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Pakistan’s venture funding landscape dramatically changed towards the second half of 2022, with only $15.15 million venture capital (VC) investment. The last quarter was particularly bad — the worst since the Q1-2020 which was impacted by Covid-19. In percentage terms, the funding in the fledgling startup ecosystem witnessed a nearly 80% year-on-year fall in funding in October–December 2022.

2023 has been proving to be an even worse year for the country’s startups with only one seed and one accelerator round disclosed in January.

2022 was rough year for companies which were hit by massive layoffs, valuation cuts, and shutdowns, all due to high inflation and supply chain disruptions. As a result, global venture capital (VC) investment dipped 35% to $415.1 billion in 2022, from $638.5 billion in 2021.

“Google Startups Accelerator Program” launched to assist Pakistani startups that raised $350 million in 2021

Asia witnessed the steepest decline at 70.52% YoY and 38.72% QoQ, with only $16.3 billion raised, making it the worst quarter in at least five years.

Globally, Pakistan is still presenting the sharpest QoQ decline in funding and the second-highest YoY, after Mexico. Moreover, Pakistan has recorded just eight, the lowest level among the peer group.

How much of the dip in startup funding can we attribute to the worsening local macroeconomic conditions at a time when startups in most parts of the world are dealing with a slowdown in venture capital funding?

Pakistan is in the middle of a major crisis, with inflation soaring, the rupee plummeting, and a severe shortage of energy.

“Global VC —and macro — slowdown has already hit emerging and frontier markets particularly hard, which have largely seen significant outflows,” Mutaher Khan, co-founder of private markets data portal Data Darbar said. “Pakistan has a much higher risk premium compared to most Asian economies, meaning the required rate of return from investors goes up, too, which looks unattainable in the near term.”

“Beyond fundraising, the issue is that Pakistan’s startup ecosystem is largely cyclical and import-dependent,” Khan said. “As a result, every round of devaluation results in higher costs, while the corresponding increase in inflation erodes people’s purchasing power.”

Beyond just the immediate crisis, Pakistan’s current economic situation may lead to long-term concerns among foreign investors as “the macro situation makes it very difficult to generate healthy dollar-denominated returns,” Khan said.

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By hachitm

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