Quarterly Deal Flow Update Q2 2024: The Drought Extends With Only 1 Deal in The Quarter

It’s time for our quarterly update!

Spoiler alert: Not much has changed since we last dissected the fundraising landscape.

Q2 2024 fell short of expectations when it comes to capital flowing into the ecosystem. We had a single deal happening, leaving startups across the board thirsting for more. It’s been a slow dance, to say the least.

Since we started keeping tabs on Pakistan’s funding flows back in 2015, we’ve seen our fair share of ups and downs. But let’s be real – this year is throwing us a curveball we haven’t seen before. Right now, we are in uncharted territory, experiencing a phase that’s as rare as a unicorn sighting.

So far, most investors have been playing it safe, watching from the sidelines as they try to make sense of what’s happening in the country. Recovery seems like a lengthy, uphill journey due to economic headwinds and the political rollercoaster.

On the macroeconomic front, this quarter’s spotlight was on the federal budget. It has been an ambitious plan for fiscal recalibration, crafted with one eye on securing a long-term IMF program. However, the budget falls short in provisions to stimulate economic growth. Consequently, a climate of suppressed dem and is likely to ripple across various sectors, impacting businesses across the board.

While Quarter 1 saw a muted deal activity with no funds raised, in Quarter 2,  Pakistani startups raised over $1 million across 1 publicly disclosed deal, marking a stark contrast to the total funding amount of approximately $1005.43 million across 354 deals since 2015.

Global Comparison

Global venture funding saw a slight uptick in the second quarter of 2024, According to Pitchbook, funding levels reached $94 billion, exceeding the amounts raised in the last quarter.

Regional Comparison

The MENA region also sustained its fundraising momentum, having raised $336.4 million across 59 deals in April and May of 2024;

  • Saudi Arabia raised $60.8 million across 13 deals
  • UAE raised $221 million across 29 deals
  • Egypt raised $33.2 million across 9 deals

(As of the time of writing, data on MENA fundraising for June was not accessible)

The region’s robust fundraising performance has been driven by a flurry of new venture funds launching, setting up their base in the Middle East, most notably in Saudi Arabia. While another notable trend was an uptick in late-stage funding rounds.

Investor Activity

Globally, investor activity remains subdued as the tricky macroeconomic environment persists. While it was expected that central banks would start cutting interest rates from the second quarter onwards, reality has proven different.

Central bankers, especially in developed economies like the US and UK, have been very cautious about lowering borrowing costs. This caution is likely to keep venture funding growth in check, as alternative asset classes continue to offer attractive returns.

On the domestic front, the State Bank of Pakistan opted for a rate cut for the first time in four years, bringing the policy rate down to 20.5% However, this rate remains too high to encourage any significant domestic capital flow towards riskier early-stage ventures.

Projections suggest that the interest rate may decrease to 16% over the next 12 months. However, a recovery in investment activity might not gain momentum until the country’s foreign exchange liquidity crisis is addressed.

That said, there’s cautious optimism that the current funding lull might be nearing its end, with a slight uptick in investment activity expected in the second half of the year.

Mergers and Acquisitions

Turkish neobank, Papara, officially announced its acquisition of Sadapay, marking a significant development in the fintech sector this quarter.

The transaction structure is noteworthy: Papara invested $10 million directly into Sadapay, resulting in a dilution of existing shareholders. Additionally, Papara acquired the remaining equity from Sadapay’s shareholders for $40 million, with the consideration being in the form of Papara’s own equity.

Finding a Way Out

Given the prolonged funding challenges faced by many startups, fatigue may have set in over time.

However, those who persevere through this period are likely to emerge with resilient and sustainable business models poised for growth.

  • For startups struggling to secure funding, exploring subsidized financing options could offer some relief, with certain impact investors lending at a significant discount on the policy rate.
  • Furthermore, aligning startup missions with the UNDP’s Sustainable Development Goals can attract patient capital. Founders should, however, exercise caution and resist the urge to raise capital solely for the sake of it, and shouldn’t hesitate to the possibility of a down round if necessary.
  • In terms of business strategy, adopting a regional focus, building in Pakistan and expanding into the region, is likely the way forward given the current market dynamics.
See You in Q3!

Startups often get flak for not meeting investor expectations, but let’s not forget that the regulatory impediments are also part of the equation and part of the problem as well.

For example, the process of establishing a venture or private equity fund in Pakistan would expose you to the worst type of red tape. Moreover, efforts to mitigate the risks associated with foreign investments in startups have been limited and lacking in firm commitment.

The potential enhancements in the ecosystem may not come to fruition without significant structural changes and proactive measures such as seen with Bangladesh’s fund of funds.

Further, it is crucial for the regulator to incentivize domestic capital to shift towards more productive endeavors rather than being entangled in rent-seeking activities.

We hope you found this update useful and look forward to seeing you next time.

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