Pakistan’s startup funding shortage sorting the wheat from the chaff

This story was republished with permission from The Realistic Optimist, a newsletter publishing exclusive opinion pieces from VCs/founders around the world. It was moderately edited to reflect Tech in Asia’s editorial guidelines.

Pakistan’s startup ecosystem, not unlike other emerging market ecosystems, is traversing a tumultuous period. The end of 2021’s VC funding fury has caused a sobering hangover.

Startups whose plans relied on the certitude of future rounds have drowned as the funding wave receded. Global VC winter has deprived Pakistan of what had pushed its startups to record highs in 2021: foreign investors. Many have lost interest in the country as they deal with their own issues.

Image credit: Timmy Loen

In Pakistan’s case, the funding winter is complemented by an internal “polycrisis,” as the country battles hard-headed inflation, persistent political instability, and an uneasy relationship with its national debt. The calamitous floods of late 2022 added insult to injury.

The accompanying decline in quality of life has led to the devastating draining of Pakistan’s human capital. The number of Pakistanis leaving the country in 2022 tripled compared to 2021.

Much to the ecosystem’s dismay, prime candidates for emigration are tech workers, whose skills remain in high demand abroad. One can’t blame a person supporting a family for seeking stability and a better salary.

For those who stay, tech startup jobs’ allure has significantly decreased compared to the golden 2021 era, when Pakistanis in the diaspora flocked back home to work in local tech.

All of these unfortunate circumstances have resulted in one overarching truth: the contraction of Pakistan’s startup scene. There are fewer VCs, startups, and rounds, yet less available talent.

But that adversity can be turned into a positive.

Responsible is cool again

2021’s funding bonanza generated a substantial number of “high burn, low margins” startups throughout the ecosystem. More often than not, these startups shared two main traits.

First, many were so-called “copycats” of a similar startup that had functioned elsewhere. Second, the bulk of their funding came from foreign VCs, carried by that year’s overwhelming bullish sentiment.

Such startups, basking in Silicon Valley narratives, assumed they should follow the traditional startup playbook: Scale fast, dominate the market, and worry about profitability later.

This playbook relies on the assumption that one will keep on raising, given satisfactory top-line growth. Mystified by 2021’s adrenaline, founders forgot a crucial component: Pakistan’s VC scene is not the Bay’s.

Mitigating risk and new ideas

Cautious optimism