To his credit are two software product start-ups in the Silicon Valley, which he co-founded. He has also been part of the founding team of two global IT consulting firms. Khurram is also an angel investor with an interest in technology and agriculture sectors.
In this interview with BR Research, Khurram sheds light on how to stir up startups in Pakistan and the ensuing challenges and opportunities.
BR Research: Where do you see the most potential in terms of attracting investment to new ideas?
Khurram Zafar: The IT products sector holds the most promise. If you look at the HR supply in Pakistan, there are tons of people who claim expertise in their respective fields; but, if you start sifting through them and try to get to the number of people who really know what they are talking about, that number is small. Products-based IT businesses provide the most leverage against good HR, and hence hold the most promise.
BRR: What makes you so bullish on IT?
KZ: For one, infrastructure and capital requirements for other industries are high. But, IT is an industry where you can build solid products and consumer services with a very small team. Instagram had 17 employees when it got acquired by Facebook for $1 billion. Whatsapp was a 55-people company when it got bought for $19 billion. There is no reason why they could not have been Pakistani companies.
The other reason why IT can mushroom here in Pakistan is that internet has made the world of IT flat and put every internet-based IT business in the world on equal footing. Thirdly, you do not need as much investment as you once needed in the IT industry. Previously huge investments were required in software and licenses, databases, firewalls and, of course, in the hardware.
These days everything has moved to the cloud and there is open source software. The hardware, databases and storage can be obtained from companies like Amazon as per your requirements and you can pay as you go. Then, distribution through massive channels like Facebook, Ebay, Google's PlayStore and Apple's App Store is in everyone's reach and you don't need a huge distribution infrastructure to get your products to market.
If we can get one Google, Ebay or Whatsapp made in Pakistan, then there would be no looking back.
BRR: But, it is like a lottery ticket. Not everyone comes up with an application like Instagram or Whatsapp--there are lots of failures in products. So, what does one need to have a Silicon Valley in Pakistan on sustained basis?
KZ: I have been consulting for a lot of venture capital firms in the Silicon Valley; and I can tell you, if they have ten investments in their portfolio, one gets successful. So, to participate in a lottery and have a chance at winning, you need to buy the lottery ticket. It happened like that in the Silicon Valley; they institutionalized this culture of investments in small businesses, by repeatedly introducing the Small Business Investment Company (SBIC) programme. The government used to underwrite the downside risks of anyone who invested in small businesses. That helped develop the whole venture capital industry.
Israel is a prime example where the government intervened. They realized that they needed to focus on and support R&D and young start-ups in the country. So, the government brought in outside investors to support small- to medium-sized R&D ventures. Aside from the matching capital provided by the government, they gave investors the option to buy its stake on principle plus nominal interest basis if the funds succeeded. The ten funds set-up with $200 million through this programme all bought out the government's share in less than five years and are now managing over $3 billion of investments in Israeli companies.
Pakistani government should also support high growth industries. Investor does not come to you until there is some deal flow and there is no deal flow until there is seed stage capital available for young, innovative companies. Replicating successful intervention programmes in the rest of the world, and incentivizing foreign investors to invest in Pakistani start-ups will not only solve this catch-22 situation but also provide local start-ups international exposure and access to outside markets.
Another key ingredient of ecosystems like the Silicon Valley is a rich network of successful entrepreneurs who are giving back to the industry either as mentors or investors. Since they have gone through the ups and downs of the entrepreneurial journey themselves, this has resulted in a support platform that doesn't penalize failure, and even celebrates it. We still have some work to do in this area here in Pakistan.
BRR: In that context, what is going on at the LUMS Center for Entrepreneurship?
KZ: We are scouting for high-impact or high-growth companies from all over Pakistan and bringing them under one roof at LUMS. We have three incubation cycles of four month each where around twenty companies will go through a very intense business development boot camp every year while getting mentorship and getting connected with potential investors.
BRR: Give us an example of the kind of projects you are currently working on?
KZ: One of the companies is trying to make all broadcast interactive. Imagine the potential! So, they are imbedding this technology with broadcasters and you can interact with it via your smartphone. For example, if 'Kaun banega crorepati' is being watched you can see the same questions on your mobile screen and interact with them. Broadcasters and advertisers can push actionable advertisement to your phones. Media ratings space can be totally disrupted with this technology. So, these kinds of technically hard problems are being solved in Pakistan; what we need to do is support these entrepreneurs and help them make bridges outside Pakistan.
BRR: And how exactly are you supporting these companies?
KZ: We provide them necessary facilities like office space and expenses, as well as support for investments, marketing and PR. We get seasoned experts and successful entrepreneurs from the local industry to come in and do a lot of mentoring. We connect them with investors. At the end of four months, they have to be on their own. We want entrepreneurs to be entrepreneurs; we don't want them to become leeches. So, from the idea stage, we bring them up to a point where they have developed a product or service and taken it to market.
BRR: What kind of investors are you trying to attract?
KZ: Up until now, we have no restriction on the kind of industries the start-ups need to belong to. We can incubate IT, consumer retail or agriculture-based businesses, for example. We have an independent foundation council of about fifteen members who come from different backgrounds ranging from industrialists to tech to marketing and they do the vetting for us. So our ideal investors are sector-neutral, or open to invest in the IT, retail, agriculture and impact sectors, and who can make seed-stage investments in young companies in Pakistan.
The early investments most of these start-ups need range from fifty to hundred thousand dollars. We provide early, in-kind investment into the start-ups but even after the four-month incubation period, a void exists that needs to be bridged with early stage capital to help the most promising start-ups build enough traction to be able to attract risk capital from local or international sources. So, we are trying to put together a seed-stage fund that can bridge that void. Our hope is to be able to do this as a not-for-profit vehicle so any dividends and capital gains from these investments can be recycled to support more start-ups.
Aside from this, we have seen a lot of commercial interest in Pakistan from Pakistani expatriates who have done well and want to invest back in Pakistan. There are other European and Asian funds that have started investing in Pakistan as well.
BRR: So, how are these investments managed? Can you give us some examples of start-ups that have raised investments?
KZ: For the not-for-profit fund, we intend to create a section 42 special-purpose-vehicle company and have an independent investment committee manage the investments. Commercial investors typically require that the Pakistani company set up a parent company in a legal jurisdiction that the investors are comfortable with. That parent company is transferred the assets of the local company and the investors then fund that parent company.
There are several companies that have raised capital recently. Popinjay is a high fashion brand that raised approximately twenty seven million rupees last year. Women from Hafizabad make bags designed by professional designers and Popinjay sells those in high fashion stores in the metropolitans internationally. Shopistan, an e-commerce website, raised thirty million. Rozee.pk, Eyedeus Labs, Convo, Geniteam, Pring, Zameen.com are all examples of companies that have managed to raise sizeable investments from local and international investors. Over the next twelve to eighteen months, we are going to see more large investments in Pakistani companies.
BRR: What are your future plans?
KZ: We want to build a very comprehensive entrepreneurship support ecosystem. The Foundation is an incubator and an accelerator within the entrepreneurship center. We want to collaborate with investors to build Plug 'N' Play centers that offer subsidized, on-demand office space to young companies. As I mentioned earlier, we want to build a fund that can invest in start-ups. We also want to make a skills commercialization center.
The IIM Ahmadabad has worked on this kind of project where they go around the country and support artisans and commercialize their skills. In our case, there are two examples: Popinjay, which utilizes skilled artisans from Hafizabad, and Markhor (previously Hometown Shoes), which gets shoes made from Okara and sells them online for as high as $300. Scouting for such artisans and pairing them up with skilled marketers and providing them a platform to market and sell their products can have an immense impact on their lives and the local economies where they come from.
We also want to build a corporate innovation center, where we extract cross-functional teams from large corporations and bring them in to a very conducive design shop and guide the team through the process of innovating and coming up with new products from a concept to a working prototype.
And lastly, we want to have integration with our academic programmes. LUMS already offers courses in Entrepreneurship. We can supplement them with experiential learning opportunities at The Foundation, our incubator, where students actually go through the process of building real companies.
BRR: How many other organizations are there in Pakistan that support entrepreneurs institutionally?
KZ: There are different types of organizations. So there is a place in Karachi where you have co-working space where you can rent a table for a day or a month and so on. Then there is an accelerator in Islamabad by the name of Invest2Innovate. Their focus is more towards impact businesses. They provide mentors and investors. Popinjay was one of their graduates.
Punjab Government has also started a technology incubator by the name of Plan9. It is doing good work. There are two to three entrepreneurship centers in Islamabad. There is an incubator in NUST and one in Peshawar called Basecamp. PASHA is in the process of building an incubator in Karachi with support from Google. There is a good ecosystem of incubators, accelerators, co-working spaces, mentors and investors evolving in Pakistan now.
There is a lot of investment coming in to Pakistan from companies like Rocket Internet and Naspers. They are two major global players in the online business space; former is German and the latter is South African. They have invested millions of dollars in Pakistan into their own ventures. Their media spend has benefited the entire online sectors of Pakistan. When Naspers spends millions on TV commercials to convince Pakistani consumers to buy and sell on OLX, it has an indirect effect of bringing those consumers to other Pakistani online businesses as well.
BRR: Don't these tech entrepreneurs face pressure from parents that good money has been spent on your education and that now they should go into the market and get a job?
KZ: To counter family pressure, we don't charge the start-ups. They pay us in equity. Accelerated companies give two-and-a-half percent and incubated companies give five percent. For additional equity, we even provide sustenance stipends to some of the entrepreneurs in order to ward off pressure from families to get a job.
BRR: What happens if they don't get the desired success?
KZ: We encourage all our start-ups to get their product out to market as quickly as possible and get feedback. Early validation or rejection by market helps the startups go through multiple iterations or pivots and can increase their likelihood of success. Especially in the IT sector, this feedback cycle is very quick and one can measure everything and improve their products or marketing and selling process. These days, there are Startup Weekends held, where ideas are developed into products and even tested in the market within a fifty four hour time span.