Startups are brave to operate in Pakistan - because the govt really doesn’t get them

In early 2019, the CEO of foodpanda’s APAC region visited Pakistan and held a meeting with the then finance minister. In the beginning of the conversation, the CEO laid down his company’s concerns regarding FBR taxing the company on the GMV instead of revenue. Exactly 7-minutes into the discussion, the minister asks the CEO to pause and says: “Gentlemen, let’s take a step back. Can you explain what foodpanda is?” After the meeting was over, the foodpanda CEO wryly said: “The minister talked to us for 45-minutes without knowing what foodpanda was.” This happened three years ago, so why bring it up today? Because while it’s a reflection of how the government embarrasses itself, it’s a stark reminder for the technology industry that the government does not support them beyond acknowledgements and awards: the said matter of taxation by FBR still lingers on. And also because nothing has changed in those three years. On March 3, an event was hosted at the President House by a little known BizNet. The event was hosted to celebrate, as the presenter called it, a “massive success of the tech heroes” achieved in the past year by raising huge capital for startups. The awards were handed over by President Arif Alvi to startups Airlift, Bykea, Finja, Cheetay, and TAG for raising substantial funds. An unusual recipient of the award was Unilever Pakistan, which was given an award for backing Munchies, a quick commerce startup, with investment. Since the event was about celebrating startups for raising investments, it would be fair to say that Munchies was on that list instead of Unilever but could not be an appropriate nominee for the event because of an unfortunate turn of circumstances: a day before the event took place, news of Munchies shutting down broke. Munchies shutting down should serve as a warning of how things can quickly take a turn for the worse in the startup space. Just five months ago, Munchies announced raising $2.5 million in pre-seed funding and was continuing on a strong growth trajectory. Munchies closure should also serve as a warning to the government that measures like acknowledging startups for raising investments, repeatedly, by giving them an award are superficial and premature. Not only is it artificial and premature, the government’s disposition towards tech companies has been callous and disrespectful in some instances.

In another recent instance, at the National eCommerce Convention, the newly appointed adviser to the prime minister on eCommerce, Senator Aun Bappi, took all the credit for startups raising record investment in 2021. “We should all be proud of our investment abroad policy. What used to happen before was that you could set up a company in Pakistan and no one would know about this company outside of Pakistan. We introduced this investment abroad policy under which you can bifurcate holding company and operating company in two parts,” the advisor said at the convention.

“....look at the figures now. Between 2014-17, venture capital funding was $130 million. After this policy, from 2018-21, because of our government, startups raised $433 million and in 2021 alone, $364 million investment came into the pockets of these young startups.”

“....Just because of this one policy,” Senator Bappi said to a packed audience among which the prime minister and the incumbent finance minister were attendees.

The senator misrepresented facts to wrongfully take credit for the investment that came into Pakistan’s startups, and, in the process, insulted startups that raised this money on their own, and were called to the same convention, and given awards as a gesture of acknowledgment from the government. There was no investment policy introduced in 2018, according to the Board of Investment data. The last investment policy was introduced in 2013 when the PML-N government was at the helm. The State Bank of Pakistan amended rules in the February of 2021 which legalised setting up holding companies abroad.

Even before the SBP’s intervention, startups raised funds as per their requirement. Karachi-based startup Bykea is one case in point which announced raising $13 million in September of 2020, has a holdco abroad and was one of the startups given an award by the president at the recent dinner. Bazaar is another startup which announced a $6.5 million raise in January 2021 and has incorporated a holding company abroad.

Startups are courageous to be operating in a country like Pakistan where the government only supports them through such superficial acknowledgments, and tries to steal them later, without understanding the core needs of these startups. There’s been a series of events either hosted or attended by either the president of Pakistan, the prime minister, ministers or advisers. There’s been private meetings, eCommerce convention, BizNet 2022 Awards, and there is an upcoming Future Fest to be privately organised in Islamabad this month. Future Fest, which is expected to bring a footfall of 35,000 attendees, is a broad themed event not focused on acknowledging startups particularly and is reportedly not going to be an exclusive event for the tech ecosystem and would be open for everyone to attend. Such big events once a year can suffice the need for celebration, instead of back to back micro events focused on one particular agenda which achieves nothing.

The government seems to be fixated on the idea that startups, just because they are able to raise funds against an idea, are the cure to the country’s economic woes. It [the government] does not seem to realise that tech startups are a very high-risk venture and without addressing their actual needs, the high of startups can turn to a low very soon. Munchies closure is an example of that manifestation.

In another example of how superficial the government’s measures are, Prime Minister Imran Khan announced a complete waiver on taxes for the IT industry. Seemingly an encouraging measure, the PTI government was actually the one to revert the exemptions earlier and introduced a tax credit scheme instead. It only reverted back to the earlier status and exemptions does not mean the IT industry has become a zero-rated industry. It’s a tax exemption, which means that the FBR officials have the powers to grant exemptions to companies and individuals at their will. The exemption does not come into immediate effect either. It is going to be approved in June when the next year’s budget is presented. Who can guarantee that the government will eventually see it through?

VC investment is flowing into Pakistan because investors see it as a big market. The doors to this market were opened and caught the attention of foreign investors thanks to Aatif Awan, the founder of Indus Valley Capital. But Pakistan simply being a big market as the reason for investor interest in Pakistan is no reason to celebrate or take credit for. What is going to be worth celebrating is if the investments continue rolling in and for that, startups need to be able to grow and show to the investors that the market was actually worth investing into.

The next phase of investments is going to be contingent upon how startups in Pakistan foreign investors invested into have grown. And if they do not see substantial results as promised, they would be reluctant to invest further and likely discourage others from investing as well.

The investment ecosystem is tightly knit where investors mostly know each other, talk to each other to vet the market before investing. So if an investor has a bad experience investing in Pakistan because despite Pakistan being a very large market, if the startup

he invested in was not able to grow, the tables can turn on the Pakistani market quickly.

These are times when everyone in the ecosystem has to be very cautious and focused. The sheer quantum and the pace at which venture capital funding entered the Pakistani market last year should be more of a reason to be thoughtful about what is going to happen next than rejoicing. If the government’s reforms are not able to keep up with the pace at which startup investment comes into Pakistan, startups are going to have a hard time growing and which will bust the next cycle of investment, or prolong it. The earlier celebrations would then appear silly and meaningless.

It is perhaps cultural here that whenever we think of an idea, we start celebrating and get complacent in the process. Our bar for reasons to celebrate is very low to begin with and complacency even when we think goals are achieved can be dangerous.

If the government wants to support the startups, it should turn away from lunches, dinners and awards and resort to meaningful ways to acknowledge them. Startup founders tell me that the government calls them, thanks them for what they are doing, listens to their problems, does nothing! It calls them again, does not do anything and the cycle continues. Should the government be appreciated for creating STZAs? Well if the government needs appreciation for that, I need a raise every time I write an article!

I know of an instance where a startup’s vendor refused to pay what he owed. Because of lack of enforcement of contracts, the start-

President Arif Alvi handing over an award to Unilever official for backing Munchies

up thought it was better to let that money go and dedicate resources to something else. Instances of IP rights violations are also not unheard of.

On a broader level, inflation has been averaging around 10% each month since last year. High inflation adds up to the GMV of a startup but adds to their costs as well and decreases the demand of products and services. Wages have been stagnant on the other hand. All of this is going to limit the growth of a startup which is a factor that will decide the quantum and pace of influx of future investments and which the government can look into.

Government PR on steroids with respect to acknowledging startups is also going to make the government look bad some day. Out of sheer frustration because of issues in the market, a startup might do something silly to appease investors and get follow-on funding. Someone from the outside is going to pick it up and think that the government was in it all along to get the dollars to sustain its reserves. The government will end up embarrassing itself at the least if the government’s PR packages identify such a startup with government dignitaries.

Startups are courageous to be operating in the Pakistani market. There is a lot of risk that these entrepreneurs have taken, leaving high paying jobs in countries like the US and the UK to start a high risk venture in Pakistan. The services they have started in Pakistan are simply a privilege for the people here.

Think about it! There is someone out there that can deliver you a hot meal at midnight, at a discounted rate, without any delivery charges in some cases. Or deliver groceries at your doorstep. It’s definitely a privilege for the people here. The startups need to be rightfully acknowledged for giving us this privilege but if they are not able to keep these services up because the government did not have its priorities sorted, the government would be denying Pakistan a privilege yet again.

Most of the problems in the Pakistani market are not created by the PTI government but it has, like it or not, fallen upon them to fix. Under these circumstances, one can only hope that the PTI government gets to recognise the opportunity and the challenges timely and does not become the one to deny us the privilege of subsidised hot meals and groceries.

Asad Umar with foodpanda APAC CEO in 2019