Quarterly Deal Flow Update Q2 2023
In the startup ecosystem, we've always admired the ability to turn a little into a lot, but the Pakistani startup ecosystem has been dealt a tough hand this year. The IMF projects an economic growth of just 0.5%, down from 6% in 2022. However, it’s not just Pakistan, global growth is forecasted to decelerate from 3.4% in 2022 to 2.9% in 2023. This trend has already impacted investment across all markets, with global VC funding experiencing a YoY drop of 53% in Q1 2023. Still, Pakistani startups will have to go the extra mile, as a global slowdown combined with a tough national macroeconomic situation is definitely an uphill climb.
This quarter was marked by political uncertainty, notably the arrest of ex-Prime Minister Imran Khan, triggering a nationwide digital blackout. Disruptions such as these can have long-term effects as startups operating in countries with internet shutdowns report 2.2% more losses on average, compared to startups in countries without such shutdowns. The instability further fuels the fragility of our ecosystem, particularly under the cloud of a potential balance of payment crisis, a high risk of default on debt repayment, and a weakening currency.
The fallout? Funding for startups in Q2, 2023 took a nosedive i.e. a whopping 94% drop from the same quarter in the previous year.
The 2023-2024 budget was no help either. When the plan initially fell short of the IMF's expectations, the government produced a revised version that led to a staff-level approval for a $3 billion bailout package. The final decision on its disbursement will be made in mid-July, nevertheless, this comes as good news for the business community which is in dire need of stability.
Despite these challenges, remember what we've always said about investing: It's about the long game. With that in mind, it's time to dive into our quarterly deal flow update for Q2 2023!
In Q2, Pakistani startups raised $5.68 million across 6 publicly disclosed deals, bringing the total funding amount to approximately $953 million across 329 deals since 2015. It has been 12 quarters since a funding amount this low was raised, with the last occurrence being $5.3 million in Q1 2020. This quarter’s investment amount, also represents a 75% decline compared to the previous quarter, despite the deal count reducing from 7 to 6 deals only.
🌎 Regional comparison
Due to the adverse global economic circumstances, in comparison to last quarter, all regional comparables saw a sharp decline in the amount raised this quarter.
Bangladesh raised $7M across 10 deals
Egypt raised $5.8M across 9 deals
Saudi Arabia raised $34M across 30 deals
UAE raised $430M across 37 deals
Considering these are Muslim majority countries, the festivities in the month of April and June perhaps contributed to the funding blues. The month of April was dedicated to the observance of Ramadan while June coincided with the month of Hajj. If the global inflationary pressures eases combined with more stable interest rates, we may get to see an uptick in startup funding and improved investor confidence in Q3 and Q4.
💰Reported deals this quarter:
April:
Goldfin raised $2 million from Insitor Impact Asia Fund
Intellia raised $1.5 million in a pre-seed round
May:
BizB raised an undisclosed amount in a pre-seed round
QistBazaar raised PKR 140 million ($0.48 million) through an equity partnership in a corporate round from Bank Alfalah
June:
OkayKer raised $0.7 million in a seed round
Neem raised $1 million in a seed extension round
*To see a detailed breakdown of reported deals in the startup landscape please visit i2i’s public Deal Flow Tracker (DFT) here.
🧮 Highest funded sectors:
Fintech seems to be the MENAP region’s north star as investors backing the sector have increased by approximately 36% annually between 2017 and 2022. Furthermore, revenue from the sector is projected to reach between $3.5 billion and $4.5 billion in 2025. Mimicking global trends, fintech retained the top spot for the highest-funded sector this quarter in Pakistan ($3.48 million). We saw fintech in the news for all the right reasons i.e. not only did fintech dominate the deal flow side, but a special shout out to Abhi for making strides in the ecosystem and venturing into an acquisition and raising through debt financing!
👫 Founder gender
It was good to see that women founders were back in the game. Compared to Q1 2023, where there was only 1 undisclosed female-cofounded deal, in this quarter there were 2 female-cofounded and 1 female-founded deal. Among 5 publicly disclosed deals, 70% was raised by male-founded startups while 30% was raised by female-cofounded startups.
This quarter:
Male-founded startups raised $3.98 million across 3 deals.
Female-cofounded startups raised $1.7M across 2 deals.
A female-founded company raised an undisclosed amount across 1 deal.
💰Investor Activity
As it stands, with harsh economic conditions and a wave of foreign companies either suspending operations or leaving Pakistan altogether - investor confidence in the country is currently shaky. Therefore it’s no wonder that international investor participation has gone down this quarter. The number of deals involving international investors has reduced by nearly 43% compared to Q1, 2023.
🔀 New sources of funding
In the face of an unforgiving economic climate and dwindling investor confidence, startups are exploring diverse funding avenues.
Fintech Abhi issued Sukuk/Islamic bonds worth $7.1 million, introducing the startup ecosystem to a new funding line during the current slowdown in venture capital.
Sukuk bonds open up billions of dollars in capital because they offer not only more predictable but also higher yield. While the government has previously issued Sukuk to meet its financing needs, Abhi’s entry into the market paves the way for startups to explore this source of high yield capital.
Bank Alfalah entered the venture capital ecosystem, with a 7.2% equity stake in Buy-Now-Pay-Later (BNPL) fintech QistBazaar.
While banks and fintechs typically view each other as competition, such collaboration leads to greater impact e.g. improved user experience, cost-effective services, an improved bottom-line, and overall advancement of digital financial services.
👉 Mergers and acquisitions
There were 3 notable acquisitions:
Fingistics: Abhi x Blue-Ex
Fintech Abhi acquired an equity stake in courier company Universal Network Systems Limited (UNSL). UNSL operates under the brand name BlueEX in Pakistan.
DigitAIze: HeyDigital x PostDrips
Estonia-based advertising company HeyDigital acquired Usama Khalid’s AI-powered LinkedIn Scheduler platform, PostDrips.
Food for thought: Along with products such as PostDrips, startups in Pakistan are starting to explore the realm of AI across different sectors e.g. agritech: Farmdar, ed-tech: Orbit-ed, healthtech: Patient First. With the launch of the National Center for Artificial Intelligence (NCAI) in 2018 and the more recent release of Pakistan’s first ‘National Artificial Intelligence Policy’ draft in May, the government seems to be making efforts to promote AI. However, the policy has been met with much criticism for being a wish list, rather than offering a decisive pathway to achieve data backed goals. There is also not much thought given to the obstacles to implementing AI in Pakistan. Not to mention that the AI policy has been drafted without first finalizing the data protection bill which is still in the draft stage!
IT: Jaffer Business Systems (JBS) x Impare
Pakistani IT solutions provider Jaffer Business Systems (JBS) acquired majority stakes in Silicon Valley-based chip verification start-up, “Impare”. This marks the first time that JBS has made a start-up investment outside of Pakistan.
👋 See you in Q3!
We remain cautiously optimistic as we step into the second half of 2023. While deal flow has seen a slow down, in a volatile political and economic environment, with acquisitions and innovative measures of raising funding, the ecosystem has shown us that it is still breathing. Necessity is the mother of invention and while we are operating in difficult times, we are hopeful that ecosystem stakeholders will remain resilient and find new ways to weather the rest of the year.
We hope you enjoyed this update and look forward to seeing you next time!
—- —- —-
Did we miss something? Questions/comments/feedback? Email us at duaanoor@invest2innovate.com