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Entrepreneurship lags behind its potential.

Byline: Tayyab Tariq

DARAZ, Pakistan's biggest e-commerce portal, has recently been acquired by the Chinese giant, the Alibaba Group. Daraz itself was a venture of a German company, Rocket Internet.

Similarly, the local ride-hailing app, Savaree, was purchased by Careem around two years ago while Travly, a Lahore-based rickshaw service, closed its operations around eight months back.

International giants are gradually eating up local start-ups. The question which arises then is: why do we not have a local Daraz or Careem despite the hype of start-up incubators and accelerators? And why have our incubators or accelerators not been able to produce a single unicorn (a start-up company worth over $1 billion) or even a $100 million company?

According to Jazz Foundation's report Digital Entrepreneurship Ecosystem in Pakistan 2017, 'One of the biggest bottlenecks in the entrepreneurial ecosystem is the lack of venture capital.' Data from this report says that out of the nearly 300 start-ups formed every year, only around 15 (a mere five per cent) receive seed or Round A funding.

According to Khurram Zafar, one mobile gaming company in Finland yields more profit-before-tax than the combined profit-before-tax of 10 of the largest cement companies in Pakistan

International investors are not willing to invest in Pakistan because they want local investors to step up and take the risk. Secondly, the political instability in the country also drives them away.

On the contrary, Sequoia Capital, a global leader in the venture capital industry, has already invested more than $1bn in Indian start-ups. Globally, it has backed firms which now hold $1.4 trillion of stock market value.

When it comes to local investors they are more interested in investing in real estate, sugar mills, textile mills, pharmaceuticals or other more conventional sectors of the industry.

The primary reason is their lack of awareness of the high returns which information technology start-ups can provide them. They also prefer safer investments in property for their idle money rather than putting it in a high-risk environment.

Thirdly, local investors are usually seeking an early return of around two to three years on their investments while many IT start-ups take longer than that to even reach the break-even point. Amazon, which was founded in 1994, finally reached its break-even in 2002.

What local investors do not know is that IT start-ups can give them much higher returns than the traditional sectors of the economy. According to a blog post on by Khurram Zafar, executive director of the LUMS Centre for Entrepreneurship, one mobile gaming company in Finland yields more profit-before-tax than the combined profits-before-taxes of 10 of the largest cement companies in Pakistan.

Kavitark Ram Shriram, managing partner at Sherpalo Ventures, is now valued at roughly $2.1bn, because he recognised Google's potential, a small company at that time, and invested in it as an early bird. According to an industry expert, Pakistan does not need a unicorn; rather, we need ten $100m companies ready for an exit or an IPO which would build investor confidence in the local market.

However, entrepreneurs here also pose a problem. A local venture capitalist interviewed said that most start-ups have unbalanced teams which are highly skewed towards software engineers. They lack business acumen as well as founders from a business background.

Secondly, start-ups lack a global vision, focusing only on their own area or city, while also being risk-averse. A dearth of mentors for entrepreneurs means that there are few advisers available in Pakistan that have work experience from giants such as Google, Amazon or other international companies.

As for the government, there is a need to provide tax incentives to venture capitalists, facilitate deal-making by relaxing the Security and Exchange Commission of Pakistan's laws, and most importantly, ensure the strict imposition of intellectual property rights laws to give cushion to both investors as well as entrepreneurs.

Overall, all the key stakeholders, i.e. the entrepreneurs, the investors and the government need to review themselves seriously. The local investors should follow the international examples like Russia where they include experienced foreign investment professionals on their boards at the onset of their venture capital funds.
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Publication:Dawn (Karachi, Pakistan)
Geographic Code:9PAKI
Date:Jun 4, 2018
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