Q1 2024 Quarterly Deal Flow Update: Fundraising Hits Historic Low with Zero Deals

👓 The Outlook

Frugality, when associated with businesses, at times, tends to carry a slightly negative connotation. However, for startups, the word remains an essential part of the playbook, especially in their early days.
The current funding environment further emphasizes its importance for local startups. In this context, Q1 of 2024 has unsurprisingly turned out to be what the ecosystem feared would transpire after the last 24 months of economic disarray – Zero fundraising.

Since we began tracking Pakistan’s funding flows in 2015, this is the first instance of no activity for a whole quarter. The earlier use of the term “unsurprisingly” was a deliberate attempt to inform our readers that the groundwork for this development was laid well before the occurrence.

The economic instability and lack of political cohesion have dented investor confidence across asset classes in Pakistan. Furthermore, the dicey global economic situation and the high-interest rate environment have dried up the venture funding pipeline.

The macros continue to be a significant concern moving forward. The World Bank projects Pakistan’s GDP growth to be a mere 1.8% in the current fiscal year, with aggregate demand remaining low and foreign exchange reserves continuing to be under pressure due to external debt obligations. 

Nevertheless, not all is bleak, as some positive developments were observed during the quarter, with the most notable being the completion of the general elections and the transition of power from the caretaker setup to the elected government. Further, the country is progressing towards successfully fulfilling the existing IMF stand-by agreement and transitioning to a newer long-term program in the coming months.

In Quarter 1,  Pakistani startups raised $0 million across 0 publicly disclosed deals, marking a stark contrast to the total funding amount of approximately $1004.43 million across 353 deals since 2015. This is the first time since we started covering funding rounds that no amount was raised in a quarter.  

🌎Around the World

Global comparison

The global venture funding slowdown continues into 2024, with the first quarter recording the second-lowest activity since 2018. According to Crunchbase, global venture funding reached $66 billion in the first quarter, marking a 20% year-on-year decrease.

Regional comparison

The MENA region continues to lead the way in venture funding recovery, having raised $429 million in the first quarter of 2024;

• Saudi Arabia raised $224.7 million across 42 deals 
• UAE raised $151.2 million across 44 deals 
• Egypt raised $34.6 million across 17 deals

While the region continues to attract investors, the spike in funding has been driven by Saudi Arabia and the UAE, with other countries falling behind in terms of recovery. Notably, Saudi startups raised around $198 million in funds in March, partly due to the LEAP conference held in Riyadh in the first week of March.

💰Investor Activity 

Investor confidence has been negatively impacted by the challenging economic conditions in the country over the past year.

VCs and other investors remain cautious of taking risks, including the potential for another round of rupee devaluation. Additionally, foreign investors involved in the ecosystem are closely monitoring the FED’s policy rate decisions. 

In the latest policy meeting in March, the US central banking system kept interest rates at a record high. A rate cut, if implemented in the coming months, could facilitate the recovery of the funding pipeline for venture firms.

Mobilizing local funds also remains challenging, with the domestic policy rate at 22%, providing very little incentive to shift liquidity from debt instruments to venture funding.

The subdued investor activity is expected to persist throughout the year, with the possibility of some improvement in the second half if the macroeconomic situation stabilizes following a successful IMF program. 

Further, with the lead time extending for the disbursement of funding due to more stringent due diligence by investors, an increase in investment announcements may occur in the latter half of the year.

The dominant theme, however, is likely to be early-stage investments, as late-stage rounds—similar to the global trend—struggle due to founders’ reluctance to raise a down round in this environment, along with limited exit opportunities for investors.

Mergers and Acquisitions

There was only one notable acquisition:

Fintech:  Papara x Sadapay

Turkish fintech powerhouse Papara acquired SadaPay, a prominent fintech company in Pakistan. Although the details of the acquisition have yet to be revealed, reports indicate that the all-stock deal is valued somewhere between $30 million and $50 million.

🔀Exploring New Avenues 

While access to conventional equity and debt financing is limited, avenues for catalytic financing have expanded. Acumen Pakistan’s Climate Fund exemplifies the potential in this area. 

The non-profit has secured $28 million anchor funding for a new $90 million Climate Fund targeting the agriculture sector in Pakistan. The initiative is structured as an innovative blended finance facility, with $80 million in equity funding allocated for early- and growth-stage local agribusinesses.

In addition to concessional financing, traditional routes can also be accessed by expanding regionally. ABHI, a Pakistani fintech startup, recently closed a funding round in the MENA region, led by Square Associates Ventures, providing a signal for local startups to consider regional expansion for securing additional financing.

👋See you in Q2! 

While we acknowledge that these are difficult times for the ecosystem we remain optimistic for a turnaround. Having documented the Pakistani ecosystem for more than a decade we have seen multiple down cycles only for the ecosystem to bounce back stronger. Our optimism doesn’t stem from delusion but informed estimates. As we conclude, we’d like to highlight two recent developments.

1. In January 2024, VC funds on Carta had the highest amount of capital available for investment since mid-2022. Fund managers need to call this capital before it becomes accessible for investing in startups, essentially serving as a staging area where the GPs prepare to allocate the funds to companies.
2. Foreign investors are turning to local T-Bills through Special Convertible Rupee Accounts (SCRA) in Pakistan, taking advantage of high local interest rates and a stable Pak rupee. After a 4-year hiatus, there was a net inflow of $82 million into T-Bills from March 1-22, 2024, with total inflows reaching $126 million since January 2024. Political uncertainties and currency risks have historically deterred carry trades in Pakistan, but with the prospect of a new long-term IMF deal, there is potential for increased foreign investment in high-yielding government papers, providing short-term support to Pakistan’s forex reserves and the Rupee.

We hope you enjoyed this update and look forward to seeing you next time!