OPINION
Uzair Younus
Winter is coming for the startups
220 million people, most of them under the age of 30, and a dramatic increase in internet connectivity is a no-brainer when it comes to disruptive potential. As a result, sectors ranging from e-commerce to edtech began seeing immense investor interest. Younger graduates, connected to the rest of the world and keenly aware of the power of the digital inter is coming. We know what’s revolution, began to believe in entrepreneurship. Gone were the days coming with it.” This line from the teleof college graduates aspiring to join large multinationals in search of a vision show Game of Thrones, which is cushy job and nice perks. This new generation of Pakistanis, like their based on the iconic book series written peers around the world, wanted to disrupt things and get rich while by George R.R. Martin, is a classic. It doing so. sums up the global economic environment, particularly as it relates The acquisition of Careem by Uber was a major inflection to the funding outlook for technology startups. point, showcasing that there was a way to exit and realize gains in For the last few years, money has been cheap, leading to a drathe region; a similar even occurred in India, where Walmart acquired matic upsurge in risk capital sloshing around the world. But as the Flipkart. This interest reached a fever pitch in 2021, with startups era of cheap money comes to an end, growth capital is drying up, raising $350 million in 2021, a fivefold increase from 2020, according to forcing entrepreneurs to become more disciplined in their approach. research conducted by invest2innovate. While this may cause some volatility and angst in Pakistan’s budBut this rapid growth in investment flows and the dramatic exding startup ecosystem, it will be a good thing for the industry to go plosion in Pakistan’s startup scene had a downside as well. With the through this cycle. world drowning in cheap capital, investors became less disciplined. The era of cheap capital meant that the financial industry, Rather than critically assess opportunities and conduct robust due from the bond market to venture capitalists, was reaching for yield. diligence of the founders who were pitching to them, they began to Developed markets had only a finite set of opportunities and as valhave FOMO – fear of missing out. uations went through the roof, investors began scouring the globe The ability to easily raise money fueled a “grow at all costs” menfor better opportunities. tality among founders, meaning that burning cash to show growth, As a result, risk capital, which was primarily seeking busieven if it was unsustainable, became the motto for some. Since money nesses with exponential growth potential, began finding its way kept being cheap, undisciplined startups burnt cash to show growth, into emerging and frontier markets. More attractive markets like leading to even higher valuations and more access to funds. The frenzy Brazil and India were the first ones to experience the influx. But as became a vicious cycle, until central banks around the world, includopportunities dried up, investors began looking at markets like Paing the U.S. Federal Reserve, took away the punchbowl. kistan which had been undervalued and overlooked for a prolonged In the last few weeks, we have seen stories of various startups period. cutting their operational and staffing footprint. This interest was further reinforced by a vibrant Pakistani They have been forced to realize that the good times may be over diaspora, particularly in the United States. Sensing an opportunity and that growing with discipline, not growth at all costs, is going to in Pakistan, foreign investors, initially led by the diaspora, began draw investors. Compounding the problem is the economic crisis in to seek opportunities in Pakistan. After all, a population of over Pakistan, where the purchasing power of ordinary citizens has been drastically cut by a rapidly depreciating currency and rising inflation. This has made the Pakistan growth story that much harder to sell, especially to global investors feeling the squeeze due to a tightening environment in developed markets. The writer is Director of To some, this may seem like the end of the world. But it isn’t. The technology sector around the the Pakistan Initiative world is facing these headwinds and more mature markets have historically emerged stronger from these at the Atlantic Council, a crises. For Pakistani founders, it is important to dig deep during these trying times and focus on making Washington D.C.-based their core business leaner and meaner. Startups who are not up to this task will wither away and die, but think tank, and host of the this trauma will only strengthen the ecosystem and make other businesses more disciplined. podcast Pakistonomy. He Pakistan’s economy will eventually stabilize, its middle class will recover, and the digital revolution tweets @uzairyounus. will only gain pace. Technology-led disruption is one of the only ways to reorient the economy and alter the status quo. In these trying times, the startup ecosystem’s participants should stay strong and carry on.
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