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Pakistan’s start-up landscape: Three ways to energize entrepreneurship

Start-up activity has surged in Pakistan as businesses emerge to meet labor-market demands. But the country still lags behind peers.

With 140 million people below the age of 30, Pakistan is one of the youngest countries in the world and one of the fastest-growing economies in Asia. As the country continues to develop, an additional 2.1 million middle-income households are expected to be established by 2025. Digital consumption is also on the rise, driven by an improvement in connectivity, with the number of third-generation (3G) and fourth-generation (4G) subscribers rising fourfold in the last three years.

Consequently, the potential for entrepreneurship is high, based on digital consumption and the unprecedented number of young people entering the workforce. The government has taken the lead, from starting structured incubators to introducing a three-year tax relief to creating regulations for local venture-capital (VC) firms and investors to set up shop in the country. The private sector also plays a key role in the start-up ecosystem, supported by foreign organizations such as Nest I/O1 in addition to new, local VCs.

Video
Unlocking entrepreneurship in Pakistan
McKinsey partner Abdur-Rahim Syed discusses what factors are needed to power Pakistan for significant entrepreneurial growth.

Overall, the ecosystem supports the growth of Pakistan’s start-up landscape, but the entrepreneurship potential is yet to be fully tapped, with fewer start-ups and less funding than comparable countries. According to the Global Entrepreneurship Development Institute, Pakistan ranks 122 out of 137 countries—the second-lowest score in Asia–Pacific and well behind all countries in the Middle East and North Africa. For comparison, the United Arab Emirates (UAE) ranks 19, with India at 69, Nigeria at 100, and Bangladesh at 133. Funding continues to be a major challenge: only nine Pakistani start-ups received VC funding in 2017, compared with 34 in Nigeria, 38 in the UAE, and some 790 in India during the same period.

Our latest research suggests that the country should adopt a three-pronged approach to accelerate growth:

Design enabling policies and facilitate infrastructure. A quick glance at Pakistan’s ease-of-doing-business ranking—136 out of 190 countries in 2018—explains some of the issues facing start-ups. These are problems that other countries have solved, and Pakistan can benefit from adopting tried and tested solutions. Typically, governments play two key roles in this field: improving policies and investing in infrastructure. When it comes to creating a nurturing environment for start-ups, the first step is to simplify business registration and taxes; establishing “one-stop shops” is one way to create transparency, simplify procedures, and help new start-ups save time and money. More than 80 economies worldwide have adopted this model and, in each of them, business registration has become at least twice as fast as in economies without such services. The second step is to invest in infrastructure. This could range from creating digital-payment gateways to modernizing government organizations, such as the Pakistan Post.

Provide start-ups access to funding. According to interviews conducted with local start-ups, there is consensus that local funding organizations are more geared toward financing well-established, traditional businesses over start-ups, which are seen as typically being higher risk. To play a key part in changing this mind-set, investors in Pakistan will need to provide start-ups with access to funding. To do so, they can leverage six best practices to turbocharge growth in the coming years:

  1. developing robust investment leveraging the local context
  2. capturing and proactively engineering network effects
  3. investing at scale
  4. managing performance with a patient and programmatic mind-set
  5. securing investment independence in governance to win the right talent
  6. monitoring key performance indicators in line with the value-creation model

Cultivate local talent. Annually, Pakistan produces about 290,000 university graduates from the 190 universities that are recognized by the Higher Education Commission. At the same time, its vocational-training institutes annually qualify an additional 315,000 people. Investing in this wide pool of local talent is the third important lever to unlock the start-up ecosystem. Globally, we have seen three models leveraged to cultivate talent for start-ups:

  1. fostering talent through university networks
  2. teaching basic digital skills through vocational institutes
  3. connecting expats with innovation in Pakistan

Ultimately, the government and the private sector must work together for the country to reach its full potential. While the government can create a facilitating environment for start-ups to flourish, the private sector should be looking to create value through funding the next big disruption. Together, they can cultivate the right talent to unleash a digital revolution in a country that is equipped to take off.

Download Starting up: Unlocking entrepreneurship in Pakistan, the full report on which this article is based (PDF–13.7MB).

About the author(s)

Asim Bokhari is a consultant in McKinsey’s Karachi office, and Abdur-Rahim Syed is a partner in the Dubai office.

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