Pakistan's startup ecosystem is maturing, says McKinsey

04 June 2020 Consultancy.asia

Favourable economic and demographic conditions have created a budding startup environment in Pakistan, although the country requires collaborative efforts from the government, investors and the workforce to ensure that it can reach its entrepreneurial potential.

This is according to new McKinsey & Company analysis of the startup ecosystem in Pakistan. According to the global strategy consulting firm, three broad factors are creating a startup-conducive business environment in the country. For one, the economy is growing at a rapid rate, and a bigger middle class is emerging with more spending power.

Secondly, McKinsey reports that 3G/4G connections in Pakistan have increased four-fold over the last three years, which marks a high level of connectivity in the country. Third is the fact that Pakistan is among the youngest countries in the world, with a median age of 23 and more than two-thirds of the population aged below 30.

Pakistan's startup ecosystem is maturing, says McKinsey

In a nutshell, Pakistan represents a young country of well over 200 million people, many of whom are wired in online. The report suggests that the government has been quick to identify the economic opportunities on offer from such a scenario, responding by setting up incubators, offering tax concessions, and relaxing regulations.

This has been bolstered by the private sector, which according to McKinsey has not only established a number of local venture capital funds, but has also drawn attention from global incubation players such as Google Nest I/O and others. The result has been the emergence of a blossoming startup ecosystem in the country.

“Since 2010, ~720 startups have been established17 (67% still active) with ~100 successfully raising funding. Some of the biggest funding deals in Pakistan have taken place in recent years, highlighting the vast opportunity for local startups and increased investor focus on a country that is still yet to produce its first high-valuation startup,” states the report.

Examples of startups in Pakistan that have raised funding recently

These trends are indicative of a maturing startup market, although McKinsey suggests that there is still a considerable way to go. The firm explains how startup growth in Pakistan remains considerably slower than in some of its peer markets, using the Global Entrepreneurship Development Index (GEDI) as an indicator.

Pakistan not only ranks as the second lowest country in the Asia Pacific region on the GEDI, but it also ranks behind all countries in the Middle East and North Africa regions. The rankings are based on the volume of venture capital funding being drawn by various economies.

As a result, Pakistan still has some way to go before it can call itself a mature startup market. McKinsey puts forth three key pillars that require strengthening if the country is to reach its entrepreneurial potential. These pillars involve the government, investors, and the workforce respectively.

VC funding per capital in Pakistan vs peers

Growing maturity

From the government’s side, the experts recommend the design and investment in a supportive infrastructure. This include simpler registration processes – preferably under a single window – as well as the modernisation of the national payments and postal systems.

For investors, McKinsey puts forth a detailed list of best practices when providing funding. These include developing a comprehensive investment strategies, instigating network effects, investing at scale, managing performances and growth expectations, and overall performance monitoring in line with a clear value creation model.

The third pillar comes into play at the workforce level, where universities, vocational institutes and experts across Pakistan should collaborate to ensure that the country’s young population is equipped with the right skills for the future business environment. Businesses in the country have had issues with the talent pool in the past – a scenario that must be corrected. Digital skills will have a large part to play in this pillar.