From avoiding illicit money to lack of finance, the many struggles of a Pakistani startup
That India and Pakistan have never seen eye to eye is no secret. Neither is the fact that the differences between the two countries outweigh their similarities more often than not. At a time when the relations between the two countries is at an all-time low comes the story of the struggles of many aspiring entrepreneurs in the neighbouring country that many in India may identify with but never match.
Unlike India, the scene and scope of entrepreneurship in Pakistan -- especially for youngsters full of ideas but with nowhere to go and hardly anyone to look up to – is vastly different.
The story of Faraz Khan’s Gizelle Communications is perhaps the biggest example. Seven years ago, banks in Pakistan turned down loan applications for his fledgling advertising company.
That, as it turned out, was only part of the challenge. Faraz tells Bloomberg that he found plenty of private investors willing to back his vision. That help, however, came with a catch. Faraz says that a lot of the funding that he was being offered was illicit and accepting it would have turned his Gizelle Communication Ltd. into a money launderer.
“There were investors with blank checks and investors who were like ‘take as much money as you want,”’ he told Bloomberg in Karachi.
“You have to sift through very carefully the ones that are dirty money.”
Khan says he rejected the lucrative offers and instead turned to other businesses and an international bank to build the company. Today, Faraz is considering listing Gizelle Communications on the Pakistan Stock Exchange this year -- a first for a startup in the country.
The reluctance of banks to fund fledgling companies or aspiring entrepreneurs was not limited to Faraz. Pakistan, South Asia’s second-largest economy and home to about 200 million people, is looked at with caution by foreign investors given its tattered infrastructure – especially power shortages – and security concerns. This despite ‘good friend’ China financing a staggering Rs 3.5 lakh crore of its infrastructure and energy projects.
The Bloomberg report notes that most of the country’s commercial banks are risk averse, making money through investments in government notes and bonds and preferring loans to traditional manufacturers and industries run by well-established families. Unemployment, on the other hand, remains precariously high with the government failing to provide job options to its youth. Precarious since over 66 per cent of the country’s population is below 30.
Not that the government has turned a complete blind eye. Prime Minister Nawaz Sharif set up a loan program for those under the age of 45 to set up businesses, providing interest free loans to more than 260,000 people since his election in 2013.
However, experts believe that was never going to be enough. Homegrown organization Planet N’s founder Nadeem Hussain believes Pakistan requires at least $1 billion of seed money to help new businesses take the next step. His firm has invested $8 million in 41 companies, most of them startups.
Of the more than 700 startups that were established since 2010, 67 percent are still active and 68 have managed to raise funding of about $20 million. At least 24 incubators, accelerators and co-working spaces supporting startups have popped up across the country in the past seven years.
Hussain says that despite the growth of incubators and accelerators, startups will continue to stumble without wider access to seed finance.
Gizelle’s Faraz Khan, whose firm, Seed Ventures, has invested $745,000 supporting 135 startups, also talks about the challenge of a cultural mindset. He says students he meets at varsities say “it’s risky, there’s a chance of failure, there’s a lack of access to finance and we’ve got great expectations from our parents to actually become doctors, engineers, lawyers and that is a safer option.”
The biggest challenge, however, continues to be the reluctance of big companies with big dollars to come into the funding space. The absence of foreign investors, largely on security concerns, only makes matters worse.