Since the emergence of the pandemic, the US has managed to keep its economy afloat by wildly increasing the printing of its currency to support covid relief operations amounting to a debilitating $5.2 trillion. The oversupply of the dollar in the global economy has led to an inflationary risk which, combined with other factors such as the war in Ukraine, major supply chain disruptions and elongated lockdowns in China, has slowly festered into a global recession. The World Bank estimates the projected growth in emerging markets and developing economies such as Pakistan, is to fall from 6.6 in 2021 to 3.4 in 2022, evident through the steady depreciation of the rupee.
Like all sectors, the startup ecosystem has been adversely affected. According to Invest2Innovate’s 2022 quarterly report , Q2 rounds ($102.7M) are 40% lower than Q1 ($172 M) but still higher than 2021 Q1 ($82M). Much like 2008’s The Great Recession, Venture Capitalists, while still investing, are greatly pulling back the amount they’re willing to inject into startups, gravitating towards less risky ventures.
This is showcased by investor-darling Airlift, which just a year ago secured the biggest Series B round ($85M) in Pakistan, announcing a complete shutdown of operations, following an initial layoff of 31% of its workforce after it failed to secure funding in a Series C round this month. This news came hot on the heels of other debilitating layoffs in the startup sector in notable companies such as Swvl, Retailo, TruckIT, Tazah Technologies and Careem.
In the business world, however, what goes down must come up. In the meantime, how can startups raise rounds during a global recession?
Insights from Superstar Startups
In 2021, a major consideration for investors was a startup’s customer acquisition, their rate of growth, but as things take a turn for the worse and Venture Capitalists become more cautious of their returns, investor interest has shifted towards profitability. “Investors are looking for companies and startups that have a monetisation model figured out,” says Ali Nomani, Co-founder and Chief Strategy Officer at Out-Class, an e-learning platform that has recently raised $500,000 in seed funding, “You have to show them your company is a safe bet.” This also seems to be why rapid delivery startups, despite enjoying a privileged position in terms of growth and funding (with an impressive $5 billion raised globally) during covid, with local examples of Airlift and Krave Mart, seem to be halfway out the door. Very rarely will the order be big enough to cover the delivery labour cost resulting in these startups to run at a perpetual loss, steadily nearing a slow death.
According to Ali Nomani,the best way to demonstrate your venture is secure is by weathering through the recession itself, showing investors that your startup has a passionate team, solid crisis management and the ability to flourish despite leaner operations. A trap a lot of Pakistani startups continue falling into is raising the absolute most they can rather than just what they need which translates into 2 distinct pitfalls, 1) losing large amounts of equity in the bargain and 2) struggling to show returns proportional to what they’ve raised. Proportional returns also encourage repeat investments, sustaining the growth of the business.
“Fundraising has a lot to do with your brand,” affirms Sarfarz Baig, Head of Experience at Sadapay, a fintech company that raised $10.7 million in seed this April.Sadapay recently gained an astounding following by marketing towards a more trends-aware demographic and creating hype through their waitlist. You’re selling a story, which is why your pitch deck needs to be just as iron clad as your business model.
Insights from Our Investor Insider
Shoaib Zahid Malik, a partner for Walled City Co, an investment firm for seed and early-stage startups, with over 17 deals under their belt, warns against the dangers of the bandwagon. Last year, more and more investors invested an audacious amount of money into startups, going beyond the pre-set averages for each round, which played a role in Venture Capitalist funds steadily dwindling. This puts added pressure on the startups. With a diminished money pool, investors have become overly cautious with their investments in startups, that is if they’re still investing at all.
The disparity between investment and returns is accentuated and in part fault of, the lack of supporting government structures, an untapped talent pipeline and unregulated developmental environments in the entrepreneurial circuit. This is reinforced by what Kalsoom Lakhani, Co-founder and General Partner at Invest2Innovate, told Aljazeera, “What’s really important for the ecosystem is to also be building health overall. So while this momentum is exciting, there needs to be strengthening of these pillars in order to create sustainability and longevity and the continuing growth of the ecosystem”.
That said, Venture Capitalists are still looking to invest in passionate startups, especially those that solve for the masses. With a particularly keen eye on verticals such as agriculture, education, health and engineering SAAS companies, Shoaib Zahid Malik affirms, “We focus on long-term value by partnering with knowledgeable, innovative and passionate founding teams leveraging technology for Pakistan-centric market opportunities. We work closely with our portfolio companies and founders to create real businesses that are generational in their approach, yet innovative in their execution.”
The resilience of the Pakistani startup ecosystem is unmatched. Together, we can hoist each other into a new era of entrepreneurial insurgence.