Pakistani startups saw a nearly 80% year-on-year fall in funding in Q4

At a time when startups in most parts of the world are facing a slowdown in venture capital funding, Pakistani entrepreneurs face a much bigger challenge.

The world's fifth most populous country is in the midst of a major crisis, with inflation soaring, the rupee plummeting and a severe energy shortage. Last week, Pakistan's government ordered the country's markets and malls to close early every day to conserve energy, according to local media reporters.

“The global VC – and macro – slowdown has already hit emerging and frontier markets particularly hard, which have largely seen significant outflows,” Mutaher Khan, co-founder of private markets data portal Data Darbar, told me. “Pakistan has a much higher risk premium compared to most Asian economies, which means that the required rate of return from investors is also increasing, which seems unattainable in the near term.

According to Invest2Innovate, a startup consultancy in Pakistan, there was an almost 80% year-on-year drop in funding between October and December 2022. In July 2022, Airlift, Pakistan's most famous startup, once touted as its first unicorn, abruptly ended when its investors pulled out of a new round of funding.

“Apart from fundraising, the problem is that Pakistan's startup ecosystem is largely cyclical and import-dependent,” Khan said. "As a result, each round of devaluation leads to higher costs, while a corresponding rise in inflation erodes people's purchasing power."

Apart from the immediate crisis, Pakistan's current economic situation may lead to long-term concerns for foreign investors as "the macro situation makes it very difficult to generate healthy dollar-denominated returns," Khan said.