Covid-19 and Startups: Pivots, Partnerships and Future Positioning

The Age of COVID

In February 2020, i2i’s Insights newsletter covered the growth of Pakistan’s travel industry, and its place on various global lists as the next place to visit. In April, just two months later, that same industry was one of the hardest hit due to the global coronavirus outbreak. In addition to travel & tourism, a number of other industries have been severely impacted not only in Pakistan but around the world. As the situation continues to worsen, we have been inundated with information on a daily basis and a great deal of this has focused on this being the worst global downturn with warnings to prepare for the worst global recession since the Great Depression in the 1930s. It is therefore safe to say that we are awaiting a major economic contraction, recovering from which will take some time.

What Does this Mean for Startups in Pakistan?
The economic repercussions of the pandemic and the subsequent lockdowns are particularly serious for startups and small businesses globally, especially given that many have had to pause operations, implement pay cuts, and fire or furlough their workforces to make it through this period. Pakistan’s startup ecosystem pre-COVID was growing fast, with startups raising over USD $32 million in funding in 2019, compared to $24.5 million in 2018 (see i2i’s Pakistan Startup Ecosystem Report 2019). In the wake of the pandemic, a lot of this startup activity has come to a halt. To understand how this downturn has impacted the local startup ecosystem, i2i’s Insights team conducted a survey & gathered data from over 100 early-stage companies operating in Pakistan. In this newsletter we will distill and present some of the major findings from the aggregated analysis, while also looking at qualitative research and anecdotes about how startups are responding and iterating their businesses during the current situation in Pakistan. A more detailed briefing is available on our websiteClick here to access the full report.

The following are some key takeaways from our analysis on startups in the country and how they are coping with the issue at hand:

Some Sectors Have Been Hit Harder Than Others

Pakistan’s startup ecosystem witnessed  96 deals – constituting over USD $154 million – by Pakistan-based startups from 2015 to 2019, where 20% were attributed to e-commerce, 12% to on-demand startups, and 7% to mobility. These are all sectors that have not fared very well in the aftermath of the lockdowns with many of startups suspending their operations. According to data collected in April 2020 from 101 companies in the Pakistan startup ecosystem, we found that companies in travel/e-tourism, e-commerce, mobility (transportation), and on-demand are some of the sectors hardest hit by the pandemic. (See figure below). Out of a total 101 startups that participated in our study, 49% suspended their services on a temporary basis. Startups in e-commerce, on-demand, tourism, and transportation accounted for about 45% of our sample and were among the ones heavily affected, wherein 56% (i.e. 26 startups) of them suspended services.

Who Has Been The Most Negatively Impacted? 

Mobility startups and more specifically ride-sharing/hailing services such as Airlift and Swvl temporarily suspended their services in all cities by late March. Bykea also had to discontinue their delivery services throughout the country. Travel and hospitality startups are also among those heavily impacted by the pandemic. In our survey, 83% of the respondents that identified as travel & tourism startups have temporarily suspended services(See figure above for details.) On-demand startups such as Mauqa Online and Gharpar, i.e. online service platform companies that employ many workers, also had to suspend their services.  This paints a very grim picture considering that not a lot of support has specifically been extended to startups by the government. The recently announced stimulus package of PKR 1 trillion – while offering financial support mainly to export companies and large industries – does not offer any real support to startups that are already high-risk businesses and are facing additional challenges due to COVID.

Startup Sectors that are Doing Relatively Well During the Pandemic are in EdTech, HealthTech & those Operating in Essential Services  

Startup sectors that have successfully raised investment in the recent past (2015-19)  were those in fintech (7%), ed-tech (7%), and health-tech (7%). Startups in the latter two sectors are doing relatively well given that lockdowns have increased demand and created opportunities for companies that provide telehealth services  and fill a gap not served by the traditional healthcare system. For example, telehealth startup SehatKahani – partner with the Digital Pakistan initiative – is providing free telemedicine services through e-clinics, their mobile application, and a video call feature.  Similarly, with the majority of the country’s population confined to their homes, educational institutions have increasingly relied on moving learning on to online platforms. In primary data collected for this study in April 2020 with over 100 companies, 51% reported that they did not suspend services due to the pandemic. Of these companies that are still operating, the highest number were from edtech, e-commerce, healthtech, and IoT. Companies in essential services have also remained operational during the pandemic, delivering items to customers from medicines to groceries.

Fundraising & Growth will be a Major Challenge in the Post-Pandemic Future.

The rising economic uncertainty amidst COVID has caused a lot of startups to reconsider their strategy for the future. Data we gathered for this briefing showed that while 52% of respondents postponed their expansion plans and 61% cancelled already scheduled hiring decisions, most of the companies have not yet not laid off any personnel (69%) nor administered any pay cuts to employees (60%) during the last month due to COVID-19. (See figure below). In light of this, many experts have suggested that startups plan for survival by bootstrapping and saving as much financial resources as possible.

This is also a challenge for future fundraising. According to Startup Genome’s recent report venture capital from China has gone down by 50 – 70% in January and February alone due to the crisis ensued by the pandemic. Venture capital in Pakistan according to experts faces an even bigger challenge as a high risk asset class. Many local investors have identified that VCs will most certainly prioritize taking care of their existing portfolio companies versus investing in new ones. 49% of the 101 companies we surveyed said they are already facing delays in closing ongoing investment deals while 37% did not have any investments in the pipeline at all.  This is challenging given the amount of cash many startups reported having in the bank –  42% of startups surveyed reported having 1-3 months, 22% 3-6 months, with only 14% reported having 12 or more months of cash. This is cause for concern in the event that the pandemic lasts for longer than 3 months, wherein 42% of these startups will most likely be severely impacted because they’ve had to halt operations and revenue growth.

What Does the Post-Coronavirus World Look Like?
While we have never experienced a pandemic of this magnitude (that has literally paralyzed 80% of the world), past economic recessions have taught us that this period is also a time for opportunity. Companies like Whatsapp, Venmo and Uber were all born soon after the 2008 recession. How can startups in Pakistan use this period to be adaptive and innovative, in order to not just survive the current pandemic, but thrive in its aftermath?

In our linked briefing, we provide recommendations and deeper analysis on the current situation – we invite you to check it out and share – let’s keep the conversation going, so we can see this crisis as an opportunity for invention and innovation

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