Pakistan is a country known for its fleeting moments of success, often followed by prolonged periods of hardship. This trend is evident across various aspects of life, from cricket victories to democratic gains. Unfortunately, the startup ecosystem in Pakistan is no exception. While there are occasional pieces of good news, they are typically overshadowed by longer spells of difficulty.
Sadapay’s Acquisition: A Mixed Blessing
Recently, the startup community in Pakistan celebrated a rare moment of joy when it was announced that Sadapay, a Pakistani fintech company, had been acquired by Turkish unicorn Papara. This was a significant event in the venture capital (VC)-funded space, though not without its drawbacks.
The acquisition deal valued Sadapay at around $30-50 million, including a $10 million capital injection. This valuation was much lower than the company’s previous valuation, meaning many investors did not profit from the deal. However, the fact that there was an exit event at all was a positive sign, generating some liquidity for the founders and potentially benefiting the broader ecosystem.
Impact on Employees
While the acquisition brought some positive news, it also came with unfortunate consequences. Sadapay announced that it would be laying off 30% of its staff, including some high-level executives and many members of the tech team. This kind of restructuring is common after such transactions, but it remains distressing for those affected.
Moreover, the equity held by employees was valued at zero, meaning there would be little to no wealth creation for them. This is a stark contrast to success stories like Careem’s acquisition by Uber, which made 75 employees millionaires. In Sadapay’s case, only a few individuals might benefit financially.
Funding Drought
The first half of 2024 saw a dramatic drop in startup funding in Pakistan. Only $1 million was raised across a single disclosed deal, compared to $28.7 million in the same period the previous year. This decline highlights the challenges faced by the startup ecosystem in attracting investment.
In more developed markets, startups can attract talent through stock options, with liquidity events like mergers and acquisitions (M&A), initial public offerings (IPOs), or secondary sales allowing employees to cash in their equity. However, such opportunities are scarce in Pakistan, limiting the potential for financial gains for employees.
Global VC Trends and Local Realities
While global VC funding saw a year-on-year increase to $94.3 billion in the second quarter of 2024, marking the first rise after eight consecutive quarters of decline, Pakistan’s startup ecosystem continues to struggle. Most of this funding growth was led by North America, and it remains uncertain when, or if, similar trends will benefit Pakistan.
Pakistan’s macroeconomic challenges, including inflation, currency devaluation, and balance of payments deficits, create a high-risk environment for business and startup investments. These issues make the required return on investment almost unattainable, particularly for foreign investors who typically seek dollarized growth.
Looking Ahead
The current economic policies, as reflected in the latest budget, do little to address these challenges. If the situation does not improve, Pakistan risks losing its entrepreneurs and talented employees to other countries, further weakening the startup ecosystem. Without a fundamental change, the dream of a thriving startup culture in Pakistan may remain elusive.
