“I have never seen as much genuine interest in writing cheques as I have in the last year,” says Kalsoom Lakhani, co-founder of the $15 million venture capital fund i2i Ventures. “There are so many international funds in Silicon Valley, East Asia, Middle East and other places that are realising that Pakistan is one of the most exciting places to come.”

Despite the pandemic, venture capitalist (VC) activities increased by 37 per cent to $65.6m in 2020 in Pakistan, explains Misbah Naqvi, co-founder of i2i Ventures. The fund is a sister concern of Invest2Innovate that was formed to support frontier markets in 2011 and acts as a pipeline of start-ups for i2i Ventures.

The lockdown speeded up sectors such as e-grocery, e-food delivery, fintech and edtech. International funds that have invested in similar companies in other markets have a much higher appetite to come into Pakistan as they already know what that model looks like, they explain.

In the last five years, over $200m has been raised by startups of which only about 3pc was towards female-founded or co-founded companies

They give the example TelloTalk, Pakistan’s first messaging platform in English, Urdu and regional languages. With close to 1.5m downloads and continuing to grow, the company has grown four times in terms of active user growth since i2i Ventures’ investment in 2019.

Understanding the VC model

In a traditional business model, the bottom line indicates the returns investors receive. In a VC model, investors make money when they sell their stake and exit the business. The exit can be in the form of an initial public offering, an acquisition, or it could be that the company is growing so fast, such as in the case of Careem and Uber, that more and more investors come in at later stages and buy the stake of initial investors.

“The whole idea of VC is to look at making 10x returns on your investments. The way VC works is that there will be a couple of unicorns that go on to become hundred-million-dollar companies, a few that will do pretty well and offer 3x to 5x returns, some that will just recoup the investment and then there will be those that will go bust,” outlines Ms Naqvi.

“It is a very high-risk asset class, especially in Pakistan where it is unproven,” says Ms Lakhani. “Since the space is really new, and exits require a five- to ten-year timeframe at least, it is too early to assess exits.”

A more mature market

There are several rounds of investments for startups. The first is when capital is raised by friends and family, followed by a pre-seed round that has angels and institutions involved. The seed level is when one starts seeing traction, after which the founders can raise either pre-seeds, Series A, up to Series A1. The Series A round of funding is when the company has figured out its product market and wants to, for example, grow to a few more cities. Series B and beyond is like putting fuel into the engine, explains Ms Naqvi.

“Considering the continuum, you can appreciate that a few years ago we were mostly seeing seed-stage deals. However, in the last year, we have had more series A deals in tandem with higher valuations of these companies.”

Criteria for funding

“We typically finance $100,000-200,000 in each investment,” they explain. Their process can take anywhere between four weeks to a few months, depending on how investment-ready the founders are.

The most important factor for the investing duo is the strength of the founding team. Secondly, they analyse the market opportunity — for example, a business in the organic food niche may be great but the opportunity would not be as large as say e-groceries. The third factor is traction — the partners don’t invest in a company that is just an idea.

“If we get two of the three factors and we believe that the third will happen as a result of the first two then we will consider investing,” explains Ms Lakhani. Out of the over 150 companies they evaluated last year, only one made the cut.

Regulatory challenges

“A lot of funds have to set up outside of Pakistan because the current form of legislation is too onerous to set up a licence,” says Ms Lakhani. The local licence is an iteration of the mutual funds’ legislation, which doesn’t pertain to VCs that have to be a lot more flexible.

“It isn’t attractive for a small fund to set up in Pakistan, which means we can’t raise money from locals as money can’t leave the country easily. It becomes harder to fundraise as there is a risk perception associated with Pakistan abroad. In essence, it means all the funds are competing for a smaller pool of money.”

The tax regime is another issue. There is a major cultural practice of double and triple books, which stems from the current inefficient tax regime. Oftentimes people that are good players cook books to make ends meet and remain profitable, she explains.

The sisterhood

“We could hear baby Jasmine crying,” reminisces Ms Lakhani about a husband and wife duo that was part of an Invest2Innovate programme. “Merilyn had the baby three months before the programme started and used to bring Jasmine with her. On the final demo day, we were babysitting while they were meeting potential investors. At one point, Merilyn heard her cry and I rushed to show the baby through the door so that she could continue with her presentation.”

Describing themselves as super passionate about women entrepreneurs, Ms Lakhani and Ms Naqvi are very active in increasing inclusivity. Out of the four companies they have invested in so far, two have been co-founded by women. Without their gender lens, it is likely that not even 20pc of their portfolio would have been female-led.

Globally, only 2-3pc of all funds raised by startups are by females. Un­­surpris­ingly, the number for Pakistan is just as dismal. In the last five years, over $200m has been raised, of which only about 3pc was towards female-founded or co-founded companies.

“Statistics show that female fund managers generate returns higher than our male counterparts, so it is really important to us that we prove this,” says the only pair of female VC general partners in the country.

A lot of unconscious bias exists for female-led companies even when they are raising money, assert the investing pair. Most of the time women have to raise money from men and are asked the kind of question such as “Oh, you have a kid, how will you balance work and raising a child?”

Global research indicates women founders are asked defensive questions, whereas male founders get asked aspirational questions. So a male will be asked a question like “How big can you grow?” versus a female founder who will be asked, “Tell me, how will you prevent this situation from happening?”

Women leaders are more aware of problems faced by females in the field and are more likely to consciously work towards levelling the playing field. “It is an environment of women supporting women and realising there is room for all of us at the top. We can only create it by supporting each other and that kind of sisterhood has to be baked into everything we do,” says Ms Lakhani.

Published in Dawn, The Business and Finance Weekly, , March 8th, 2021