Why do Startup fail: A case study from Pakistan
Today’s economic world is highly dominated by entrepreneurs diving into the future and making strides in the business world. The global economy is inching towards an Al-first world, making it the ideal time for startups to make their mark.
Below are some of the top international unicorn startups in 2021:
Source: (Visual capitalist, 2022)
The question arises is why does some of these fast-growing startups fail and crash as rapidly as they rise?
The pandemic of 2019 set the international economy in a downward spiral. Many businesses from around the world were unable to sustain the brutal domino effect of COVID 19. In this article we will elaborate upon factors to why startups fail to sustain operations long run. Here is a summary of various factors that lead to failure of startups by CB Insights:
Source: (CBINSIGHTS, 2021)
Case study
In this article we will discuss these above factors taking in consideration two of Pakistan’s biggest startups that that shut down in 2022. In Pakistan, with first 6 months of 2022 Startups ranked $284.89 million total disclosed funds (Ventures, 2022). In the last two years there was an array of new startups making waves highly inspired by success of Airlift.
Regardless of rising inflation, supply chain shocks, high energy cost and lockdowns the start-up market in Pakistan has witnessed exponential growth. The following graph shows sector wise funding in Pakistan:
Source: (Dawn news, 2022)
The five largest disclosed startup funding rounds in 2021 were:
Airlift
The abrupt closure of Pakistan’s most valuable company is bad news for the country’s developing ecosystem. However, local investors claim that Airlift is not representative of the sector. Launched in 2019, Airlift fought tooth and nail throughout its brief stay in Pakistan to first make their mass-transit concept fail before jumping on the rapid commerce bandwagon and spent tens of millions of dollars in the process.
Early in 2020, the Covid-19 outbreak struck Pakistan, putting Airlift, a fledgling mass transit company that provided an Uber-like service for buses, in a precarious position. “At that time, the main concern was whether to continue operations. Do we continue to burn or do we retreat? Usman Gul, a co-founder of Airlift, recalled in a June 29 interview with Rest of World. To satisfy the requirements of the millions of people stuck at home, Gul and his colleagues made the audacious decision to switch Airlift to rapid delivery.
It was a risky move, but it was successful: Airlift went on to become Pakistan’s most valuable startup and secured the single-largest round of funding the nation has ever seen, raising $85 million.
When faced with a fresh, shifting economic situation two years after the company’s initial recovery, Airlift was unable to avoid repeating the mistakes of the past. Airlift announced its closure on July 12 and cited “the global recession and [the] recent fall in capital markets” as reasons. According to a statement, the company had “clear forward motion” up until early July and was in discussions to get “Series C1 financing.” However, numerous investors expressed uncertainty about their distribution plans “despite increasingly deteriorating conditions in the world economy.” Consequently, a total shutdown was “inevitable.” Nearly 300 individuals worked at Airlift, while more than 1,000 more were employed by its transport services and warehouses.
The growing entrepreneurial scene in Pakistan has been shaken by the shutdown. Deosai Ventures partner Shehryar Hydri said that “when your poster kid gets assassinated overnight, everybody kind of stresses out.” Some commentators attribute Airlift’s demise to its aggressive and ambitious growth-at-all-costs culture, which drove the company’s meteoric rise and fall. When Airlift switched to the 30-minute grocery delivery concept, problems started to arise. Quick commerce has established itself as a famously challenging industry to succeed in. According to Gorillas in Europe and Getir in Turkey, the industry is a money pit that requires continuous funding infusion to remain afloat. With a monthly cash burn rate of $50–$75 million, Berlin-based delivery app Gorillas left Italy, Spain, Denmark, and Belgium in June. In May, Getir lay off 4,000 workers, or 14% of the workforce. Both businesses have valuations that surpass that of Airlift, making them unicorns.
What happened?
Rising inflation
People are currently less inclined to pay money for luxuries like rapid food delivery due to factors like the global financial crisis, rising inflation, and skyrocketing gasoline prices. On top of that, businesses like Airlift have had to raise the price of these services because of the worldwide economic slump.
Fractional ownerships: low risk for startups
Startups have long supported these luxuries with VC funding, and as investors tighten their purse strings during the recession, there is kind of a modern breakdown happening. Running a startup requires funding. Funding stops flowing when VCs lose interest in a startup. That is main the reason behind the failure of Airlift, one of the few startups that raised the highest amount in round B. A startup is financially susceptible if it depends heavily on one source of capital or one source for a significant share of its total funding. Fractional ownership might be an excellent idea for future entrepreneurs to eliminate the risk of total financial collapse.
Understanding the idea behind fractional ownership is crucial. A DAO’s objective is to provide a platform for blockchain entrepreneurs to look for funding for their initial projects, a decision-making process that is made by the DAO’s members. The effectiveness of funded firms is assessed at each level, and money is only provided with the program committee’s permission. A set of hard-coded rules govern how DAO will act.
Due to funding issues, the firm was on the verge of closing completely. Investors had backed out of the $20 million round of funding. According to a startup source, “the company is packing up merchandise at its warehouses and there is significant concern around the future of the workforce.”
Rigid customer preferences
Like other rapid commerce businesses, Airlift operated under the assumption that if they attracted enough clients, they would eventually scale and turn a profit. People were never going to be comfortable paying for these services, especially in a nation like Pakistan where inexpensive house labor and a tradition of extorting favors from establishments like neighborhood kiryana stores abound.
Due to funding issues, the firm was on the verge of closing completely. Investors had backed out of the $20 million round of funding. According to a startup source, “the company is packing up merchandise at its warehouses and there is significant concern around the future of the workforce.”
Investor scrutiny
Although the $200 million investment was not formally announced, greater investor scrutiny of the startup’s financials had already started to cause problems. Following the announcement on May 25 that it was discontinuing operations, Airlift has been working to complete a $20 million bridge round fundraising while only continuing to operate in Pakistan’s three major cities of Karachi, Lahore, and Islamabad. A further announcement from Airlift stated that 31% of its workers would be let go, citing worries about raising money in a weak market as investors avoid the “growing at all costs” concept.
Pivot gone bad
The restructuring of Airlift, which involved closing South Africa and smaller cities in Pakistan, was a part of the business’s plan to be self-sufficient and independent when funding sources ran out. To be self-sufficient, Airlift needed to make money from its own operations, which seemed impossible in the retail rapid commerce industry. tors reject the mantra of “development at all costs.”
Other examples
Airlift’s cease of operations was followed down by several some other major players such as SWVL, JOVI, VavaCars, dukan.pk, Car first and Truck It In. The food delivery business by Careem was also ceased, as the resources were relocated towards delivery verticals.
Future of Startups in Pakistan
It has been a hard year for Pakistani startups however all is not lost. Kalsoom Lakahani the Co-founder of i2i Ventures which is a $15 million venture capital fund stated that “My concern is that it [Airlift’s shutdown] reflects on all of us in the ecosystem and is a take on Pakistan as a whole — and I don’t think it should be,”. However, the startup eco system has the potential to sustain well planned startups and their growth curve in the coming year. The nation is on course to surpass the $1 billion investment threshold and has all it needs to become a new tech Eldorado. The future is quite bright for both local entrepreneurs and investors because of the region’s 220 million huge and youthful population, growing middle class, educated talent pool, enormous unexplored industries, and expanding local and international investor ecosystem.
The below mentioned factors make Pakistani economy a favorable environment for startups which will be elaborated upon in the next article:
These factors will elaborated upon in our next article.