Most of startup investments never land in Pakistan

KARACHI: Pakistani startups attracted investment worth over $350 million in the last and $189 million in this fiscal year; however, most of that capital never landed in the country, as the venture capitalists kept their funds outside the country, owing to some transactional disadvantages.

The investors have been gradually releasing it for startups on ‘as and when needed’ basis to run their operations.

“It is how venture capitalists want it and it makes sense,” said a healthcare startup founder, who has also received international funding.

“It is easier for them to repatriate their funds if the investment is in countries such as Dubai, while Pakistani currency is also continuously depreciating. So, there is no incentive in bringing all the investment into Pakistan.”

Then there was a lot of scrutiny that made it difficult for the investors to move the investment if it was in the country, he said.

Several other people from the IT sector have confirmed it. “It has been happening and funding in Pakistani startups is something to celebrate but the perception that it is also supporting the country’s depleting foreign exchange reserves is however wrong,” industry officials said.

The healthcare startup entrepreneur added fragmented investments were brought into Pakistan to meet the commercial expenses of the IT enterprise.

Finance Minister Miftah Ismail in a recent statement said his government would try to improve regulations for investors to repatriate their profits/funds and make doing business easier for the IT sector in order to attract more investments.

Adnan Sami Sheikh, AVP Pak Kuwait Investment Company, said only operational expenses were released to Pakistani startups.

“The central bank’s red tape keeps venture capitalists and startup investors on the tenterhooks. They fear they won’t be able to repatriate their investment and profits in case of an increase in valuation of the startup,” he said.

“Moreover, depreciating rupee has also been affecting the startups and their investors' decision to bring bigger chunks of investments. They try to bring in as little as possible to meet startups' needs in Pakistan,” Sheikh said.

Khurram Schehzad, CEO and founder Alpha Beta Core, says venture capitalists commit investment this way and they don’t just give all of it to the startup right away. “There are Pakistani startups, which have plans to kick off regional operations such as in Africa and in the Middle East. Those startups and their investors also don’t bring all the investment in the country,” said Schehzad.

“The depreciating rupee has also been an obstacle.”

However, he says that this is a systemic issue that affects investment patterns for every industry, not just IT or startups.

It is logical that when the rupee depreciates, people try to keep dollars outside and refrain from bringing it into the country as if converted to rupee the value of their investment will go down drastically. “However, it won’t happen if they keep the investment outside of the country in dollars,” he added.

According to a top fintech startup official, the investors such as venture capitals commit funding to startups over a period of time with achievement milestones.

“They release it in fragments when startups achieve mutually set goals such as if the number of subscribers reach a certain, say a million, milestone,” he said.

“It is easier to bring dollars in Pakistan than to send them outside.”

However, he believes the regulations are not an issue for startups since venture capitalists or investors don’t take cash out of the startups.

They only do it when they choose to pull out and for that they have ample reasons and required paperwork, he said.

However, it was difficult to send money out of Pakistan for operational reasons, he said. “Once I was unable to send $2,000 to pay a person in Dubai for his consultation services and we are now settling such transactions from outside the country,” he added.