KARACHI: Pakistani startups continue to face major obstacles due to bureaucratic red tape despite raising $563.5 million in the last seven years, said a report on the country’s startup ecosystem which was released earlier this week.
Local startups face cumbersome know-your-customer (KYC) processes required by the Financial Action Task Force (FATF) which placed Pakistan on its grey list in 2018 due to the country's weak and vulnerable financial system.
The central bank’s Anti-Money Laundering, Combating the Financing of Terrorism, and Countering Proliferation Financing (AML/CFT/CPF) regulations require a comprehensive list of documents from registered entities as part of customer due diligence.
“Setting up and transacting through bank accounts is considered to be critical pain points for both startups and investors who are expecting foreign inflows/outflows during the course of their operations,” said the Pakistan Startup Ecosystem Report 2021 that was released on Tuesday night.
Circulated by Invest2Innovate, a venture capital fund for Pakistan, the report is based on a study that focused on 150 startups, 17 investors, and 20 entrepreneurship support organizations (ESOs) operating in the country.
The report documents the developments in the startup ecosystem in Pakistan along with the challenges and opportunities that have surfaced in the last two years.
Pakistani startups have raised a total of $563.5 million through 255 deals since 2015, with $350 million raised via 83 deals in 2021, accounting for over 60 percent of all deals completed in the last seven years.
According to the study, there are approximately 98 ESOs operating in Pakistan which range from incubators (22) and accelerators (13) to coworking spaces (18). Additionally, university-based business incubation centers (24) and other organizations like foundations and business associations (13) also form part of the support system to facilitate both new and mature founders.
The report maintains a vast majority of investors prefer to finance emerging startups, adding that financial capital for later rounds is usually scarce due to a lack of investors.
“It is very difficult for startups to raise series A and B and beyond, whereas most of the funds internationally coming to Pakistan are very much focused on pre-seed and seed stage and very few players are looking across the stages,” Kalsoom Lakhani, the founder of Invest2Innovate, told Arab News on Wednesday.
According to the report, existing policy framework in the country discourages international investors from funding entities solely registered in Pakistan due to extensive oversight requirements and cumbersome regulations.
“A clear policy direction must be set with respect to outflow of capital when exits start to happen as uncertainty about capital controls often discourages international investors from investing further,” the report added.
A significant majority of investors who participated in the study pointed out that a lack of a legal framework allowing for seamless inflow of foreign investment capital into the country constituted a significant barrier.
The report notes that Pakistan’s startup ecosystem is booming despite the country’s other economic challenges, adding this indicates an accelerated digital economy in the future.
However, the study also points out that the strength of the startup ecosystem and its role in Pakistan’s economic recovery depends on the government’s ability to develop a better environment for these organizations.
