Kanwar Muhammad Dilshad
PAKISTAN’S startup landscape is nascent with most progress occurring in the last 5-8 years. Recent indicators suggest that it is moving in the right direction. In 2012, only two major business incubators and accelerators were in operation with no funding sources or investors. By 2019, 24 incubators and accelerators and 20 formal investors (High Net Worth Individuals, Family offices and Institutional Investors) were operating in this space. 47 deals took place in 2018-19 alone, compared to 54 in the three-year period between 2015-18. Total amount raised in the five years between 2015-19 was $165 million. 82 companies were funded in this period mostly in E-Commerce (25%), Health and Health Tech (12%), Ed-Tech (11%) and Fintech (11%). Angel investors who are vital for early stage investment funded 60% deals while Venture Capitalists were responsible for 25% among others that included incubators/accelerators and international investors not in the VC or Angel Investor category.
As of 2019, there were 20 formal investors in the startup ecosystem in Pakistan that provide pre-seed like USAID, Karandaaz (up to $250,000) and seed stage funding ($250,000 to $500,000). There were two notable investments by funds in female founded or co-founded companies in 2019 – Dot & Line (Sarmayacar), and Mauqa. Online (i2i Ventures and Karavan). As noted earlier, investors do like the quality of deals led by women, but overall see less volume of deals by women. In order to improve this number, it’s also important to improve the overall pipeline of female-led companies, both from the support and funding side. In Pakistan, donor funds and organizations like USAID SMEA and Karandaaz in Pakistan, as well as global organizations are specifically supporting women-led companies through grants and early-stage investment – this type of risk capital is important in helping a female-led company become ready for an institutional round of investment. The Global Competitiveness Report 2018 ranked Pakistan 28 out of 140 countries on the availability of venture capital which is higher than Bangladesh, Sri Lanka and Nigeria. While this indicator is encouraging, Pakistan still has a lot of ground to cover in the access to finance area. Between 2016-18, Pakistan received only $0.06 per capita of VC funding from 20 formal investors. This is 3 times less than Nigeria ($0.18 per capita) and 62 times less than India ($3.72 per capita). While this indicator is encouraging, Pakistan still has a lot of ground to cover in the access to finance area. Between 2016-18, Pakistan received only $0.06 per capita of VC funding from 20 formal investors. This is 3 times less than Nigeria ($0.18 per capita) and 62 times less than India ($3.72 per capita). Based on Global Innovation Index’s 2020 report, Pakistan ranks 77 out of 81 countries on venture capital deals sliding 5 places down from 72 in 2019, and below all its South Asian peers except Sri Lanka. Moreover, a breakdown of the deals from 2015-19 shows that most investments were not in the early or pre-seed stage when founders are often reliant on personal sources of funds. Over 11% of investments were seed stage (when the company has been launched and working on proof of concept) or Series A (54% – when a startup expands its user base and product offerings) compared to pre-seed (6%).
In 2017, the government, through the Finance Act 2017 made amendments to the Income Tax Ordinance, 2001. One of these amendments was related to the introduction of the concept of startups [Section 2(62A)]. A startup was defined as: “a business of a resident individual, Associations of Persons (AOP) or a company that commenced on or after first day of July, 2012 and the person is engaged in or intends to offer technology driven products or services to any sector of the economy provided that the person is registered with and duly certified by the Pakistan Software Export Board (PSEB) and has turnover of less than PKR 100 million in each of the last five tax years;” To provide incentives to startups, a tax exemption was granted on the profits earned by businesses (incorporated on or registered after July 1, 2012) in the year in which they are certified by PSEB and two subsequent years. An exemption from levy of minimum tax was also granted to startups through the Finance Act, 2017. The definition in the Income Tax Ordinance, 2001 is very narrow and restrictive as it only covers technology related companies that are certified with PSEB.
After extensive stakeholder consultations in 2019, SECP introduced several changes in the Companies Act, 2017 that include the introduction of a definition of a startup. SECP’s definition for a startup has been broadened compared to the one in the Income Tax Ordinance, 2001 to be sector and industry agnostic, the ceiling for annual revenue has been increased (from PKR 100 million to PKR 500 million) and a limit placed upon the number of years of incorporation (up to 10). A “startup company” is a company that (a) is in existence for not more than 10 years of its incorporation; (b) has an annual turnover of not more than PKR 500 million or any other amount specified by SECP; and (c) is working towards the innovation, development or improvement of products or processes or services or is a scalable business model with a high potential of employment generation or wealth creation or for such other purposes as may be specified or (d) such other companies or classes of companies as may be notified by the Commission: Provided that a company formed by the splitting up or reconstruction of an existing company shall not be considered as a startup company.— Continued.
—The writer is former Federal Secretary Election Commission of Pakistan and currently Chairman National Democratic Foundation.
