The year is 2016. 3G and 4G mobile internet services have just launched. Smartphone adoption and broadband internet usage are growing by the millions monthly, and by all accounts, a tech revolution is brewing in Pakistan.

However, the country’s nascent start-up eco-system is still missing one crucial ingredient: Venture Capital. This is where Rabeel Waraich comes into the scene. A young Wall Street professional with experience in private equity and investment banking, Rabeel decides to ditch the suits and take the plunge, moving back to the Homeland to set up Sarmayacar, his very own VC fund.

Fast forward seven years, and Sarmayacar – which means ‘investor’ in Urdu – has established itself as the country’s premier venture capital firm. With successful funding across multiple verticals, Sarmayacar is now looking to the future, as it makes plans to launch a first-of-its-kind dedicated climate fund to support Agritech and Climate-tech startups, as the country navigates a multitude of climate-related challenges.

ProPakistani sat down with the Sarmayacar founder and CEO for a candid conversation about his journey, where the ecosystem stands as of now, and where he sees the future headed.

Risk, Capital, and The Road Less Travelled

An MIT graduate, Rabeel’s journey in global finance began much as any other, including roles at Morgan Stanley and the Government of Singapore Investment Corporation. Yet, after a decade on Wall Street, Rabeel started to wonder “What next?” and turned his gaze homewards. It didn’t take long for him to identify the gap in the Pakistani investment space.

“Investment trends in Pakistan traditionally focused on real estate and stocks rather than people. Our goal (with Sarmayacar) was to seize this opportunity and promote the idea that investors can support capable individuals in creating thriving businesses essentially shaping a new asset class in the country,” he said, adding, “I applied the knowledge gained from my career to ensure we did it the right way”.

Of course, throughout this time, Rabeel remained fully cognizant of the risks he was taking; however, he felt that he would be better served by taking that ‘road less traveled’. After all, even if he were to return to his previous job in case of failure, he would be in a stronger position having gained the experience of trying to launch a VC fund from scratch. As we all know, he did not fail – and today, the Sarmayacar story is an inspiring narrative of passion, dedication, and belief in Pakistan’s entrepreneurial potential.

To date, the firm has raised US$ 85 million in disclosed joint funding for 21 deals across nine verticals, including Fintech, Super-Apps, E-Commerce, Healthtech, Agritech, and Logistics. Some of the Fund’s picks, like SimPaisa, Bykea, Abhi, Oladoc, and TruckSher, have proven to be trendsetters in their spectrum.

TruckSher was successfully acquired by MENA’s biggest logistics start-up Trukkr in 2021; while SimPaisa is generating more cashflow monthly than its entire valuation at the time of funding.

Rabeel also reveals that one of their biggest endeavors, Bykea, is expected to become profitable by December 2023, which he said had seemed unlikely from their burn rate a year and a half earlier. In 2023, Sarmayacar has also decided to bet again on successful TruckSher veteran Abid Butt for his new LTL solution, Truckistan Technologies.

Supply chain technology companies have come out to be unexpected survivors of the post-pandemic economic shock and are being seen as more resilient to withstand the ups and downs emerging markets like Pakistan are prone to. But more importantly, Truckistan’s proprietary technology for solving Less than Truck Load (LTL) is also unique in the market.

Time Teaches, But Being A VC Teaches More

Of course, as with all journeys, this one has had its ups and downs and there are lessons to be learned. Some of Sarmayacar’s portfolio companies, such as Jugnu, have had to pivot; while others struggle as a slowdown in the global economy leads to a squeeze on funding.

Meanwhile, in Pakistan, the Holy Trinity of E-Commerce, Fintech, and Logistics has continued to fare well, raking in the major chunk of venture capital. And rightly so. Consumption patterns have been moving to digital-first avenues for years, and with an e-commerce store comes the need for online payments; after that, you need to ship your product through a service that at least gives a nice tracking service.

That said, all three verticals still have a way to go in gaining consumer trust, and some of the challenges are beyond their control. While telecom connectivity and institutional support for start-ups and venture capital firms have come a long way, national-level structural issues remain.

Tax-to-GDP ratio, fiscal deficit, circular debt, tax heavens, smuggling, and an informal economy double the size of the formal one are just the tip of the iceberg. So what are Rabeel’s thoughts?

“Our approach has naturally evolved; in venture capital, it’s all about recognizing patterns. Initially, we drew inspiration from international trends, but we’ve come to understand that certain business models simply don’t fit within the context of our economy and demographics,” he said.

He clarified that Sarmayacar prefers using the term ‘business-model market fit’ instead of ‘product-market fit’ to describe a successful product or service. It goes beyond merely having demand, it also means having a sustainable business model that aligns with the local realities.

Regarding regulatory support, Rabeel mentions that the SBP and SECP have played a critical role in facilitating the establishment of holding companies, attracting capital, and introducing digital banking regulations and licenses. This is something that some countries, like Egypt, completely lack. However, there are still some other institutions that need to catch up with these advancements.

The Need For ‘Lean’ VCs?

For a while after Sarmayacar’s founding, it seemed like Pakistan’s startup scene had arrived. The COVID-19 pandemic saw even the most ‘Sethia’ businesses enter the digital realm; and with capital flowing at an all-time high, both salaries and startup valuations reached for the stars.

But after almost a decade of business-friendly dollars, which got a second wind courtesy of the Pandemic, it now seems the party is finally over. Pakistan’s quarterly startup funding ­­­– a metric that shows investor confidence in the long-term stability of the ecosystem – has dropped to historically low levels, and several startups have shut down, with more shutdowns likely in the coming months.

Rabeel’s view is that many business models that emerged in 2021 turned out to be unworkable in Pakistan. “We all learned these lessons the hard way,” he said, adding, “We’ve realized that there are more capital-efficient approaches to achieve the same goals. If a business depends on having ideal conditions to thrive and create value, it may not be a great business to begin with. The market is no longer about quick, short-term gains”.

Rabeel points out that startups don’t require large teams with high salaries when the same service can be delivered with just a quarter of the workforce. Additionally, businesses that are operationally intensive and require substantial capital are challenging to maintain.

In some other areas, like ride-hailing apps and edtech, breaking through is nearly impossible, especially with rationalized fuel prices and parental skepticism about the value of digital education for their time and money.

According to Rabeel, as these challenges thin out the competition, startups have the opportunity to gain a larger share of the market. This will serve as a valuable learning experience for the entire ecosystem, distinguishing between those who are genuinely building solid businesses and those who are not, separating the serious players from the less committed ones.

One look at all 21 startup funding deals that Sarmayacar has realized till 2023 so far, and you will see how a more targeted and niche approach in addressing problems is becoming more abundant than in previous years. E-commerce stores have a circular economy angle attached to them, while fintech startups are also geared around investing, taxes, and credit scoring, rather than traditional payment solutions.

In the current landscape, the market is no longer conducive to short-term gains; it demands a strategic approach. While occasional strokes of luck may come your way, relying on serendipity isn’t a sustainable investment strategy. It’s essential to build a robust investment thesis that withstands the test of time, avoiding the pitfalls of short-lived successes.

Climate Fund? It’s About Time!

A large part of clever investing is about knowing where and how to put one’s dollars to work. Enter the climate. Pakistan suffered more than US$30 billion in economic damages during the devastating 2022 floods; and still stands as the eighth-most vulnerable country to climate change, despite contributing less than one percent to global emissions. At the same time, we remain largely dependent upon traditional fossil fuels and the road to a clean energy transition stays long and arduous.

As an agribusiness journalist, I have long wondered when Pakistani VCs will get serious about all this. The number of founders and startups working towards a sustainable future is in the dozens, but the capital for support is not just there. It was with great relief then that I heard Rabeel outline Sarmayacar’s plans for an upcoming climate fund.

“We are partnering with the Green Climate Fund, the world’s largest climate fund,” he said, adding, “We are shifting our focus beyond tech ventures to explore new opportunities and invest in ways that make a real impact on the environment”.

Rabeel mentions that Sarmayacar has developed a new climate strategy for Pakistan; and while that might sound challenging, they want to take action now to create real value before everyone catches on, making it tougher and more competitive to find the right opportunities.

“We are convinced that, given the urgent necessity for climate action in Pakistan, we can effectively channel both funding and expertise towards promoting climate initiatives. These opportunities are the only ones that transcend economic cycles on a global scale,” said Rabeel.

When discussing the verticals they plan to pursue, he said that Sarmayacar’s strategy is to align with Pakistan’s National Adaptation Plan. Key areas of focus include clean energy generation and transition, infrastructure, and water conservation, while also exploring specific areas with a greater emphasis on mitigation, acknowledging that adaptation often requires behavioral changes.

“My biggest concern with Pakistan’s ecosystem is that many individuals, including myself, are hesitant to share because we are apprehensive about what others might do with our ideas. This issue also extends to those covering this asset class in the industry. Due to the scarcity of information, people attempt to piece things together, and when done inaccurately, some individuals criticize publications and start attaching labels.,” he said.

Highlighting the difference between Silicon Valley and Pakistan, Rabeel mentions that when founders meet in Silicon Valley, they openly discuss their challenges, successes, and failures. In contrast, in Pakistan, if one founder spots another in a coffee shop, they might opt to move elsewhere, fearing the other person might overhear their conversation; an approach that stifles learning. That said, Rabeel believes that with time, this too will improve. Ultimately, we all share the responsibility for making that change happen.

Source: Pro Pakistani