By Nida Qasim Khan

General overview of the Pakistani start-up ecosystem

According to the Pakistan Startup Ecosystem Report 2019, business start-up activity increased significantly between 2012 and 2019. In 2012, there were only two major incubators and no notable funding sources or investors. However, 2019 saw an increase of 24 major incubators/accelerators, 20 formal investors/ funding sources and 80 co-working spaces in Pakistan, as well as the launch of National Incubation Centers (NICs). The report also noted that funding and support to startups have significantly increased since 2012, via the government, private and corporate sectors.

In Pakistan, start-up culture and entrepreneurship were conceived post-2014, after 3G and 4G licenses were given, ushering in greater mobile internet connectivity. Pakistan now hosts a total of 800 or more startups, most of which are concentrated in Lahore and Karachi. It estimated that over USD $160 million was raised by 82 companies between 2015 and 2019, with 101 deals in total. 2018 – 2019 has seen rising interest from foreign investors in the Pakistani start-up market as well. This growth has been supported by both infrastructural and policy measures. Over the past few years, business incubators, accelerators and co-working spaces have emerged across Pakistan, some supported by the Federal Government’s National R&D Fund.

Figure: Pakistan’s ranking in global entrepreneurship and venture capital availability compared to benchmark countries.

Gaps and challenges faced by business start-ups in Pakistan

First, the current company law regime in Pakistan is unfavorable for startups as it demands high regulatory costs that bigger companies can afford but that are unsustainable for startups. Due to the current regulatory environment, it is therefore not easy for entrepreneurs to do business in Pakistan. The lack of proper laws to incentivize foreign investors is also a key hurdle. As a result, foreign investors do not feel secure in investing in local startups, which leads to local startups registering abroad due to the absence of appropriate laws in their home country.

Second, one of the biggest hurdles for business startups is taxation. According to the Pakistan Startup Ecosystem Report 2019, issues such as opening a bank account, receiving credit, paying taxes, enforcing contracts, etc., still need to be dealt with. There is a lack of an effective taxation process for entrepreneurs and stakeholders of e-commerce platforms. Each province has its own revenue authority, for instance, which administers sales tax rates on services and has different criteria for the collection of sales tax, often leading to double taxation.

Third, a challenge that is repeatedly brought up by entrepreneurs is the lack of proper digital payment infrastructure in Pakistan. This has significantly hindered growth in the e-commerce sector compared to other countries. Digital payments are at the center of e-commerce, and as such, can greatly aid startups and consequently support the growth of the e-commerce economy.

Finally, another challenge according to the investors is that most incubators are more focused on the number of startups they graduate rather than the quality of the work they produce. Entrepreneurs have also complained that mentorship services and matchmaking are not at optimum levels at many incubators and accelerators.

Figure: Ratings of investment raising process in Pakistan and challenges faced by entrepreneurs while investing in Pakistan.

What policy changes are needed for start-ups to excel in Pakistan

1. Simplify company laws – The 2020 Companies (Amendment) Ordinance, with the Securities and Exchange Commission of Pakistan (SECP)introduced legislation that could address some of the concerns that Pakistan’s startup ecosystem had been expressing for the past few years. There are four major changes that the new law has proposed. First, the regulations will allow for greater equity compensation for employees. Second, many of the costly regulatory documentation requirements have been eased for startups. Third, the definition of what constitutes a startup has been expanded considerably so that more companies will be able to benefit from these changes. And lastly, startups will be allowed to buy back their own stocks.
2. Implement an effective taxation system for entrepreneurs– In this regard, the CEO of the notable startup TelloTalk expressed that: “Although the government has laid laws to determine which company is a start-up and provided it tax exemptions as well, other public departments were not complying which is a potential loophole in the system.” He said that while the Securities and Exchange Commission of Pakistan (SECP) had updated its regulations to support start-ups, the Federal Board of Revenue (FBR) and the State Bank of Pakistan (SBP) would also need to take steps in this regard: “All start-ups are associated with these three departments and the culture can thrive further if all three of them turn the ecosystem conducive in the country.”
3. Create better digital infrastructure for businesses – Innovation is key to the growth and development of any business and as such, digital innovation will bring great improvements in Pakistan’s start-up culture. Pakistan launched its first-ever e-Commerce Policy Report of 2019 under the ‘Digital Pakistan’ policy, to create an environment for holistic growth of e-Commerce across all sectors of the country while protecting the interests of consumers and sellers with a special focus on the development and promotion of SMEs. It also looked at how to make Pakistan a significant player in the regional and global digital economy. The report proposed multiple policy reforms to enable an e-commerce friendly ecosystem in Pakistan, including policy changes such as those of harmonization in sales tax rates, avoidance of double taxation and simplified procedures for the filing of tax returns.
4. Improve the value of services provided by support organizations –While support organizations in Pakistan do provide certain essential services (such as mentorship, legal guidance, access to investors, etc.) to startups, there are some gaps in their support. The Pakistan Startup Ecosystem Report 2019 has some great suggestions on how to improve these gaps. Support organizations can overall increase the value they provide startups by customizing their services for respective startups. Instead of just basing their success on the number of startups they’ve graduated from, they should measure their success on the outcome, that is how much value they’ve provided the startups with. There is a desire among entrepreneurs for better mentorship services, events and network development, and being matched with industry-specific mentors. These are things that incubators and accelerators should pay special attention to. Alongside support programs such as incubators and accelerators, the role of tech hubs and labs can also play an important role in providing young people with the tools to then be able to develop startups.

Article originally published by the Sustainability Development Policy Institue