Pakistan’s startup sector at risk as funding crashes 88%

Pakistan’s once-thriving startup scene, hailed as a beacon of hope for its struggling economy, is now in jeopardy as venture capital investment collapses and regulatory bottlenecks stifle growth, according to a new report supported by TelenorVelocity, Visa and Ignite.

The study, titled Closing the Funding Gap for Startups in Pakistan, reveals a dramatic 88% plunge in startup funding, from $355 million in 2022 to just $43 million in 2024.

This sharp decline comes despite the country’s strong fundamentals: a youthful population of 241.5 million, with 67% under age 30, and expanding mobile broadband access reaching 57% penetration.

Over the past decade, tech-driven ventures have reshaped key sectors, including fintech, e-commerce, logistics and mobility, with National Incubation Centers alone fostering more than 1,950 startups and generating over 183,000 jobs.

The e-commerce market, valued at $5.2 billion in 2023, is projected to grow to $6.7 billion by 2029, while IT-enabled service exports hit a record $3.2 billion in fiscal year 2024. Yet these gains are now at risk as startups struggle to secure funding amid global economic uncertainty and local challenges, including soaring inflation, currency depreciation, recurring internet shutdowns and inconsistent policy implementation.

Regulatory maze stifles innovation

According to the report, startups face a complex web of bureaucratic hurdles that discourage investment and push entrepreneurs to relocate. Outdated financial regulations, burdensome compliance requirements and lengthy licensing processes create unnecessary barriers.

For example, conflicting definitions of a “startup” across tax and corporate laws leave many firms ineligible for incentives, while foreign investors must navigate a cumbersome foreign exchange approval system dating back to 1947.

Banks, bound by strict collateral requirements, rarely lend to early-stage ventures, and alternative financing options such as revenue-based lending and crowdfunding remain largely prohibited.

Intellectual property, often a startup’s most valuable asset, is not recognized as collateral, further limiting funding avenues.

Reforms urged to salvage growth

The report proposes a sweeping overhaul of Pakistan’s startup ecosystem, beginning with regulatory simplification. Key recommendations include creating a dedicated legal framework for startups, harmonizing conflicting tax definitions and extending tax relief periods to help young firms stabilize.

To attract investment, the study calls for recognizing intellectual property as loan collateral, easing rules for venture capital and angel investors, and digitizing foreign exchange approvals to accelerate cross-border funding.

It also suggests establishing specialized startup tribunals to fast-track intellectual property disputes and enforcement.

Pakistan’s regulatory sandboxes, designed to help fintech startups test innovations under relaxed rules, suffer from low participation due to poor awareness and overlapping oversight by multiple agencies. The report recommends merging the State Bank of Pakistan and Securities and Exchange Commission of Pakistan’s sandboxes into a single “Pakistan Innovation Testing Hub” with streamlined applications and clearer pathways to full licensing.

With funding drying up and startups struggling to survive, the report warns that Pakistan risks losing its competitive edge unless reforms are implemented swiftly.

“The window of opportunity is narrowing,” the study cautions, emphasizing that the country’s demographic dividend — its vast young workforce — will not last indefinitely without a supportive ecosystem for innovation.

Policymakers must act now, the report concludes, or risk seeing Pakistan’s brightest entrepreneurial talent flee to more hospitable markets, taking jobs and economic growth with them.

Telenor, Invest2Innovate, and the Special Technology Zones Authority, along with support from the Ignite National Technology Fund, Telenor Velocity and Visa Foundation, co-hosted a roundtable discussion to help drive these reforms at the +92Disrupt Conference in Karachi — Pakistan's leading tech and startup summit.