Pakistan's Tech Ecosystem Growth - A Rising Hub

Pakistan's Emerging Digital Economy

Pakistan, currently the fifth most populous nation globally, has experienced a comparatively gradual integration into the internet economy. In contrast to rapidly digitizing emerging markets like China, India, and Indonesia, Pakistan has historically lagged in both technological adoption and the creation of new businesses.

However, the substantial potential of Pakistan’s digital economy has long been recognized by investors. With a population of 220 million, and nearly two-thirds under the age of 30, the country presents parallels to Indonesia – a nation that has quickly become a leading technology hub outside of the United States and China.

Recent Growth and Investment

Following a period of slower development, Pakistan’s technology sector has witnessed remarkable growth over the last year and a half. Startups within Pakistan are projected to secure more funding in 2021 than they did in the preceding five years collectively.

Significantly, a considerable amount of this investment originates from international sources. Capital is flowing in from investors throughout Asia and the Middle East, as well as established firms based in Silicon Valley.

This swift rise of Pakistan’s tech ecosystem isn't coincidental. It stems from a combination of evolving circumstances and altered dynamics within the startup and investment landscape, accelerated by the recent pandemic.

Factors Contributing to Growth

• Demographic Advantage: A young and growing population provides a large potential user base and workforce.
• Increased Investment: Inflow of capital from both local and international investors is fueling innovation.
• Shifting Global Dynamics: The pandemic has reshaped investment priorities, leading to increased interest in emerging markets.

The confluence of these factors is positioning Pakistan as a promising destination for technology investment and startup development.

Pakistan's Emerging Tech Landscape

The recent prominence of Pakistan’s technology sector on the global stage can be attributed to a confluence of factors. These include enhanced security, the rapid expansion of mobile connectivity, and pivotal legal reforms coupled with deregulation.

Due to its role as a frontline state and ally in the U.S.-led intervention in Afghanistan, Pakistan experienced a dramatic increase in casualties resulting from terrorist activities. Fatalities rose from 295 in 2001 to exceed 11,000 by 2009. This period of instability and violence deterred international commerce and investment within Pakistan for a significant portion of the 21st century’s early years.

However, following a series of military operations, the implementation of border fencing along the Afghan frontier, and improved law enforcement in urban centers, the incidence and severity of terrorist violence in Pakistan diminished considerably. By 2020, recorded fatalities had fallen to 506.

This improved security environment facilitated a renewed interest from international investors and businesses, notably including substantial investment from China as part of the Belt and Road Initiative.

Alongside the security improvements, Pakistan’s accelerating mobile connectivity has fostered a conducive environment for technological advancement. The number of mobile phone users in Pakistan has surged from 114 million in 2014 to over 180 million currently.

Mobile Penetration is now exceeding 80% of Pakistan’s population of 215 million. Crucially, nearly 100 million of these mobile users have access to 3G or 4G data services.

A final, essential element in the growth of Pakistan’s tech ecosystem is the legal and regulatory adjustments championed by progressive regulators within Pakistan’s Securities and Exchange Commission and State Bank. Furthermore, dedicated advocacy from local tech industry leaders has been instrumental.

Historically, Pakistani legislation prohibited foreign holding companies from owning local businesses. Such holding companies, commonly situated in international financial centers like Dubai, Singapore, and Hong Kong, are prevalent in emerging markets.

They serve as a mechanism for attracting investment from international sources. These hubs provide robust legal and financial safeguards, reassuring investors when engaging with markets possessing less developed legal frameworks or where local legal complexities are not fully understood.

These restrictions on holding companies have historically hindered international investment in Pakistan. However, in February 2020, the State Bank of Pakistan introduced new regulations specifically designed to facilitate local startups in securing foreign funding.

The regulations permit the creation of holding companies for local startups. Pakistani startups are now able to establish overseas holding companies with equity stakes in their Pakistan-based operations. These revised regulations have spurred a significant influx of international investment capital.

This includes funding from prominent venture capital firms such as Kleiner Perkins and First Round Capital, demonstrating increased confidence in Pakistan’s tech potential.

Emerging Sectors and Imitative Ventures

Similar to technology hubs in other developing nations, the current generation of Pakistani startups largely adopts and adapts proven business models from comparable markets. These include:

• B2B wholesale marketplaces: Companies like Bazaar, Tajir, Dastgyr, and Retailo are prominent examples.
• SMB accounting solutions: CreditBook and Easy Khata (a product of Bazaar) cater to this need.
• Grocery delivery services: Bykea, GrocerApp, and 24Seven are key players.
• Ride-hailing and travel platforms: Bykea, Sastaticket, and Bookme offer these services.
• E-commerce marketplaces: Daraz and PriceOye lead the way.
• Digital banking solutions: SadaPay, Tag, and Oraan are gaining traction.

These businesses have successfully tailored these established models to Pakistan’s specific regulatory landscape and consumer preferences. The relatively unexplored nature of the market for these products, coupled with the widespread adoption of mobile phones, has facilitated rapid growth.

The substantial user base and revenue figures achieved by these ventures have attracted significant international investment. Startup valuations in Pakistan are experiencing rapid increases, often reaching levels comparable to competitive seed-stage deals in the United States. Furthermore, the size of funding rounds is also expanding quickly. Notably, Tag, a digital banking platform, recently secured a $5.5 million pre-seed investment – the largest of its kind in Pakistan to date.

Looking ahead, the sectors poised to attract the most talented entrepreneurs and substantial investor capital in Pakistan are expected to be fintech, e-commerce, and edtech.

Pakistan continues to be significantly underbanked, particularly concerning women, with 93% of adult women lacking access to banking services. The increasing prevalence of mobile money wallets such as Easypaisa and JazzCash, the launch of a fintech regulatory sandbox by the Securities and Exchange Commission of Pakistan, and governmental initiatives promoting financial inclusion all contribute to a favorable environment for fintech innovation.

The e-commerce market in Pakistan presents a considerable opportunity, having reached an estimated value of $1.5 billion in 2020. However, this figure is dwarfed by Indonesia’s $45 billion e-commerce market in the same year, which is projected to surge to $125 billion by 2025.

Beyond fintech and e-commerce, the edtech sector in Pakistan is ripe for disruption. The country’s public education system faces challenges in effectively educating its rapidly growing youth population. Pakistan’s adult literacy rate, remaining at a low 60%, underscores the need for improvement. Nevertheless, with a school-age population exceeding 80 million students, the potential market for educational services represents a significant commercial opportunity.

Navigating Obstacles and Future Prospects

Although significant progress has been observed within the last twelve months, Pakistan's technology sector still encounters several hurdles. A primary concern for investors revolves around the market's scalability and Pakistan’s capacity to cultivate businesses capable of achieving revenue streams in the hundreds of millions of dollars.

Pakistan’s GDP per capita, currently at $1,200, remains considerably lower when contrasted with figures from Indonesia ($4,100) and Nigeria ($2,200). This disparity in purchasing power prompts scrutiny regarding the extent of consumer spending potential within Pakistan, particularly concerning services aimed directly at consumers.

Securing funding continues to present difficulties for startups operating in Pakistan. While obtaining seed funding or Series A investment has become more accessible recently, raising capital for growth-stage rounds remains a considerable challenge.

Global investors focused on growth typically exhibit a greater aversion to risk compared to those investing in early stages, and have yet to fully embrace Pakistan as a viable investment destination.

Despite these existing obstacles, a fresh wave of Pakistani entrepreneurs is actively establishing startups dedicated to the digital transformation of the nation’s economy. These ventures span crucial sectors including logistics, e-commerce, and fintech.

As Pakistan’s economic expansion continues and the influx of investment capital gains momentum, the country’s technology ecosystem is poised for substantial growth in the coming years.