Pakistan: Untold Story Of Technology & Entrepreneurship

A Tale of Two Networks Pakistan: The Untold Story of Technology & Entrepreneurship

Introduction Asad Jamal, founder of ePlanet Ventures, a technology fund based in Silicon Valley, faced a dilemma. A recent business plan submitted by an entrepreneur based in Pakistan had rekindled nagging thoughts that Pakistan should be considered a strategic play for his venture fund. Although of Pakistani origin, Asad had spent the majority of his life away from the country, after getting his BSc (Honors) from The London School of Economics. He had developed an outstanding track record at ePlanet Ventures by demonstrating his ability to identify promising opportunities in the Advertising & Media, Communication & Wireless, Computing Software, Consumer Internet, Energy, Enterprise Software, Financial, Life Sciences, Network, Optical, Security, and Storage Networks space. As with any 1

successful VC, he was always on the lookout for new horizons, and once again turned his thoughts to what he had witnessed in Pakistan during his visits over the previous 10 years. Regulatory reform and a strong economy “GDP growth has been strong in recent years,” at between 6.5 and 8.6% for the last 4 years. “In the past, GDP growth in Pakistan has been held back by political instability, poor and inconsistent policies (rampant corruption at the top) and, more fundamentally, by the economy’s narrow production base. However, in the last five years wide-ranging reforms, an aggressive privatization program, a domestic consumer boom, moves to invest in the textile sector, and substantial foreign aid inflows have underpinned a pick-up in growth.”1

Figure 1: Foreign Direct Investment, net inflows (% of GDP)

As a country on the verge of bankruptcy prior to 9/11, Pakistan’s fortunes have seen a remarkable turnaround. Since 2001, the influx of billions in US aid in return for supporting the ‘War on Terror,’ in combination with pro-reform government policies designed to stimulate the economy, Pakistan’s business environment and investment climate is flourishing. Pakistan's recent policy trends of liberalization and deregulation have been consistent and successful. In the World Bank's “Doing Business 2008” report, Pakistan was ranked #1 in South Asia for its ease of doing business and #76 globally (India is #120).

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Economist Intelligence Unit – Pakistan Country Profile – Main Report – 21st September 2007. Accessed 15th October 2007

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The introduction of the Private Equity and Venture Capital Funds Act of 2002 also provided an enabling regulatory environment for the capital markets. The Pakistani Government recently announced the creation of a venture capital fund to provide seed expansion capital as well as other functions. A talent pool and a new generation of entrepreneurs As Asad thought back about his childhood in Pakistan, he remembered growing up wanting to get his higher education in the UK or the United States. However in the post-9/11 world where student visas and work authorizations are difficult to obtain for Pakistani citizens, the former brain-drain is fast becoming a braingain for Pakistan. In fact, in the technology space alone, Pakistani universities now produce upwards of 20,000 talented, English Speaking graduates per year. Importantly, Pakistani educational establishments, particularly the missionary Convent schools instil neutral English accents, enabling better communication with their Western counterparts. These bright, young technically trained graduates are turning to new horizons. Faizan Burdar, founder of Scrybe – an up-and-coming Pakistani web 2.0 company – expressed different aspirations to Asad: "I realized that the Web would be hot and took a plunge with a shoestring budget and no formal investments. In fact, I didn’t even have a US visa so attracting funding from the US just seemed impossible!" Scrybe, currently in beta testing, is the most anticipated software at the Museum of Modern Betas, a Web site that tracks emerging Web 2.0 projects and has recently attracted venture capital from Adobe Systems and LMKR. Scrybe is not alone. There are numerous other home-grown IT startups in Pakistan making their mark on the global markets recently, fuelled by a new breed of Pakistani graduates:  iTrango, a game and 3D content studio, provided content for the wildly successful game Tomb Raider Legend, and also for high profile companies such as Nike, Lexus, Scion and other global brands.  Trevor, a software company, recently acquired by Bentley Motors, was one of the world’s top providers of GIS/geospatial software solutions  Post Amazors, an animation house, provided content for the film, The Mask, and also the local character of Safe Guard for P&G which is now being used globally (Mexico).  EnterpriseDB develops and supports EnterpriseDB Advanced Server, a leading leading Oracle-compatible relational database management system (RDBMS).  Ultimus is one of the most widely deployed Business Process Management solutions in the world, enabling over 1800 3

companies to increase profitability by managing, automating, modelling and optimizing core business processes. Their customers include Microsoft, Lockheed Martin and others. Total number of IT companies registered with PSEB

1082

Number of substantial IT companies city-wise breakup

384 Karachi 276 Islamabad 353 Lahore 69 others

Total number of foreign IT and telecommunication 60 companies working in Pakistan Number of CMMI-assessed companies

One CMMI Level 5 company, one CMMI Level 5 company, three CMMI Level 3 companies and four CMMI Level 2 companies

Total industry size

US$ 2.8 billion (WTO-prescribed formula)

IT and IT-enabled services exports

US$ 1.4 billion (WTO-prescribed formula)

Percent growth in exports over the last one year

61.18%

Number of IT graduates produced per year

Approximately 20,000

Export targets for the current fiscal year 20062007

US$ 108 million

Number of universities offering IT/CS programs

110

Number of IT professionals engaged in exportoriented activities (software development/call centers etc.)

More than 15,000

Total number of IT professionals employed in Pakistan

110,000

Total IT spending in the fiscal year 2005-2006

US$ 1.4 billion

Total space utilized in IT & Software Technology Parks

Eleven IT Parks covering an area of 750,000 sq ft

Table 1: Statistics of the Pakistan IT Industry

Bridging the Gap – OPEN Asad reflected on his last visit to Boston, when he had met up with an old acquaintance Tom O’ Flannigan. Over lunch Asad had sat enthralled as he listened to Tom describe how the Irish emigrated en-masse to the US starting around the time of the Irish Potato Famine in 1850, up until the 1930’s. The descendents of these individuals formed a highly trained Diaspora with strong links to their native land who played an instrumental role in Ireland’s spectacular economic boom in the late 1990s. When they went home to start high-tech, and other ventures, they took with them access to management, capital and markets. Does Pakistan share more in common with Ireland than Green – the national color? Is this process currently being emulated by US-based Pakistanis? The Organisation for Pakistani Entrepreneurs (OPEN) was formed in 1998 to facilitate and encourage the growth of Pakistani entrepreneurs & professionals. The initial focus was a coherent approach for Pakistani-American entrepreneurs to get organised and develop an effective network. 4

Figure 2: OPEN Chapters in the United States

That network has started to reach overseas. Umair Khan, Faraz Hoodbhoy, Zia Chishti and many others have taken all or parts of their businesses to Pakistan. In the other direction, Faizan Burdar, founder of Scrybe, had not even set foot in the US and credits introductions from OPEN members with starting the sequence of events that has got them to where they are, funded by a highquality US company. Furthermore, OPEN, in collaboration with the MIT E-Center has been taking an active role in educating Pakistani-based entrepreneurs. Workshops, seminars and a recently concluded Business Acceleration Plan (BAP) Competition, led by local entrepreneurs Farrokh Captain, Azhar Rizvi and Dr. Zahir Syed, have resulted in an increased amount of mentorship provided to local entrepreneurs from their US counterparts. Zafar Khan, CEO of Sofizar, and winner of the BAP Competition said, “This program has helped me well beyond my extremely high expectations. I could not get this quality of help, even if I had employed a team of highest-paid management consulting firms. The mentors were sincere, and pushed me to improve. I didn’t need to raise money…I just needed guidance and I got it.” If Pakistan is going to be a successful hub of entrepreneurship, it is clear that OPEN will need to increase its activities even further to provide the link between the two networks. The recent formation of the Tech Angels Network (TAN), led by MIT Faculty members, Ken Morse, Bill Aulet and Imran Sayeed, President of the MIT Club of Pakistan, Farrokh Captain and Azhar Rizvi, Vice Chair of the MIT Enterprise Forum Pakistan, is indicative of the fact that the investment environment is already starting to look different! An opportunity to get in early 5

This flourishing entrepreneurial community has not gone unnoticed by entrepreneurially-minded Pakistanis living in the US. The Pakistani-American diaspora has started to recognise Pakistan as an attractive destination to locate elements of their US-based ventures. As Faraz Hoodbhoy, co-founder of Silicon Valley-based PixSense - a firm which develops network sided software to improve cameraphone image sharing - says, "I knew I wanted to start a business and I had strong family connections in Pakistan – but I didn’t choose to go to Pakistan because I wanted to do something great for the nation – I chose to do so simply for business reasons.” And so he moved whole parts of the business to Pakistan. Similar moves were made by Umair Khan, an MIT Graduate and serial entrepreneur based in Silicon Valley, with his first venture Clickmarks, an internet content aggregation and distribution company, and by Zia Chishti of The Resource Group (TRG) and Sana Khan of TrueMRI. In each of these cases, these US-based, Pakistaniborn entrepreneurs saw the opportunity to compete effectively by harnessing Pakistan's strengths, in spite of its obvious challenges. To date they've done so successfully. Nadeem Elahi of TRG states that he believes customer satisfaction for their portfolio companies has been approximately 50% better than companies with backoffice operations in other South Asian countries. A large, evolving market Pakistan is the 6th most populous country in the world with an increasingly empowered middle class whose needs are starting to resemble those of the West. The US Venture Capital community is realizing that many technologies that have worked successfully in the West can be replicated for markets like Pakistan. For example the success of Baidu in China was based on a few smart entrepreneurs realizing that they could customize a search engine to meet the needs of the Chinese market and VC’s like ePlanet Ventures saw the potential. According to Ayaz-ul-Haque, MD in the Silicon Valley and New Delhi offices of ePlanet Ventures, “What we look for in a company in a country like Pakistan is whether the business can survive and sustain itself in the local market. Given the political concerns in the country, if a business is based on outsourcing and 90% of its clientele is abroad, there is no knowing when those clients will yank their contracts away. Whereas if a business is domestically-focused, it can continue to thrive despite the political situation because life continues to move along regardless of who is in power.” Clearly there are opportunities to invest in Pakistan for logical business considerations, in addition to those based on cultural or family connections. Companies have already been outsourcing to Pakistan, particularly for call centers, but more recently also in the high-tech space. Even larger companies have been cashing in. En Pointe Technologies, a NASDAQ listed provider of advisory services 6

to IT organisations in the space of SAP and Information Security amongst other areas, owns several subsidiaries in Pakistan employing over 700 people, as well as in India and other developing countries. Although the CEO of En Pointe is Pakistani, the company clearly allocated its resources to countries that were best able to serve their needs, and Pakistan was prominent amongst them. Next Steps Asad sat and considered the issues over a hot bowl of his favourite Boston speciality, the clam chowder. His instincts told him that Pakistan was a seething cauldron of opportunity and potentially a next frontier for technology-based entrepreneurship. China had been done. India had been done. What was the next high-growth region and was he willing to bet on his homeland? The Wild West had grown into prosperous communities but he was fairly sure his Limited Partners would not give him a hundred years to show a return. He thought about three issues in particular: Scaling for Sustainable Growth Although Pakistan was starting to demonstrate a successful track record of entrepreneurship, all the individuals he had spoken to were primarily concerned with the ability to scale. Building a 30person company was not the problem. Expanding it to a 300 person company was where the challenge lay. The issue of a second layer of management was key. Trusted management was hard to come by in Pakistan, and therefore the culture was still one of family-owned businesses with limited professional management. It would be impossible to scale without addressing this issue. The empowerment of an increasingly growing middle class and a trend for overseas Pakistanis to return home indicated that this problem may resolve itself, but how long would it take? Would the cost arbitrage in labor still remain if overseas Pakistanis had to be paid US level salaries? And that led him to his next thought. Pakistan was becoming attractive not just because of its talent pool, but because this talent pool was generally 30-40% cheaper than its neighbours in India & China. The UAE and Saudi Arabia have already pumped huge amounts of capital into the country. However, in terms of infrastructure the Wild-West scenario still held partly true. Realestate was comparably expensive, but, as in China, the main issue was the unreliable supply of electricity, water and other utilities, which meant companies, had to build redundant systems into their infrastructure, and that cost valuable dollars. He hoped that Pakistan’s continued economic growth would help address this issue. Access to other markets 7

Asad paused over dessert and reflected on why VCs were so often inclined to invest within a 15 minute drive of their geographic location. In his view this was an element of the short-sightedness that prevailed in the industry. The world was now a global village, and particularly in the consumer internet/web 2.0 space, this issue was now almost mute. Plus, this was where the Pakistani American Diaspora could have a real effect. Offices or subsidiaries in the US could help to raise exposure. However, Scrybe demonstrated ingeniously through the use of YouTube to promote their product that it did not matter that they were located in a leafy suburb of Islamabad, and so did Monis Rahman’s Naseeb Networks which now had hundreds of thousands of users. Scrybe wanted 5,000 users for their beta, they got close to 100,000. However, in order for a business to survive, he decided it must also flourish in its home market, particularly if outside the consumer/web 2.0 space, and here again he wondered about the growing middle class. With India, China and Dubai on his doorstep, he was reassured somewhat. In particular, Pakistan had traditionally had strong relations with China and the UAE, and his gut told him Pakistani business would be well received in those regions. He recalled with a wry grin how Pakistan International Airlines had played a major role in starting Emirates Airlines, now arguably the fastest growing airline in the world. Exit Opportunities Literally the million dollar question was how to exit from investments. The Karachi Stock Exchange (KSE) is the biggest and most liquid exchange and was declared to be the "Best Performing Stock Market in the World” by Business Week in the year 2002. As of June 29th, 2007, 658 companies were listed with a market capitalization of approximately $66 billion having listed capital of $ 10.39 billion. The KSE 100 Index closed at 14,473 on December 7th, 2007.

Figure 3: KSE 100 Index Market Performance

This was certainly encouraging. However, in the quest to build global companies, would companies have the reach and opportunity to list on the major markets in the world, such as London & New York? London has two Pakistani companies listed on the London 8

Stock Exchange, but neither of them are technology companies. No companies as yet have listed on NASDAQ, but companies founded and run by Pakistanis in the US have, the most recent being Cavium Networks, an intelligent network provider which listed on NASDAQ in May 2007. Here again the Diaspora may come into play. A few strategically placed board members in combination with US offices/subsidiaries could pay dividends in the long-run. In fact, Chinese companies, and Baidu in particular was the story which stuck out most in Asad’s mind. Having no roots in the US, this Chinese search engine became the most successful first-day foreign IPO in U.S. market history – and Asad and ePlanet had a front-row seat. With Dubai, Shanghai and also India in the near vicinity, there appeared to be no reason why high-quality Pakistani companies could not list wherever they chose. Also, with the increase in M&A as a viable alternative exit route to IPOs in Europe and the USA, Asad cynically thought he could start 10 companies in Pakistan all of whom had a primary goal of being acquired by Google. Invest early, or risk waiting? The main question in Asad’s mind was not whether the Pakistan market is ripe but whether he wants to be amongst the first entrants. Adobe & Qualcomm had already invested in Pakistani companies, and ePlanet was on the brink. He realized that most emerging economies have reached the stage they are at from similar beginnings and Pakistan is no different. In risk there is reward; does he want to learn from others mistakes or make those mistakes himself and learn from them. And would he be able to convince his partners at ePlanet Ventures of the same.

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Part B – Pakistan from the perspective of an Entrepreneur Bushra was driving home from lunch with Asad Jamal, an old friend from her days in Pakistan. They'd been discussing the prospects for new IT ventures in Pakistan and a long-time fantasy of going back to Pakistan and making her mark as an entrepreneur seemed more real than ever. She'd been following the developments of exciting companies like Scrybe and Naseeb closely, and saw a real opportunity for a web-based start-up. Despite her excitement, there were still nagging doubts. How would her company’s and her own brand be affected by being located in Pakistan? Would the infrastructure and corruption be a problem? Could she find and recruit the right people to grow? More importantly, would she personally be able to adjust to the lifestyle change after having spent her entire adult life over the past 15 years living in the US. But, she knew that the potential was huge and she had little to lose knowing that she could always come back to Silicon Valley and pick up where she left off. She recalled a conversation with Ken Morse, her favorite professor from her MIT Sloan days, who said, “The reason Silicon Valley is Silicon Valley is that it takes 15 minutes & $15 to get a company incorporated – ultimately that’s how easy it needs to get in Pakistan, and it is moving in the right direction.” However there were still some challenges that lay ahead. Availability of Middle Management 10

While there is no lack of fresh talent graduating with Computer Science and Engineering degrees in Pakistan, most entrepreneurs worry about finding seasoned managers. Companies like DiagnosisOne, TrueMRI, Folio3, Techlogix, Pixsense, TRG, and Zenprise have realized that many Pakistanis based in the West are thinking about returning home mainly because they want to be closer to aging family members. Most of this group has been educated in the US and has worked for global companies and what is needed is the right set of incentives to make it attractive enough for these Pakistanis to move back. This is not unique to Pakistan and many emerging economies have thrived based on a similar trend of foreign educated and experienced nationals returning back to their countries to either start or join exciting ventures. Bushra understood the importance of the right team to begin with and she knew that there were plenty like her who were just looking for the right opportunity in Pakistan to make the decision to move back. She wondered how long it would take for a country like Pakistan to move beyond the challenge of having a severe shortage of middle and upper level managers. But she also knew that this shortage wouldn’t go away until people like her took the plunge. Bushra reflected on the comments of Adnan Lawai, CEO of Folio3, and of Faraz Hoodbhoy, CEO of Pixsense that they had employed expatriate Pakistanis in the US to go back and handle the management of his activities there. Clearly there was a ‘secret sauce’ that convinced these individuals to go back, but the challenge in Bushra’s mind was how to achieve this without negating the cost advantage. Ready access to customers Whilst the middle class was up and coming middle in Pakistan, and the numbers were hard to ignore, Bushra was unsure about how long it would take for this group of people to become serious users of technology. Unless a company focused in the Web 2.0 space where physical location of the company didn’t really matter, it was critical to find and grow a local customer base. She knew that companies like The Resource Group had managed to deploy a unique model of acquiring troubled companies and offshoring their back-end work to different parts of the world, including Pakistan. This type of model has worked really well for a country like Pakistan which has been fighting an unstable political environment for years and in the face of uncertainty, it is quite difficult to sell services to clients in the West. With TRG’s model once they hold a majority stake in a company, it is their decision to off-shore where they want without having to worry about a US client yanking their contract if the country goes through a military coup.

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Bushra was not concerned in her ability to come up with a unique business model and she knew that the excitement was the promise that lay in the 150+ million people residing in Pakistan – one of the fastest growing internet adopting nations in the world. Access to capital Any entrepreneur knows that while bootstrapping may work in the initial stages of a start-up, at some point in the life of the company, access to capital becomes the key factor behind whether a venture will succeed or not. Ali Siddiqui of Jehangir Siddiqui Financial Group says that there is an abundance of angel investors in Pakistan. “The amount of capital is not the issue, if an entrepreneur complains about not being able to find capital in Pakistan, then I would doubt their ability to run a business”, says Ali. Though the venture capital industry in Pakistan is still taking baby steps, there are a growing number of private businesses that are interested in seeing the entrepreneurial community in Pakistan flourish and want to invest in innovative and promising ventures. The New Frontier Bushra realised that she could spend months weighing up the pros and cons of starting an enterprise in Pakistan. Yet her gut instinct told her that Pakistan was at the beginning of a phase of growth that would be comparable if not exceed that of other Asian economies in the previous decade. She could count a significant number of friends who still kicked themselves at shirking India 15 years ago and regretting it today, and she was determined not to fall into the same trap. Pakistan was by no means the Promised Land, yet it clearly offered opportunities that someone with perseverance, hard work and skill at managing people, could take advantage of. Should Bushra follow her gut feelings?

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