ISSUES & CHALLENGES FOR VENTURE CAPITAL INDUSTRY IN PAKISTAN
Pakistan’s “non-social” business people require comparable and striking support. They require it, not from the altruistic or non-benefit world, but rather the private area. Capital markets can’t be worked by any other individual.
• Better economic growth in last 6 years
• Growth and consolidation of the banking sector
• Better spending on higher education
• Lack of entrepreneurship
• Shortage of skilled human resource
• Lack of innovation and R&D among enterprises
• Limited knowledge-based sectors
• Risky investment and few exit opportunities
• Increase in foreign direct investment
• Young entrepreneurs willing to share the success
• Growth potential in many sectors of the economy
· Law and order situation
· Political Instability
- Country Image Perception
Business and technology incubation centers
Incubators typically give a very initial stage support to young entrepreneurs who want to develop their idea to a viable commercial proposition, which may be financed and supported by the venture capitalist.
In Pakistan, National University of Science & Technology (NUST) has established Technology Incubation Center (TIC) in Islamabad in 2004. There is need to establish many incubation centers in other universities/research centers with the strong collaboration of private sector.
Late return investment
Venture capital investment is a comparatively long-term investment; i.e. average success time is 4-8 years. We have seen huge investment in real estate by local as well as overseas Pakistanis and sometimes they also wait for few years for their required returns. But there is fear of their investment becoming zero in case of failure of VC project, which we do not see in real estate and other investments.
Few opportunities for exit
The exit is an important part of the venture investment cycle. IPO, mergers, and acquisitions are main channels of exit. In Pakistan, a listing of small and medium-sized companies on the stock exchange is not viable due to initial high cost and lot of reporting requirements. There is no tax benefit for the company to list on the stock exchange. According to Mr. Sohaib, companies having worth of the U.S $ 4-5 million may be in a position to be listed on a local stock exchange; whereas, for offshore listing, the requirement goes between the U.S $ 12 -15 million dollars.
Looking at these factors, a listing of VC projects in Pakistan seems difficult in the current scenario. Small and medium-size companies prefer expansion of their own businesses instead of buying other businesses for expansion, which also results in very few mergers between SMEs. Earlier, VC companies in Pakistan were not focusing on exit strategies at the time of investing in companies. The main reason was lack of expertise for designing exit strategies and another reason was infancy stage of VC industry. But now, they have realized the significance of formulating an exit strategy for the success of VC Company.
Lack of innovation in Pakistani enterprises
As venture capital companies are interested in ventures having innovative ideas with the potential of high returns; Pakistani educational institutes, particularly engineering institutes, lack research facilities as well as attitude. Similarly, the private sector is not willing to invest in research and development. This is also visible from very few patent and copyright registrations (around 600 patents registered during 2005 and 2006 but most of these were made by multinational companies). Even after getting copyright and patents of their products, it is very difficult to stop other companies from copying the products due to the weak legal framework and weaker enforcement system.
No investment in VC funds by government agencies
The government of Pakistan has initiated a couple of funds i.e. Competitive Support Fund (CSF) and Business Support Fund (BSF), but these funds support only existing businesses. Besides these, there is no exclusive fund by the federal or provincial government for VC. Pakistan Software Export Board (PSEB) is also making efforts to initiate 50 million dollars VC fund with other agencies for the enterprises in the area of software development and information technology. But there is need of sector-specific VC funds focusing on early-stage companies.
Deal flow and culture of shifting businesses to their next generation
The attitude of business people in Pakistan is having full control over the business. This is the reason that people do not want to get financing from sources like venture capital, where they are required to share their business. This issue is called as deal flow, and India also faced this issue in their early stage of venture capital industry.
In Pakistan, there is the tendency of shifting business to their next generation. Enterprises in Pakistan do not think of selling their businesses even in the case of getting better value. So there is the clash in the culture and attitude between VC companies and business community in Pakistan
Low investment by overseas Pakistanis
Large numbers of Pakistanis are living in USA, UK, Canada, Australia, Middle East region and other countries. A good number of these people are employed in financial and technology sectors but we could not attract them to invest in Pakistan and could not get benefit from their expertise, knowledge and market linkages.
Limited knowledge-based sectors in Pakistan
The main interest of VC companies has been in knowledge-based sectors due to the potential of their growth. BioTechnologies, Business Process Outsourcing (BPO), Information Technology (IT) and related services, pharmaceutical research (drug discovery), health services are few of these sectors where Pakistan has the opportunity to make a lot. These sectors have big opportunities for exports and also appetite of VC funding. There is low-level activity among few of these sectors but most of the work is focusing local market only. The interest of VC companies will only come to these sectors when these sectors will grow to a level when they can target export markets also.
Shortage of skilled human resource and its management
Bankers in Pakistan have expertise in evaluating the risk and worthiness of the projects, but they have no experience of supporting their clients in management and marketing areas. In other countries, VC companies have a pool of experts in different functional areas and these experts have also the experience running few companies. But if we look at Pakistani scenario, this element is totally missing.
Legal and accounting issues
Venture capital differs from standard forms of financing in a major way because there is much more involvement of providers of funds than is the case with other forms of lending such as bank loans. Venture capital investors are also concerned about resolving the uncertainty of cash flows. Currently, VC companies are being registered under NBFC Rules & Regulations 2003 and SECP has also prepared draft rules for Private Equity & Venture Capital Companies 2006. Industry players have few concerns on these issues particular registration of foreign VC companies with SECP in case of VC investment in Pakistan and regulatory measures which reflect a comparison of VC with mutual funds by SECP. Besides above, they also feel Venture Capital companies face same reporting requirement as for other companies listed on stock exchange. According to Mr. Zulifqar, there is urgent need of allowing limited partnership firms to operate venture capital firms in Pakistan.
Lack of entrepreneurship
There is lack of entrepreneurship culture in the society of Pakistan. Only those graduates (business, engineering, and other fields) join the business whose families have any business i.e. these graduates do not start their own businesses. Generally, people start those businesses, which have a high probability of success. Getting finance for new business is very difficult in Pakistan and particularly equity ratio requirement is very high. According to Mr. Nadeem Ul Haq, government policies have also promoted “rent -seeking” (rent-seeking is defined as a situation in which an individual or firm makes money by manipulating economic environment rather than by profit-making through trade and production of wealth) investors instead of entrepreneurs. There is also shortage of Business Development Services (BDS) providers in the market who can support SMEs in the areas of HR, marketing, technical issues. Government support is also limited to new entrepreneurs.