Despite all the pessimism reported about the future of venture capital, especially regarding its suitability for Pakistan, the country has shown good resilience amid a global downturn. New (and old) investors continue to back Pakistani entrepreneurs, with Peter Thiel – the founder of PayPal and Palantir Technologies – becoming the latest high profile addition.
According to Data Darbar, overall startup ecosystem investments of $325 million year-to-date are still on track to at least match the 2021 total of $366 million, although this is due to agreements made earlier. Of course, rounds could slow further as many foreign investors reassess their allocation to both the venture capital (VC) asset class and Pakistan. But that’s not the case for William Bao Bean, the general partner of SOSV, the world’s fourth most active venture capital firm in the second quarter according to Pitchbook, with $1.2 billion in assets under management.
In just over two years, the fund has invested in 16 Pakistani companies. Unlike many international investors who entered the local market for fear of missing out in 2021, Mr Bean and his fund appear to have the country as part of a larger strategy.
“We’re doing Pakistan for Pakistan,” Bean says in response to questions about whether fragile macro risks have changed his view of the market. Having covered China’s telecommunications, media and technology sectors for Deutsche Bank in the 2000s, he sees many parallels between China then and Pakistan today. “When I started covering the Internet in China in 2003, the total valuation of all startups was $3 billion. My goal was to help Jack Ma explain Alibaba, the business-to-business (B2B) marketplace, to global investors for its IPO. Since then, the market capitalization of the sector has grown to $2.5 trillion. Pakistan is now $3 billion, so I’m hoping for something similar,” he adds. .
In 2003, the total valuation of all startups in China was $3 billion, but since then the sector’s market capitalization has grown to $2.5 billion – Pakistan is now at $3 billion, so there is hope for a similar path
“I want to do the same thing here as in China: explain the local market as well as possible to people from all over the world. My biggest goal here is not just to help startups get started and grow, but also to make sure global investors can understand and be comfortable writing checks here,” says Mr. Bean.
For now, the fund is primarily interested in early-stage startups trying to solve “big problems,” which essentially share one characteristic: those solving “big problems” like digitizing kiryana, logistics, and insurance, among others.
Initially, the terms of the deal are pretty standard: take 5-7% of the common stock and invest $150,000, though the valuation may differ. Of this amount, $45,000 represents the cost of the program to portfolio companies – in the case of Pakistan, the former MOX and Chinaaccelerator were recently merged into one and rebranded as Orbit Startups.
Mr. Bean believes that beyond the money invested, these programs are what sets SOSV apart. “Our added value is selling to businesses and acquiring customers, and all startups benefit from free advertisements as well as a strong corporate network,” he says. The fund makes follow-on investments, although its pockets are a bit tight there. “We have a follow-up fund for $20M+ Series B and beyond that doesn’t conflict with the base fund [$277m]. We try to keep our pro rata as close as possible, but last year our in-orbit businesses closed $286 million in follow-on funding. Meanwhile, our total follow-up budget in one year is $35 million, and the prorated is $150 million,” the investor explains.
Orbit’s portfolio of 16 companies in Pakistan has amassed more than $53 million since beginning operations, with the five that participated in subsequent rounds receiving follow-on funding from SOSV. Of course, the numbers are skewed by Dastgyr’s $37m – the only startup in the portfolio to have raised Series A investments while the other fifteen are still in pre-seed or seed stage.
The fund has previously been exposed to logistics and e-commerce (B2B kiryana and direct-to-consumer brands like HighStreet and PriceOye) and is now looking at the missing sectors. “We look at agriculture, healthcare, edtech – any business that has a high customer acquisition problem but is making money and can benefit from our free advertising and distribution,” Bean says. .
The author is the co-founder of Data Darbar, a private market portal
Posted in Dawn, The Business and Finance Weekly, September 5, 2022