ 100,000, startups have to register abroad. Government of Pakistan has many projects to support young entrepreneurs and female entrepreneurs but these initiatives do not focus on digital innovation.
Immature digital market
Only 3% of the population i.e around 5 million regularly shop online. The market is heavily dependant upon Cash on Delivery payment method.
Lack of business and global market knowledge
Digital entrepreneurs complain that universities do not equip them with skills and knowledge to survive in the real world. They are relying on incubation centers and accelerators to provide them the guidance and mentorship.
Gaps in regulatory framework
Regulatory framework is improving and credit must be given to government but there are still some gaps. Policies on financial services are bit strict. Startups that deal with foreign stock markets, provide payment platforms and offer payment processing services still need more enabling policies and support from government.
Way Forward
Countries typically take 5 to 10 years to build a self-sustaining entrepreneurial ecosystem. Pakistan has started in 2012 and if it continues at its current pace, it will achieve sustainability by 2025. On a positive side, Pakistan has most of the ingredients to build an active ecosystem. A large youth population, high density of telecom penetration and IT expertise are some of the elements of a successful ecosystem that Pakistan does have. However lack of education is one aspect that should be addressed on critical basis.
Research suggests to take following actions to strengthen startup ecosystem in Pakistan.
Universities
Universities should focus on R&D and collaborate with industry and incubation centers. Labs should be established for R&D in areas of IoT, Augmented Reality, Artificial INtelligence and such emerging trends.
Investors
We need to bring in experienced investment professionals from abroad. Also, network of investors to be established to support startups looking for ways to expand in the region.
Corporations
Corporations can help startups by either developing their own incubation centers where they provide marketing and distribution support or they can partner with established ones. Participations by corporates in events where they disseminate knowledge by interaction with young minds can be really helpful.
Incubation Centres & Accelerators
Incubation centers can collaborate with international centers for mentorship and knowledge sharing. Also, they should arrange more training sessions by inviting people from industry.