Amir Saeed

Pakistan’s startup ecosystem has experienced a sharp decline in funding, highlighting the growing challenges for emerging markets in a volatile global economy.

Talking to WealthPK, Ahad Nazir, Associate Research Fellow at the Sustainable Policy Development Institute (SDPI), highlighted that the drop in venture capital (VC) was due to the multiple global and domestic factors that had made growing economies like Pakistan less appealing to the venture investors, leading to fewer and smaller funding rounds. He further highlighted that the main reason for this downturn had been the rise in interest rates set by the US Federal Reserve. As the FED raised rates, the cost of borrowing increased, reducing the capital available for investment. This shift in monetary policy has had a ripple effect, particularly in emerging markets like Pakistan, where risk profiles have become less attractive to the international investors.

The startup ecosystem has experienced a sharp decline in venture capital funding, with a staggering 82% drop in investments. After a record-breaking $366 million in VC funding in 2021, the landscape for the country’s tech startups has changed dramatically in the last couple of years. The venture capital funding landscape for the country’s startups started changing in 2022 when the country received $365 million in investments. Although this figure was lower than in 2021, it still reflected a positive trajectory for the country’s tech situation. However, a combination of external and internal factors has led to a drastic reversal in fortunes. “The global economic landscape, influenced by events such as the ongoing conflict between Russia and Ukraine, has further heightened geopolitical risks.

The fallout from Ukraine has disrupted the global supply chains and exacerbated inflationary pressures worldwide.” Furthermore, the investors are afraid of markets seen as unstable due to the increased uncertainty brought on by the upheaval in Gaza and other areas. These events have made matters worse in the country, where inflation, currency depreciation, and political unrest have all added to the country’s already dire economic situation. As a result, the foreign investors have become more cautious, shifting their focus away from markets that are seen as risky and volatile. He lamented that the country’s legal and regulatory environment was one of the factors that had contributed to the decline.

Lack of strong legal protection for investments, coupled with uncertainties surrounding the government policies, has made the venture capital firms hesitant to invest. In an environment of heightened risk, the investors are seeking markets where legal frameworks provide clearer safeguards, and where there is more certainty in policy implementation. Talking to WealthPK, Anees Amin, Chairman of Gilgit Baltistan Software House Association (GBSHA), pointed out that the drop in funding had also been significantly influenced by the depreciation of the Pakistani rupee and the growing costs of conducting business in the country. “As the value of the dollar has risen against the rupee, the cost of operations for tech startups has increased, squeezing margins and making it more difficult for the local entrepreneurs to attract foreign capital.

With less disposable income and fewer growth opportunities, the investors are increasingly reluctant to take a chance on a market that seems to be struggling to recover from its internal crises.” He lamented that the tech industry in the country, which once thrived on the back of these VC investments, had now entered a period of austerity. Startups are finding it difficult to secure the funding necessary to scale, develop new products, or expand into new markets. “Many companies have been forced to either scale down their operations or pivot to more sustainable models that rely less on external investment.

The focus is now on survival, with a greater emphasis on cost-cutting measures and securing local revenue streams rather than relying on international VC funding.” “As the global venture capital market remains uncertain, the country’s startups must find innovative ways to attract funding from alternative sources, such as local investors, government-backed initiatives, or strategic partnerships. The future prospects for the sector depend on the ability to build a more stable and investor-friendly environment that can attract the capital necessary to foster growth,” he suggested.

Credit: INP-WealthPk