For those involved in the startup or venture capital (VC) space, the better part of the past year was spent deliberating on the spiralling valuations across the globe. In Pakistan, the conversation involved a fair bit of apprehension about its sustainability given the market’s on-ground realities which are far too often beyond the control of everyone — founders, investors or customers.

If the early signs are any indicator, there is already some cause for alarm. According to Crunchbase, global Q12022 funding fell quarter-on-quarter – something that hadn’t happened since Q12020 at least. Similarly, the investment amount raised by Asian startups declined even year-on-year. Of course, it’s entirely possible that this slowdown — if we can call it that in the first place — is no more than a blip. No matter what side of the argument you’re on, it’s fairly easy to cherry-pick data points to support your position.

First of all, 2021 was an exceptional year and not business as usual so a slight correction from its peaks — that too on only a quarter-on-quarter basis so far — hardly suggests a reckoning for the venture ecosystem. Secondly, seed and angel deals amount continued unabated globally hitting a new peak during Q1 and whatever pullback came was on the back of late-stage and growth rounds. Meaning a healthy pipeline of new companies, with much more capital and far higher valuations than the five year average — is still on track.

On the flip side, some of the most high-profile VC-backed startups to do an initial public offering in 2021 have been laggards. Let’s just look at neighbouring India where 11 companies listed themselves (including offer for sale). Of these, seven are still in the red and the median percentage change from their opening prices is at negative 33 per cent. Then of course there’s inflation and rate increases by central banks all around as many investors are reportedly negotiating deal terms.

When push comes to shove, many of the tech founders — whose LinkedIn is full of posts about building the right culture — will throw their team under the bus at the first sign of distress

Regardless of what you want to believe in, there is confusion about what lies ahead and its repercussions for Pakistan. While the optimists believed our moment had come in 2021 and the pessimists raised questions about the truthfulness of it even, those in the middle had a more realistic approach: raise as much as you can while you still can. Before the investors start caring about due diligence, the local macroeconomic environment or the performance of companies on their radar. Many founders took it to heart and amassed more capital they could reasonably spend.

Read: The mirage of tech growth

The fear-of-missing-out wasn’t just on part of investors but the founders — at least those who understood this game well enough — were in it too. There’s nothing wrong with it, except that great funds come with greater responsibility. Someone raising $10 million would most likely (or should, I really hope) have more aggressive key performance indicators to meet than a counterpart seeking $1m. Of course, the former would have a longer runway and could buy growth with discounts or poach talent from competitors at exorbitant salaries.

But the problem is that too often, expense far outpaces the scale and in order to sustain it, you need to keep raising follow-on rounds. Except that those get tricky when markets are bearish. Just last week, Fast — a much-famed one-click checkout fintech that had raised over $120m since founding in 2019 — shut down, laying off its 450 employees. Media reports suggest the company had made a revenue — not profit — of $600,000 in all of 2021 while the burn rate was about $10m a month. Yet the founder tried to get new funding at a $1bn+ valuation, never mind the underlying financials of the company.

Or if you are looking for an example closer to home, go back a couple of years. KeepTruckin, a well-funded US-based startup founded by Shoaib Makani and with a sizable team based out of Pakistan, laid off around 20pc of the staff hardly a month into Covid-19 lockdowns. Did I mention they had built a very fancy office in Islamabad not long before that? The point is, when push comes to shove, many of these tech founders — whose LinkedIn is full of posts about building the right culture — will throw their team under the bus at the first sign of distress.

As for Pakistan’s investment landscape, it’s futile to predict (ask the research analysts at AKD Securities). But what we have are a few data points to try and make sense of the situation, as arbitrary as the approach may be. For starters, a significant share of local startups was raising money from high net worth individuals or small VCs instead of big-shot names, barring a few exceptions.

What does that signify? Well, 2021 was a record year for micro funds which raised a cumulative $5 billion across 339 vehicles, according to Pitchbook. A lot of these investors happen to deploy capital very early on and outside the traditional startup hubs in order to stay competitive; both of which can bode well for Pakistan. However, when the prospects of follow-on rounds and valuation spikes seem dim, there will be reverberations for the early stage too. That takes us to all who can raise funds, at least Series A, soon-ish.

As per Data Darbar, 67 startups that raised a total of 74 deals since 2021 might fit our criteria: 53 seed, 7 Pre-Series A, 11 Series A and three Series B. Using an unscientific approach — based on factors such as time since last funding, amount previously secured, sector operating in, and of course market whispers — I tried to categorise them in order of investment likelihood. With this arbitrary methodology, 15 companies should be closing in on deals while another 10 might be somewhere in the middle.

Obviously, this exercise needs to be taken with a handful of salt but what we can say is that the higher you go up the stage, the more uncertain the situation becomes. Later rounds require much bigger cheques which usually come from large funds leading the deals. And they are apparently reevaluating their positions in view of the public markets so where does Pakistan fit into their strategy? We’ll find out in about time.

Published in Dawn, The Business and Finance Weekly, April 11th, 2022