Analysts say 90pc start-ups fail, there is no guaranteed success; urge businesses to hang in there.
After Swvl and VavaCars, Airlift — a bus service that later pivoted to the last-mile delivery segment — has announced the permanent closure of its operations in Pakistan, shaking the already wobbly start-up market of the country.
In a statement issued on Wednesday, the firm pegged global recession and the recent downturn in capital markets as the key reasons for the shutdown, claiming that economic activity across the board had a “devastating impact” on its business, forcing it to suspend operations on July 12.
“This has been an extremely taxing decision that impacts a large set of stakeholders and an emerging technology ecosystem,” stated Airlift, whose statement also contained several other reasons explaining its untimely demise.
The announcement, unfortunately, does not come as a shock, especially given the economic distress Pakistan has been in for the past few months.
The country’s start-up ecosystem is currently suffering from the tremors of skyrocketing fuel prices, global recession, uncertainty on the local front, limited foreign investment, and difficulty in finding sponsors, forcing firms to scale down operations, lay off employees, and service rollbacks.
Careem, Swvl, VavaCars, and Truck It In are some of the companies that have done this in recent times. As for Airlift, ominous signs were already present long before the final bomb dropped.
The company, referred to by the media as the “poster-child” of Pakistan’s start-up scene, was launched in 2019 with a mass-transit service. The year that birthed Airlift also birthed the Covid-19, which forced people across the world indoors.
So what does a firm formed on the premise of moving people do when there are no people to carry? Sensing an opportunity, the firm shifted gears to quick commerce (or q-commerce) the following year. It provided delivery services through which users could order groceries, fresh produce and other essential items, including medicines from the Airlift website or app and have it delivered to their doorsteps —all within 30 minutes.
According to start-up data portal Crunchbase, the company raised $85 million in the country’s largest Series B funding round — the second round of funding for a company that has met certain milestones and is past the initial start-up stage — in August last year. The amount was the highest for any Pakistani start-up.
It added that the company had raised a total of $109.2m in six rounds, with Future Positive and Moving Capital among its most recent investors.
However, the model that proved to be quite successful during Covid, lost its charm once the virus started to wane.
So how did things go wrong?
Wrong place, wrong time?
Ali Meruani, the co-founder and chief operating officer of GoLootlo — a QR-based discount app — told Dawn.com that despite popular opinion, more money does not necessarily guarantee successful businesses. “There are multi-billion-dollar companies that have gone bankrupt.”
When you invest in a start-up, he said, there’s never any guarantee of returns. “In this environment, not everything is a success. You need to take calculated risks, which also mean failures.”
Meruani explained that the quick commerce model Airlift operated on during the coronavirus lockdown proved to be a success — initially.
Under a q-commerce model, a network of warehouses is set up only to hold inventory to serve a large number of customers across locations quickly. But maintaining inventory is a costly endeavour, and global consulting firm McKinsey estimates the costs of warehousing at 300 billion euros a year worldwide.
“During the lockdown, the assumption was that this [quick commerce] model would persist,” the GoLootlo COO said. “But then [after the lockdowns eased] supply chain costs and inflation increased, forcing consumers to cut down their discretionary spending. So, a consumer preferred to go to a grocery store in his locality instead of spending Rs100 on delivery [charges] from an app.”
He said the trends extended globally. "Food delivery companies across the world have suffered heavy losses. And this is exactly what happened with Airlift too."
“The company didn’t have the runway. They needed money in this environment but failed to raise it,” he said, adding that a company as fast-growing as Airlift was just "in the wrong place at the wrong time".
According to Faiz Ul Haq, head of media and marketing at the Federation of Pakistan Chamber of Commerce and Industry (FPCCI), Airlift’s collapse could be explained by the company not expanding its tech infrastructure.
“The company did not swiftly deploy the funding to where it belongs i.e. expansion of tech infrastructure; flexing the footprint to reach untapped potential for first-mover-advantage and the development of the human resource,” he outlined.
Meanwhile, Sustainable Development Policy Institute (SDPI) head Ahad Nazir told Dawn.com that Airlift lost its market to small suppliers that were better when it came to the availability and quality of the service.
"The company couldn't cater to smaller markets such as people living in Bahria Town. This opportunity was seized by local general stores that developed apps and replicated Airlift's model," he pointed out.
So what's Pakistan’s start-up scene like?
Despite battering inflation, Covid lockdowns, high energy prices, and supply chain shock over the past few years, Pakistan’s start-up market has seen exponential growth, proving to be a silver lining for the country.
According to Invest2Innovate, a local consultancy firm, in 2021 alone, 83 start-ups in the country successfully raised $350m, while so far this year, the sector has already raised $136m.
The five largest disclosed startup funding rounds in 2021 were: Airlift ($85m), Bazaar ($30m), Tajir ($17m), Qisstpay ($15m), and TAG ($12m).
A report published by Al-Jazeera earlier highlighted that Pakistan was among the final few untapped markets for start-ups and investors to offer internet-based services like those in other countries such as ride-hailing, food, and grocery delivery.
Atif Zafar, research head at Topline Securities, agrees. He told Dawn.com that Pakistan had seen significant growth in the start-up market despite being late to the party.
“Even today, the number of start-ups as compared to our population’s demographics is pretty low which means that there is ample potential in the market,” he said.
However, Zafar cautioned that where there is the gleam of great power and success, the shadows of steep falls and losses lurk. “Across the world, the success rate of start-ups is very low with 1 out of 100 being successful.”
Economic crises leading to cash burns and low investments are a common phenomenon around the globe. “The world has been there and done that. It is just here in Pakistan that it is happening for the first time.”
GoLootlo’s Meruani concurred. He said that Pakistan still has a relatively small start-up ecosystem, "which is also why we were in a bit of a shock at Airlift’s failure".
“There is no guaranteed success — 90 per cent of start-ups fail. Pushing boundaries means that failure is part of the equation, so we should be comfortable with it,” he pointed out, adding that there are some amazing startups doing great work in the country.
“We should celebrate them and celebrate failures. Running a start-up means you must be resilient, so this is just another bump in the road.”
'Hang in there'
There is a mix of caution and optimism in wake of Airlift’s collapse.
Hasnain Mirza, managing director at tech start-up Expando, said that with the absence of Pakistan’s start-up poster-child and the ongoing economic crisis, there will be hurdles for other companies when it comes to investment. “It would be difficult to attract investors and venture capitals after the closure of a unicorn turning start-up.
“I know a couple of ideas that are in the pilot phase and need investment but are facing a lot of bottlenecks because of the current crisis,” he said, warning that this could increase in near future.
Mirza said the Asian market has always had a great potential to test new ideas due to its behaviour of easy adaptation and burgeoning population. “Talking about Pakistan and considering the length and breadth of its population, a figure of even 1.9m grocery stores is a needle in a haystack.”
Despite the potential, the entrepreneur said that the situation had impacted his business as well. “There was the Covid uncertainty initially, then the economy and now start-ups are failing miserably.”
However, GoLootlo’s Meruani believes that the crisis won’t last long. “In the short run, funding will become difficult because of the global recession and political uncertainty. But Pakistan has a lot of potential and investors know this. So, hang in there, we will do just fine.”
On the other hand, SDPI's Nazir highlighted that start-ups had a lot to learn from Airlift's fate. For one, they need to have adoptive and agile models that are not easily replicable. "I feel that incubation centres need to make careful decisions when it comes to funding.
"We also need to realise that the models followed by Bill Gates and Steve Jobs can't be run in Pakistan because our regulatory environment is very different. Start-ups require additional knowledge and examples from local models," he added.
Sahib Dino, another young professional working for Noon, said that with rising fuel prices, cost of business, and depreciating rupee, the digital industry was the best market to dive into.
“We have seen that retail industries are suffering the most because their operational costs have increased, and profits have decreased. And investors will only give you money when you return them double in less time.”
He added that what happened with Airlift was disheartening but also a signal for start-ups to "shift their gears".
Expando's Mirza also had some advice for new start-ups: “Tech comprises just 20 per cent of the start-ups. Do not think that developing an app would create a successful start-up. Come up with multiple plans, both short-term and long-term, iterate them, research, know your audience, closely study the business model, and explore multiple revenue models. This is the only way you can grow and create a successful start-up.”
