A Tale of Two Networks

Pakistan: The Untold Story

of Technology &
Entrepreneurship

Introduction

Asad Jamal, founder of ePlanet Ventures, a technology fund based in

Silicon Valley, faced a dilemma. A recent business plan submitted by
an entrepreneur based in Pakistan had rekindled nagging thoughts
that Pakistan should be considered a strategic play for his venture
fund. Although of Pakistani origin, Asad had spent the majority of his
life away from the country, after getting his BSc (Honors) from The
London School of Economics. He had developed an outstanding
track record at ePlanet Ventures by demonstrating his ability to
identify promising opportunities in the Advertising & Media,
Communication & Wireless, Computing Software, Consumer
Internet, Energy, Enterprise Software, Financial, Life Sciences,
Network, Optical, Security, and Storage Networks space. As with any
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successful VC, he was always on the lookout for new horizons, and
once again turned his thoughts to what he had witnessed in Pakistan
during his visits over the previous 10 years.

Regulatory reform and a strong economy

“GDP growth has been strong in recent years,” at between 6.5 and
8.6% for the last 4 years. “In the past, GDP growth in Pakistan has
been held back by political instability, poor and inconsistent policies
(rampant corruption at the top) and, more fundamentally, by the
economy’s narrow production base. However, in the last five years
wide-ranging reforms, an aggressive privatization program, a
domestic consumer boom, moves to invest in the textile sector, and
substantial foreign aid inflows have underpinned a pick-up in
growth.”1

Figure 1: Foreign Direct Investment, net inflows (% of GDP)

As a country on the verge of bankruptcy prior to 9/11, Pakistan’s
fortunes have seen a remarkable turnaround. Since 2001, the influx
of billions in US aid in return for supporting the ‘War on Terror,’ in
combination with pro-reform government policies designed to
stimulate the economy, Pakistan’s business environment and
investment climate is flourishing.

Pakistan's recent policy trends of liberalization and deregulation

have been consistent and successful. In the World Bank's “Doing
Business 2008” report, Pakistan was ranked #1 in South Asia for its
ease of doing business and #76 globally (India is #120).

1
Economist Intelligence Unit – Pakistan Country Profile – Main Report – 21st
September 2007. Accessed 15th October 2007
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The introduction of the Private Equity and Venture Capital Funds Act
of 2002 also provided an enabling regulatory environment for the
capital markets. The Pakistani Government recently announced the
creation of a venture capital fund to provide seed expansion capital
as well as other functions.

A talent pool and a new generation of entrepreneurs

As Asad thought back about his childhood in Pakistan, he

remembered growing up wanting to get his higher education in the
UK or the United States. However in the post-9/11 world where
student visas and work authorizations are difficult to obtain for
Pakistani citizens, the former brain-drain is fast becoming a brain-
gain for Pakistan. In fact, in the technology space alone, Pakistani
universities now produce upwards of 20,000 talented, English
Speaking graduates per year. Importantly, Pakistani educational
establishments, particularly the missionary Convent schools instil
neutral English accents, enabling better communication with their
Western counterparts.

These bright, young technically trained graduates are turning to

new horizons. Faizan Burdar, founder of Scrybe – an up-and-coming
Pakistani web 2.0 company – expressed different aspirations to
Asad: "I realized that the Web would be hot and took a plunge with a
shoestring budget and no formal investments. In fact, I didn’t even
have a US visa so attracting funding from the US just seemed
impossible!"

Scrybe, currently in beta testing, is the most anticipated software at

the Museum of Modern Betas, a Web site that tracks emerging Web
2.0 projects and has recently attracted venture capital from Adobe
Systems and LMKR.

Scrybe is not alone. There are numerous other home-grown IT start-

ups in Pakistan making their mark on the global markets recently,
fuelled by a new breed of Pakistani graduates:

 iTrango, a game and 3D content studio, provided content for the

wildly successful game Tomb Raider Legend, and also for high
profile companies such as Nike, Lexus, Scion and other global
brands.
 Trevor, a software company, recently acquired by Bentley
Motors, was one of the world’s top providers of GIS/geospatial
software solutions
 Post Amazors, an animation house, provided content for the
film, The Mask, and also the local character of Safe Guard for
P&G which is now being used globally (Mexico).
 EnterpriseDB develops and supports EnterpriseDB Advanced
Server, a leading leading Oracle-compatible relational database
management system (RDBMS).
 Ultimus is one of the most widely deployed Business Process
Management solutions in the world, enabling over 1800
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 companies to increase profitability by managing,
automating, modelling and optimizing core business processes.
Their customers include Microsoft, Lockheed Martin and others.

Total number of IT companies registered with

1082
PSEB
384 Karachi
Number of substantial IT companies city-wise 276 Islamabad
breakup 353 Lahore
69 others
Total number of foreign IT and telecommunication
60
companies working in Pakistan
One CMMI Level 5 company, one CMMI Level 5
Number of CMMI-assessed companies company, three CMMI Level 3 companies and four
CMMI Level 2 companies
Total industry size US$ 2.8 billion (WTO-prescribed formula)
IT and IT-enabled services exports US$ 1.4 billion (WTO-prescribed formula)
Percent growth in exports over the last one year 61.18%
Number of IT graduates produced per year Approximately 20,000
Export targets for the current fiscal year 2006-
US$ 108 million
2007
Number of universities offering IT/CS programs 110
Number of IT professionals engaged in export-
oriented activities (software development/call More than 15,000
centers etc.)
Total number of IT professionals employed in
110,000
Pakistan
Total IT spending in the fiscal year 2005-2006 US$ 1.4 billion
Total space utilized in IT & Software Technology
Eleven IT Parks covering an area of 750,000 sq ft
Parks
Table 1: Statistics of the Pakistan IT Industry

Bridging the Gap – OPEN

Asad reflected on his last visit to Boston, when he had met up with
an old acquaintance Tom O’ Flannigan. Over lunch Asad had sat
enthralled as he listened to Tom describe how the Irish emigrated
en-masse to the US starting around the time of the Irish Potato
Famine in 1850, up until the 1930’s. The descendents of these
individuals formed a highly trained Diaspora with strong links to
their native land who played an instrumental role in Ireland’s
spectacular economic boom in the late 1990s. When they went
home to start high-tech, and other ventures, they took with them
access to management, capital and markets.

Does Pakistan share more in common with Ireland than Green – the
national color? Is this process currently being emulated by US-based
Pakistanis?

The Organisation for Pakistani Entrepreneurs (OPEN) was formed in

1998 to facilitate and encourage the growth of Pakistani
entrepreneurs & professionals. The initial focus was a coherent
approach for Pakistani-American entrepreneurs to get organised and
develop an effective network.

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 Figure 2: OPEN Chapters in the United States

That network has started to reach overseas. Umair Khan, Faraz

Hoodbhoy, Zia Chishti and many others have taken all or parts of
their businesses to Pakistan. In the other direction, Faizan Burdar,
founder of Scrybe, had not even set foot in the US and credits
introductions from OPEN members with starting the sequence of
events that has got them to where they are, funded by a high-
quality US company.

Furthermore, OPEN, in collaboration with the MIT E-Center has been

taking an active role in educating Pakistani-based entrepreneurs.
Workshops, seminars and a recently concluded Business
Acceleration Plan (BAP) Competition, led by local entrepreneurs
Farrokh Captain, Azhar Rizvi and Dr. Zahir Syed, have resulted in an
increased amount of mentorship provided to local entrepreneurs
from their US counterparts. Zafar Khan, CEO of Sofizar, and winner
of the BAP Competition said, “This program has helped me well
beyond my extremely high expectations. I could not get this quality
of help, even if I had employed a team of highest-paid management
consulting firms. The mentors were sincere, and pushed me to
improve. I didn’t need to raise money…I just needed guidance and I
got it.”

If Pakistan is going to be a successful hub of entrepreneurship, it is

clear that OPEN will need to increase its activities even further to
provide the link between the two networks. The recent formation of
the Tech Angels Network (TAN), led by MIT Faculty members, Ken
Morse, Bill Aulet and Imran Sayeed, President of the MIT Club of
Pakistan, Farrokh Captain and Azhar Rizvi, Vice Chair of the MIT
Enterprise Forum Pakistan, is indicative of the fact that the
investment environment is already starting to look different!

An opportunity to get in early

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This flourishing entrepreneurial community has not gone unnoticed
by entrepreneurially-minded Pakistanis living in the US. The
Pakistani-American diaspora has started to recognise Pakistan as an
attractive destination to locate elements of their US-based ventures.
As Faraz Hoodbhoy, co-founder of Silicon Valley-based PixSense - a
firm which develops network sided software to improve
cameraphone image sharing - says, "I knew I wanted to start a
business and I had strong family connections in Pakistan – but I
didn’t choose to go to Pakistan because I wanted to do something
great for the nation – I chose to do so simply for business reasons.”
And so he moved whole parts of the business to Pakistan.

Similar moves were made by Umair Khan, an MIT Graduate and

serial entrepreneur based in Silicon Valley, with his first venture
Clickmarks, an internet content aggregation and distribution
company, and by Zia Chishti of The Resource Group (TRG) and Sana
Khan of TrueMRI. In each of these cases, these US-based, Pakistani-
born entrepreneurs saw the opportunity to compete effectively by
harnessing Pakistan's strengths, in spite of its obvious challenges.
To date they've done so successfully. Nadeem Elahi of TRG states
that he believes customer satisfaction for their portfolio companies
has been approximately 50% better than companies with back-
office operations in other South Asian countries.

A large, evolving market

Pakistan is the 6th most populous country in the world with an

increasingly empowered middle class whose needs are starting to
resemble those of the West. The US Venture Capital community is
realizing that many technologies that have worked successfully in
the West can be replicated for markets like Pakistan. For example
the success of Baidu in China was based on a few smart
entrepreneurs realizing that they could customize a search engine
to meet the needs of the Chinese market and VC’s like ePlanet
Ventures saw the potential.

According to Ayaz-ul-Haque, MD in the Silicon Valley and New Delhi

offices of ePlanet Ventures, “What we look for in a company in a
country like Pakistan is whether the business can survive and
sustain itself in the local market. Given the political concerns in the
country, if a business is based on outsourcing and 90% of its
clientele is abroad, there is no knowing when those clients will yank
their contracts away. Whereas if a business is domestically-focused,
it can continue to thrive despite the political situation because life
continues to move along regardless of who is in power.”

Clearly there are opportunities to invest in Pakistan for logical

business considerations, in addition to those based on cultural or
family connections. Companies have already been outsourcing to
Pakistan, particularly for call centers, but more recently also in the
high-tech space. Even larger companies have been cashing in. En
Pointe Technologies, a NASDAQ listed provider of advisory services

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to IT organisations in the space of SAP and Information Security
amongst other areas, owns several subsidiaries in Pakistan
employing over 700 people, as well as in India and other developing
countries. Although the CEO of En Pointe is Pakistani, the company
clearly allocated its resources to countries that were best able to
serve their needs, and Pakistan was prominent amongst them.

Next Steps

Asad sat and considered the issues over a hot bowl of his favourite
Boston speciality, the clam chowder. His instincts told him that
Pakistan was a seething cauldron of opportunity and potentially a
next frontier for technology-based entrepreneurship. China had
been done. India had been done. What was the next high-growth
region and was he willing to bet on his homeland? The Wild West
had grown into prosperous communities but he was fairly sure his
Limited Partners would not give him a hundred years to show a
return. He thought about three issues in particular:

Scaling for Sustainable Growth

Although Pakistan was starting to demonstrate a successful track

record of entrepreneurship, all the individuals he had spoken to
were primarily concerned with the ability to scale. Building a 30-
person company was not the problem. Expanding it to a 300 person
company was where the challenge lay. The issue of a second layer
of management was key. Trusted management was hard to come by
in Pakistan, and therefore the culture was still one of family-owned
businesses with limited professional management. It would be
impossible to scale without addressing this issue. The empowerment
of an increasingly growing middle class and a trend for overseas
Pakistanis to return home indicated that this problem may resolve
itself, but how long would it take? Would the cost arbitrage in labor
still remain if overseas Pakistanis had to be paid US level salaries?

And that led him to his next thought. Pakistan was becoming
attractive not just because of its talent pool, but because this talent
pool was generally 30-40% cheaper than its neighbours in India &
China. The UAE and Saudi Arabia have already pumped huge
amounts of capital into the country. However, in terms of
infrastructure the Wild-West scenario still held partly true. Real-
estate was comparably expensive, but, as in China, the main issue
was the unreliable supply of electricity, water and other utilities,
which meant companies, had to build redundant systems into their
infrastructure, and that cost valuable dollars. He hoped that
Pakistan’s continued economic growth would help address this
issue.

Access to other markets

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Asad paused over dessert and reflected on why VCs were so often
inclined to invest within a 15 minute drive of their geographic
location. In his view this was an element of the short-sightedness
that prevailed in the industry. The world was now a global village,
and particularly in the consumer internet/web 2.0 space, this issue
was now almost mute. Plus, this was where the Pakistani American
Diaspora could have a real effect. Offices or subsidiaries in the US
could help to raise exposure. However, Scrybe demonstrated
ingeniously through the use of YouTube to promote their product
that it did not matter that they were located in a leafy suburb of
Islamabad, and so did Monis Rahman’s Naseeb Networks which now
had hundreds of thousands of users. Scrybe wanted 5,000 users for
their beta, they got close to 100,000. However, in order for a
business to survive, he decided it must also flourish in its home
market, particularly if outside the consumer/web 2.0 space, and
here again he wondered about the growing middle class. With India,
China and Dubai on his doorstep, he was reassured somewhat. In
particular, Pakistan had traditionally had strong relations with China
and the UAE, and his gut told him Pakistani business would be well
received in those regions. He recalled with a wry grin how Pakistan
International Airlines had played a major role in starting Emirates
Airlines, now arguably the fastest growing airline in the world.

Exit Opportunities

Literally the million dollar question was how to exit from

investments. The Karachi Stock Exchange (KSE) is the biggest and
most liquid exchange and was declared to be the "Best Performing
Stock Market in the World” by Business Week in the year 2002. As of
June 29th, 2007, 658 companies were listed with a market
capitalization of approximately $66 billion having listed capital of $
10.39 billion. The KSE 100 Index closed at 14,473 on December 7th,
2007.

Figure 3: KSE 100 Index Market Performance

This was certainly encouraging. However, in the quest to build

global companies, would companies have the reach and opportunity
to list on the major markets in the world, such as London & New
York? London has two Pakistani companies listed on the London
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Stock Exchange, but neither of them are technology companies. No
companies as yet have listed on NASDAQ, but companies founded
and run by Pakistanis in the US have, the most recent being Cavium
Networks, an intelligent network provider which listed on NASDAQ in
May 2007. Here again the Diaspora may come into play. A few
strategically placed board members in combination with US
offices/subsidiaries could pay dividends in the long-run.

In fact, Chinese companies, and Baidu in particular was the story

which stuck out most in Asad’s mind. Having no roots in the US, this
Chinese search engine became the most successful first-day foreign
IPO in U.S. market history – and Asad and ePlanet had a front-row
seat.

With Dubai, Shanghai and also India in the near vicinity, there
appeared to be no reason why high-quality Pakistani companies
could not list wherever they chose. Also, with the increase in M&A as
a viable alternative exit route to IPOs in Europe and the USA, Asad
cynically thought he could start 10 companies in Pakistan all of
whom had a primary goal of being acquired by Google.

Invest early, or risk waiting?

The main question in Asad’s mind was not whether the Pakistan
market is ripe but whether he wants to be amongst the first
entrants. Adobe & Qualcomm had already invested in Pakistani
companies, and ePlanet was on the brink. He realized that most
emerging economies have reached the stage they are at from
similar beginnings and Pakistan is no different. In risk there is
reward; does he want to learn from others mistakes or make those
mistakes himself and learn from them. And would he be able to
convince his partners at ePlanet Ventures of the same.

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 Part B – Pakistan from the perspective of an Entrepreneur

Bushra was driving home from lunch with Asad Jamal, an old friend
from her days in Pakistan. They'd been discussing the prospects for
new IT ventures in Pakistan and a long-time fantasy of going back to
Pakistan and making her mark as an entrepreneur seemed more
real than ever. She'd been following the developments of exciting
companies like Scrybe and Naseeb closely, and saw a real
opportunity for a web-based start-up.

Despite her excitement, there were still nagging doubts. How would
her company’s and her own brand be affected by being located in
Pakistan? Would the infrastructure and corruption be a problem?
Could she find and recruit the right people to grow? More
importantly, would she personally be able to adjust to the lifestyle
change after having spent her entire adult life over the past 15
years living in the US. But, she knew that the potential was huge
and she had little to lose knowing that she could always come back
to Silicon Valley and pick up where she left off. She recalled a
conversation with Ken Morse, her favorite professor from her MIT
Sloan days, who said, “The reason Silicon Valley is Silicon Valley is
that it takes 15 minutes & $15 to get a company incorporated –
ultimately that’s how easy it needs to get in Pakistan, and it is
moving in the right direction.” However there were still some
challenges that lay ahead.

Availability of Middle Management

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While there is no lack of fresh talent graduating with Computer
Science and Engineering degrees in Pakistan, most entrepreneurs
worry about finding seasoned managers. Companies like
DiagnosisOne, TrueMRI, Folio3, Techlogix, Pixsense, TRG, and
Zenprise have realized that many Pakistanis based in the West are
thinking about returning home mainly because they want to be
closer to aging family members. Most of this group has been
educated in the US and has worked for global companies and what
is needed is the right set of incentives to make it attractive enough
for these Pakistanis to move back.

This is not unique to Pakistan and many emerging economies have

thrived based on a similar trend of foreign educated and
experienced nationals returning back to their countries to either
start or join exciting ventures. Bushra understood the importance of
the right team to begin with and she knew that there were plenty
like her who were just looking for the right opportunity in Pakistan to
make the decision to move back. She wondered how long it would
take for a country like Pakistan to move beyond the challenge of
having a severe shortage of middle and upper level managers. But
she also knew that this shortage wouldn’t go away until people like
her took the plunge.

Bushra reflected on the comments of Adnan Lawai, CEO of Folio3,

and of Faraz Hoodbhoy, CEO of Pixsense that they had employed
expatriate Pakistanis in the US to go back and handle the
management of his activities there. Clearly there was a ‘secret
sauce’ that convinced these individuals to go back, but the
challenge in Bushra’s mind was how to achieve this without
negating the cost advantage.

Ready access to customers

Whilst the middle class was up and coming middle in Pakistan, and
the numbers were hard to ignore, Bushra was unsure about how
long it would take for this group of people to become serious users
of technology. Unless a company focused in the Web 2.0 space
where physical location of the company didn’t really matter, it was
critical to find and grow a local customer base. She knew that
companies like The Resource Group had managed to deploy a
unique model of acquiring troubled companies and offshoring their
back-end work to different parts of the world, including Pakistan.
This type of model has worked really well for a country like Pakistan
which has been fighting an unstable political environment for years
and in the face of uncertainty, it is quite difficult to sell services to
clients in the West. With TRG’s model once they hold a majority
stake in a company, it is their decision to off-shore where they want
without having to worry about a US client yanking their contract if
the country goes through a military coup.

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Bushra was not concerned in her ability to come up with a unique
business model and she knew that the excitement was the promise
that lay in the 150+ million people residing in Pakistan – one of the
fastest growing internet adopting nations in the world.

Access to capital

Any entrepreneur knows that while bootstrapping may work in the

initial stages of a start-up, at some point in the life of the company,
access to capital becomes the key factor behind whether a venture
will succeed or not. Ali Siddiqui of Jehangir Siddiqui Financial Group
says that there is an abundance of angel investors in Pakistan. “The
amount of capital is not the issue, if an entrepreneur complains
about not being able to find capital in Pakistan, then I would doubt
their ability to run a business”, says Ali. Though the venture capital
industry in Pakistan is still taking baby steps, there are a growing
number of private businesses that are interested in seeing the
entrepreneurial community in Pakistan flourish and want to invest in
innovative and promising ventures.

The New Frontier

Bushra realised that she could spend months weighing up the pros
and cons of starting an enterprise in Pakistan. Yet her gut instinct
told her that Pakistan was at the beginning of a phase of growth that
would be comparable if not exceed that of other Asian economies in
the previous decade. She could count a significant number of friends
who still kicked themselves at shirking India 15 years ago and
regretting it today, and she was determined not to fall into the same
trap. Pakistan was by no means the Promised Land, yet it clearly
offered opportunities that someone with perseverance, hard work
and skill at managing people, could take advantage of. Should
Bushra follow her gut feelings?

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