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Funding Hits the Brakes in Pakistan

Two women holding up newspapers which read "Funding Hits the Brakes in Pakistan".

The global recession has had dire consequences for Pakistan’s already crippling economy, with a rapid depreciation of the rupee, a torrent of layoffs and the country at the crux of defaulting. It comes as no surprise then, that the sector struggling the most is the startup ecosystem, filled with hopeful founders trying to disrupt and survive the economic slowdown.

Crunchbase reports globally startups have experienced a 53% decrease in VC funding from 2022 to 2023, with many risk averse investors falling back from funding ventures. This is especially true for larger rounds in late stage funding like series A and series B, as opposed to pre-seed and seed.

Mar Hershenson, Managing Partner at Pear VC told Forbes, “Seed valuations will remain high, because everyone sees seed as the lowest risk spot in the market.”

A graph showing quarterly deal activity

According to Invest2Innovate’s quarterly deal flow update, Pakistani startups have raised $5.6 million across 6 publicly disclosed deals in Q2 2023, an immense 94% reduction from last year, and the lowest investment raised in the last 12 quarters. Some people have despondently claimed that this is just the new normal. However, there’s a multitude of macroeconomic factors that shape Pakistan’s unique predicament. With a spike in political unrest due to toppling governments, rising interest rates and ecological crises like the 2022 floods decimating essential infrastructure, there’s a notable pullback from international investors, with international investor engagement down by 43% compared to last year.

A man standing by the window at Daftarkhwan | Downtown.

However, this adversity has forced founders to get more creative in how they’re financing their startups, from bootstrapping and pivoting to a more profitable business model to debt financing as seen by Abhi, a leading fintech company that recently raised $7.2 million and issued $7.1 billion in Islamic bonds, opening up a new vein of funding for startups in the face of venture capital decline.

A man making a transaction with GPAY.

While all sectors have suffered due to the recession, there are some industries that have fared better than others. According to a report by Dealroom, while fintech suffered a 36% reduction from last quarter, it was still the second most VC funded industry globally with $14 billion in Q1 2023, with the creation of 3 new unicorns. In Pakistan, fintech has been the top funded sector in the last fiscal year, making 61% of all investment raised in Q2 2023.

Founders shouldn’t feel too disheartened.

Gene Frantz, General Partner at Capital G spoke to Forbes about the global trajectory of the startup ecosystem, “The current news cycle may be rough, but persistence and innovation combined with an improving economic outlook will restore the optimism that has always defined our industry.”

Ali Najam, VP of Amaana Capital, conversing with people at Daftarkhwan | Vogue.

Our supercommunity member, Ali Najam, VP at Amaana Capital, a venture capital firm that recently invested $3.7 million into logistics company Trax, commented, “We are still chasing mid to long term VC opportunities in emerging markets which are large and growing markets but still significantly underserved. At Amaana, we’ll continue to invest in the MENASA region’s most pressing issues by focusing on easily adaptable solutions in fintech, healthcare, mobility, consumer experiences, food security and education.”

With the long awaited short term IMF loan of $3 billion being granted and the economy on its way to rebalancing itself, the startup ecosystem must continue acting with the same resilience that has characterized it thus far.


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