The software development including the E-commerce industry has experienced a dramatic growth worldwide. Even the conventional retail based super stores now have an online version of their business with a dedicated IT department. But what does it take to start, survive and make it big in this industry in Pakistan? Any layman with a decent knowledge about the potential of the internet will argue that it is quite easy and will not require much initial capital. But let us explore this within the views of some historical and present day academic authors.
To begin, very little academic research has been found on the entrepreneurial start-ups, especially within the software and tech industry and let alone in Pakistan, therefore leaving many questions unanswered about its potential for growth. To find out more about this industry, I conducted a research to highlight the issues faced by entrepreneurs when starting a software house and later found that the same results were applicable to the upcoming E-commerce industry as well.
To briefly explain what entrepreneurship is about, it does not only limit to start-ups as it can be seen in big, small and old businesses. For example Blue-chip organisation like Intel and IBM guide their employees towards R&D and innovation in an effort to maintain market leadership and therefore are entrepreneurial in nature. Some big companies may have a strategy to keep an eye out for small innovative ventures such as Microsoft which for instance, works with 750,000 small companies around the work and therefore conduct entrepreneurial activities. I mention this because it is a misconception amongst many young Pakistanis who strive to be entrepreneurs. But this article is focused towards start-ups limited to the software development and E-commerce industry in Pakistan.
The Global Entrepreneurship Model (GEM) has divided entrepreneurs into three distinct groups. First, those exhibiting High-Expectation Entrepreneurship Activity (HEA); this group includes 9.8% of the world’s entrepreneurs to create 75% of jobs with the help of their business ventures (Autio, 2005: 15). Second, Opportunity Entrepreneurship Activity (OEA); entrepreneurs who identify business opportunities and take focus on execution. In comparison to HEAs these entrepreneurs expect to achieve lower rate of growth (Valliere & Peterson, 2009: 461). Third, Necessity Entrepreneurship Activity (NEA); this group considers entrepreneurship to be their last resort. It is vital for an economy to have a larger number of HEAs. Furthermore, different economic phases of a country such as developed versus developing economy also affect the way it exhibits growth (Valliere & Peterson, 2009: 462). Based on this we can categorise Pakistan to be in the developing group, thereby making market entry difficult for new entrants comprising of mostly NEAs and very few OEAs.
To ensure a successful venture, Smith and Smith have identified a strong business plan with a blend of adequate financing aligned with a strategic plan, to be a success formula (Smith and Smith 2004:10). To support this theory, Seigfried and Evans have acknowledged initial capital to be the most important factor for any start-up thereby causing barrier to entry in the case of lack of it (Seigfried and Evans: 1994). Recent history has shown that the finance and knowledge are the most important identifiers for a start-up in Catalonia (Blasco et al 2008: 445). Arguably, the same problem exists in Pakistan’s start-up arena.
The software development and E-commerce industry is unique when compared to conventional businesses. Cultural differences, geographical locations and work experience play a very negligible role when it comes to categorizing reasons of failure as the power of internet has narrowed boundaries. Having said this, 70% of the entrepreneurs who replied to the survey identified lack of finance as the main barrier to entry and survival in Pakistan. This is true because the concept of start-up incubators, such as Plan9, is relatively very new in Pakistan and not many people are aware of it.
Entrepreneurs here are bound to face financial issues because Pakistan itself is still in the development stage and therefore is the reason why most entrepreneurs are OEAs or NEAs, as mentioned above. Having said this the potential for economic growth by a tech-business is extremely profitable and has yet to be exploited to its maximum capacity. Under-developed financial institutions are the cause of these issues as explained by Ross Levine and Raghuram and Luigi Zingales in their articles “Financial Development and Economic Growth” and “Financial Development and Growth” respectively.
A Pakistani entrepreneur is left with three ways to raise funds; Bank loans, Venture Capital business angels, or Self-financing (Debt Financing). Because of the high collateral rate, bank loans is the most risky source of funding and 70% of the entrepreneurs did not opt for. Mobilization of capital is poor despite the provision of hedging and other risk diversifying financial products by banks.
Another alternative to accumulate funds is by attracting Foreign Direct Investments (FDI). The global opportunities for acquiring capital for IT are lucrative but this is discouraged by the lack of a developed financial system along with political instability. This element has started to shift as foreign investors have started to show interest in this sector especially after their success in India. The government has failed to realize the importance of IT as a major potential contributor towards its GDP, causing problems for the software houses and new ventures. The concept of Venture Capitalism is very new in Pakistan, and therefore requires a lot of development and awareness. This leaves the entrepreneur with debt financing or self-financing as the main source of raising funds. Many would tackle this by working for someone else initially and accumulate enough funds or obtain unofficial loans from family members.
These methods of funding overlap with that found in the US. Unfortunately, for such conditions no best approach for a successful entrepreneurial venture can be defined. But if you have access of funds or know family members who would invest in your business, then that is the way to go about it. But since majority of the people do not lie in this category, an entrepreneur should raise funds from his savings and start small with minimum overheads, attract foreign projects. Within sometime he/she would know the potential growth of the business. If the projections are positive, it will create traction and that’s when you approach local and foreign angels for investment or potential buyout.