WITH the startup ecosystem now finally deep in the money (relative to our own past), you can hear all the buzz about the impending tech boom in the country.

Founders, investors and outside observers alike seem pretty bullish on the market and why wouldn’t they be? Just in the first six months alone, local startups have raised somewhere between $100 million and $120m, depending on how one defines what deals should be counted as Pakistani. Compare that with the entirety of 2020 — itself a big year funding-wise — when $60m-plus was poured in.

Read: Pakistani startups on a roll as they rake in $120 million in first half of 2021

That came on the back of increasingly larger rounds as at least 20 deals recorded in 2021 so far were of $1m or greater (up to $20m if some estimates for Jabberwock’s undisclosed Series B are taken).

But amid all this excitement, someone has to ask the question: is funding really worth all this attention? Does it not incentivise an unsustainable growth trajectory where the primary objective is fuelling the top line with the help of aggressive discounts? Forget that, is it really the right signal on the market’s outlook? If the logic behind that is investors are rational beings, well, let’s just say most of us have moved on from Econ 101. Most importantly, how does investment translate into scale? After all, that is ultimately the key promise of any tech startup.

It’s becoming common to see startups go for one round after another every year. There more capital available — and the capital structure allows this typical venture-backed growth

Admittedly, the debate is more theoretical and best left for evening tea. But we attempted to bring in some numbers to this intellectual debate. With the help of invest2innovate and techshaw’s deal trackers, we analysed investments made in 2015-2017 to see how things have changed and how far those startups have come. Again, this approach has many flaws, but is meant to at least open the discussion for more nuanced views.

To begin with, about 54 startups scored around 62 deals over the period. 2015 was a standout year for it saw over $85m invested in the country, though $55m came from Daraz alone. Now onto the interesting bit: 22 of the funded upstarts have shut down, 32 still continue to operate in some form.

Not too bad, right? Well, sort of. Depends on how loosely one defines “activity” which, by the way, can be hard to establish in a few cases. Some of the seemingly live startups have barely any operations and, at times, are even smaller than they were a few years back. For example, inov8, which was one of the highest-funded companies back in the day, seems to have shut its flagship app, Fonepay, as it’s no longer available on Playstore. The point is that the promised scale hasn’t come to fruition. It was obviously growth that the startups had pitched and ideally that should be taken as the yardstick to measure them against. However, that assessment can be tricky.

The period also saw one acquisition (excluding Daraz) as Slide was bought while Markhor and Car Chabi sort of reinvented themselves and are still well in the game, especially the former as its co-founders launched the hip sneaker brand Atoms. Based on the data, there appears to be no exact correlation between higher investment and scale even though quite a few names that scored somewhere between $100,000 and $250,000 have shut.

A better metric than the round size is to look at companies that received follow-on funding, of which we have 15 (if we take out Daraz and Zameen). What stands out here is that most had founders with quite a few years of industry experience. That includes Bykea, Cheetay, Finja and Dawaai — all with tens of millions of dollars in cumulative funding now — but also three entities that have shut down: PredictifyMe, Karlocompare and Perkup.

That follow-on investment is partly a function of the shareholder cap table, meaning if earlier investors took too much stake, it reduces the incentive for later-stage financiers to put their money in unless there is the required dilution. Now at a time when the startups had to give up a majority ownership for the so-called seed rounds, it naturally limited their ability to go for the next as the capital structure didn’t leave room for many new entrants.

This was the time of local investors, mostly angels and syndicates, which had a strong appetite for control in return for a petty amount of cash. There were hardly any institutionalised funds as such that were looking to do minority investments until a few surfaced in 2018 onwards. The difference couldn’t be clearer: it’s becoming more and more common to see startups go for one round after another every year as not only is there more (choice of) capital available but also the capital structure allows this typical venture-backed growth.

As money has started pouring in, it’s a good time to strengthen the public markets so these startups eventually have an exit route — something the financiers will also be turning their eyes to in a few years.

Published in Dawn, The Business and Finance Weekly, July 12th, 2021