Good things come to those who wait and for Pakistan’s tech ecosystem, the wait finally seemed to be over in 2021. Funding surged over 5x to $366 million and tech exports crossed $2 billion. Big shot investors entered the market, things were on the go and optimism was all abound.

But that cliched saying doesn’t really mention anything about good things lasting, and that’s exactly what happened in 2022. Despite a solid start which saw almost $173m raised in Q1, investment activity plunged and reached a 10-quarter low. The annual total still came in at over a healthy $351m, but the slowdown was glaringly obvious.

The change in global macros and the subsequent carnage in venture capital cut short the newfound love for Pakistani startups among foreign investors, as the country’s risk premium became too high for the available return potential. The doomsday peddlers and default mongers would tell you this might be the end of a rather short-lived era. And perhaps we might not return to the 2021-2022 levels, but would still stay reasonably above our 2020 total of around $65m.

However, for the near future, the deal flow will remain depressed, especially for relatively later-stage startups — as per Pakistani standards, those looking for Series A or further. Based on this criteria, there are at least 14 companies that might need to raise follow-on rounds soon (ignoring all those who had seed deals in 2021). For the remaining, the deals might still continue, albeit at much lower valuations and at a slower pace.

The source of early-stage capital could tilt towards accelerators, whose $100,000-$250,000 cheques once seemed like peanuts to some founders

One reason to believe that while investment value plunged by a massive 79 per cent year-on-year in Q4-2022, the deal count fell by relatively less to eight. That too because a number of investment rounds actually went unreported and the small base amplifies the decline in percentage terms. The source of early-stage capital could tilt towards accelerators, whose $100,000-$250,000 cheques might have seemed like peanuts to some founders during the good times.

That said, the cycles do change, even if the gloom today might not seem like it, as did the optimism from last year. Markets often have amnesia and move on sentiments — which will improve sooner or later. Well, at least as far as the global macros are concerned, if not Pakistan’s. Beyond the venture funding environment — which honestly takes up an outsize share in tech-related discussion — there is one missed theme from 2022. One that is a little concerning.

In Q1-2021, Pakistan’s digitally paid e-commerce transactions fell to 9.1m, from 136m in the preceding period. While the number did recover to over 10.1m in the second quarter, it still spells trouble, especially considering how our macroeconomic situation worsened from July onwards. For example, inflation peaked in August and the past few months have been marred by complete chaos for anyone trying to run a business. It’s not just the data. Market talks paint a pretty bleak picture as major e-commerce stores see declines in orders. Last year, the situation was the exact opposite — almost everyone struggled to keep up with the demand and supply squeezed. Now, the players are reportedly sitting on excess capacity, which has its own overheads, or trying to renegotiate terms with partners.

According to Hammad Khan, the co-founder of AlphaVenture — the digital agency behind the price comparison website Pakistanistores.com, sales have declined around 10-15pc this year compared to 2021 despite more people coming online. “Even though our website traffic went up 5pc year-on-year in November 2022, it hasn’t necessarily translated into more orders for stores as major players in the industry are having a relatively slower period.”

“But more than demand, supply has been the issue as almost all sectors — regardless of online or traditional channels — struggle to source products. If companies cannot source products in the first place, how are they even going to fulfil orders?”

The troubles are now coming for e-commerce transactions to foreign merchants, as banks have to settle them by first purchasing dollars from the open market. This is making payments to vendors like hosting providers, software etc — a necessity in any tech-enabled business — even more expensive.

On the technology exports side, things are a bit more unclear. Not the part where proceeds have slowed down — that much is clear enough, but rather the why of it. After all, till mid-2022, telecom group exports were growing monthly at upwards of 20pc year-on-year but then declined to single digits. In certain periods, not even that.

These pages have explored that topic in more detail and discussed how the political and economic uncertainty, especially with regard to paying for services in dollars, is discouraging companies from bringing money back to Pakistan.

And that theme will most likely continue in the near future as we don’t seem to be heading near stability anytime soon. In fact, the heavy-handedness and panic of policymakers might even leave deeper scars and do more long-lasting damage.

Published in Dawn, The Business and Finance Weekly, January 2nd, 2023