Until recently, the only incubators in Pakistan were found in hospitals or poultry farms. But now startup incubators are proliferating. This phenomenon is part of the global wave of shared office spaces, accelerators, incubator programs, and university labs that cultivate entrepreneurship and innovation in the hope of kickstarting their local tech ecosystems and becoming their region’s Silicon Valley.
Like all trends in Pakistan, entrepreneurship is a hot buzzword that’s thrown around too often and hyped beyond what the market fundamentals can support. It’s encouraging to see people get excited about running their own companies, but it’s critical to provide them the tools and most importantly the mindset to achieve extraordinary success on a global scale, rather than ending up as an ordinary local company.
Before looking at the 27 incubators that now exist in the country (embedded below), first we need to understand the environment in which these wannabe entrepreneurs are dreaming about making their first million dollars. Or, inspired by the Zuckerberg story, a billion dollars. Maybe we need a reality check first.
Most tech grads swept away in entrepreneurship fever follow the familiar path of two or three friends moonlighting on freelance work and then finishing their computer science degree to start a “company”, which basically means the three of them sitting at someone’s home and making websites for random clients on Odesk, Elance, or their cousin in Toronto. Once the money starts flowing in, they get a small office and hire three more people to start app development services for iOS and Android. There might be Macbooks and iPhones on the table and a Steve Jobs poster on the wall but it’s a slow, linear slog of adding “seats” and scrabbling around between between rock-bottom hourly rates, Pakistan’s image problem, and offshore client’s expectations.
This service model offers the low hanging fruit that helps get a foothold in the market but it also sucks away the time and energy needed to work on your own products. If services do well, you get more work and more money and the option of risking all that for a fantasy product with no guarantee of success is a difficult decision, one that seems harder with every passing year. It’s a bit like painting walls on daily wages and wishing that one day you’ll create the next Mona Lisa.
Even the largest tech companies in Pakistan are primarily providing services or earning from consulting focused on the typical ERP, CRM, HR, business outsourcing (BPO) solutions that a thousand other providers are vying for. Only a handful have been able to make standalone products that are profitable, let alone become leaders in their segments or globally known brands.
For any ecosystem to succeed, we need these four elements:
- An ample supply of skilled teams with unique, viable ideas.
- A large marketplace that’s hungry for those products and services.
- Multiple sources of funding for those teams.
- Bigger companies that support and ultimately acquire those startups, providing investors and founders a lucrative exit, so that the whole cycle can start again.
In Pakistan’s IT industry, two of those key elements have been missing. We’ve always had teams with ideas as well as access to local and some global markets but we’ve never had any major funding sources, solid mergers and acquisition activity, or exit options. Add to that an absence of supporting legal frameworks and a dismal R&D culture and it seems impossible to establish a self sustaining loop.
There’s a reason why Silicon Valley has not been replicated anywhere in the world – not in Japan, Europe or any emerging market with petro dollars. Even if we ignore the secret sauce and the history of how that ecosystem came to be, just the sheer volume and frequency of the deals make it an unbeatable Mecca of the tech universe.
In 2012 alone, $27 billion was invested by 530 VCs in 3,826 technology sector deals. There were 49 IPOs and 487 M&A deals. To put that in perspective, that’s more money than Pakistan made through all its exports last year.
We in Pakistan have a habit of overhyping every minor success as the next step to becoming a South Asian Silicon Valley or feeding our favorite daydream of catching up with India’s tech sector. While encouraging our local companies is critical and spreading the good news is always beneficial, we must plan with a realistic view of our capabilities.
Our IT industry has over 100,000 people. But India’s largest tech firm, Tata Consulting, has 250,000 employees – yes, just that one conglomerate. And it makes $11 billion in revenue, almost matching Pakistan’s entire textile sector exports. Our IT exports are under $1 billion in value, while India is crossing $80 billion. Given this imbalance, our world-class companies and milestones are few and far between. The product landscape is barren, and although we provide services to Fortune 500 companies, we’ve been unable to scale that significantly like other countries.
Top Pakistani companies like Techlogix, TRG, Systems Ltd, LMKR, TPS all have revenues in tens of millions of dollars but somehow have failed to grow beyond 2,000 employees, the glass ceiling that no company has broken yet. Netsol is the only Pakistani company that managed an IPO on the NASDAQ – that was in 1998. Its share price is below par and while it’s revenues touch $50 million, they haven’t scaled to their true potential.
Foreign acquisitions are almost unheard of in Pakistan. The rare exception being Mixit’s acquisition for $28 million in 2011. The last major local tech acquisition was in 2005 on the hardware side, with Inbox being acquired by Dawood Group, which was one of the seminal investors in the company. Mobilink’s acquisition of LinkDotNet and the recent merger of Wateen and Qubee are promising examples, but such companies are perceived as telco and infrastructure entities rather than software success stories.
The missing elements
If we stop comparing ourselves to the Valley and Bangalore for a second and assume that we still have solid teams with interesting ideas, why hasn’t there been a supply of local funds to support them?
In most markets, the funding circles start from the tech sector itself, since they understand the huge upside of their industry. Large companies and their sponsors are first in line to invest in new ideas and young startups, and as those success stories go public, other mainstream investors also want a piece of the pie and jump in with larger funds. This core is supplemented by bank loans, government and non-profit grants and if nothing else, the founders’ personal credit cards. For a variety of reasons, it hasn’t happened this way in Pakistan.
Firstly, our tech sector hasn’t produced the sort of millionaires we’re used to reading about on Techcrunch. They’ve done moderately well but they don’t have enough “smart money” to aggressively kickstart a culture. The next tier of mainstream investors have a lot of “dumb money”, which means they end up comparing tech startup ROIs with buying gold, a Bahria plot, or opening a burger chain, which is a losing battle for anyone raising funds at a decent valuation. Other sources like bank loans require collateral, and government grants are a painful tunnel to enter.
Another key mitigating factor is that our legal structure does not protect minority shareholders too well, so both corporate and private investors ask for a majority stake right away. This either kills the deal or stifles the startup in most cases. On the flip side, companies seeking funding prefer to grow slowly rather than cede control whereas they should be thinking of a smaller piece of a larger pie.
The first and bravest VC to invest in a diverse portfolio was TMT Ventures, backed by AKD and a few mainstream banks in 2001. The fact that they invested in things like an animation studio, call center platforms, and game developers tools meant that they wanted to take risks and shake the market. Although giving 10 to 30 percent to founders in sweat equity seems very restrictive, it was still a groundbreaking effort for that time.
Venture capital is about making multiple bets with one blockbuster success – making a 10x return – wiping out the other losses. Just a single VC, no matter how diverse, cannot kickstart a sustainable ecosystem. Out of eight portfolio companies, TMT had only one successful exit of $3 million (2.6x), which although historic, was not enough to encourage the investors to continue the fund aggressively.
Another key player missing in action are the Pakistani expats who have done well in the tech sector abroad. They should ideally have the kind of smart money we need and should also be comfortable working and investing in Pakistan.
Sadly, organizations like TIE and OPEN have done little in terms of structured institutional funding. There have been random angel investments over the years but most of these remained below the radar and did not achieve any substantial results. Our local products may be weak but the expat community has also been risk averse and shied away from solid long-term commitments and meaningful mentoring. Seminars and business plan competitions are a start but nothing moves things more than a checkbook.
May you live in interesting times
With this lukewarm history, what options do Pakistani entrepreneurs have in terms of funding or mentoring if they have a solid product idea instead of the safe services model? Given the absolute lack of venture capital or private angel funds, the current trend of tech incubators is definitely a valuable and permanent addition to the ecosystem. Their funding offer of a few thousand dollars might be comparable to what one can gather from family and friends, but their true value lies in providing a platform for startups to network with industry leaders, gain access to foreign markets and get a crash course in becoming true commercial successes.
The silver lining however is how quickly things are transforming. A software startup doesn’t need much more than two people with an idea, laptops, and an internet connection. If anyone has a genuinely solid product, attracting the right global audience is doable. Whether startups look at local options or international platforms, the variety of choices is increasing rapidly.
Besides the mobile app stores’ revolutionary access to global markets, Pakistan itself is on the cusp of a drastic change. Over the next three to five years, e-commerce, mobile payments, broadband, and mobile content will explode. For once, our local markets will become more relevant than the foreign ones and we’ll be better positioned for that gold-rush than any outsider. The next Mian Mansha will not own textile mills but might be the founder of Pakistan’s version of Amazon.
Here’s a list of 27 incubators across Pakistan. From the government-backed Plan9 in Lahore to civic-minded Invest2Innovate in Islamabad, these are the places for Pakistan’s smartest tech startups to hone their skills and find their market.
(Disclosure: Hydri is an advisor to the Eyedeus/Groopic team, which has been incubated at Plan9).
(Image credit: Instagram user OnlyinPakistan; editing by Steven Millward)