In 2019, when Kalsoom Lakhani and Misbah Naqvi founded i2i Ventures, a $15 million Pakistan-focused venture capital (VC) fund, they hoped to sign about three deals a year. Now, they’re signing that many deals every quarter.

“I can barely keep up with the deal flow,” Lakhani told Rest of World. “My days are insane. My partner and I work anywhere between 10- and 14-hour days. I’m meeting about four to five new teams each week, in comparison to one or two a year back.”

Pakistan is in the midst of a massive boom in its tech startup sector: In 2021, Pakistani startups raised $365.87 million in VC funding, more than every previous year combined. By the end of the first quarter of 2022, the sector had received seven times as much funding as in the first quarter of 2021. The world’s fifth-most populous nation has also caught the fancy of some of the world’s largest VC investors: Tiger Global made its first investment in Pakistan in December and has since backed at least two more startups.

But Lakhani says these international investors are still not seeing Pakistan as a “strategic” investment destination but are, rather, simply “dipping their toes” into the country. In fact, the flood of funds has her worried. “There’s a lot of noise, and sometimes the valuations [that the startups are getting] are not priced right. What I would have laughed at a year ago is the norm now. I keep wondering, when did we become comfortable with valuations like these?”

Lakhani spoke to Rest of World, via Zoom from Washington D.C., about the reasons for the recent spurt, the change it has triggered on the ground, and why she’s cautious about the future.

This conversation has been edited for length and clarity.

As someone who has been a stakeholder in the Pakistani startup space for a while, what do you think of the recent funding boom?

It feels like we’re drinking from a firehose. The pace at which things are moving right now is probably 20 times faster than I’ve ever seen in the ecosystem. Earlier, on average, you would get a deal, and it would take a month or two to close. So, you had about six weeks to do due diligence, and by the end of it, you felt quite sure. Now, sometimes I have to do the due diligence in a week! You have international investors who aren’t really on the ground. So, they’re doing their diligence but not to the extent of checking things on the ground. These are early deals, so they oftentimes make decisions in a few days.

Not only are the first rounds happening really fast but the time between successive funding rounds is also getting shorter. I’ve seen people raising funds again within four months. Like, how? A company that we invested in raised their first and second rounds within six months of each other. As an investor, it felt like I was barely caught up with what was happening.

Will we see more international investors do their debut rounds in Pakistan soon?

Many international investors are looking at Pakistan right now. Tiger Global is actively looking at the market for more deals. Sequoia Capital has been looking at Pakistan for a while. There have been rumblings about Accel investing in the country. Dragoneer Investment Group has invested in the country. Among the newer funds, Vibe Capital and Buckley Ventures have already invested, and [British VC] Harry Stebbings’s fund 20VC has done some deals. Village Global [backed by Bill Gates, Jeff Bezos, and Mark Zuckerberg, among others] has a scout on the ground. [San Francisco–based] Global Founders Capital hired their first official person in Pakistan recently. There are a lot of people who have not even been to the country themselves but are scoping out people that can join them.

What kinds of investment opportunities are available for these investors?

Like a lot of early emerging markets, most companies, especially the ones that are venture backable and raising funding, are coming up in the B2B or B2C e-commerce, fintech, and logistics. With a growing consumer class and digital adoption, these three sectors grow, often in relation to one another. I’m also seeing a lot of ideas that have a sibling version in another market — something might be the “Khatabook for Pakistan” or the “Stripe for Pakistan.” Founders still have to localize and innovate the model for the local realities, and a lot of international investors like pattern matching. While they may not know Pakistan well, they can understand the model because they’ve seen it work before.

Why are we seeing this sudden spurt in investment in Pakistan?

Before 2021, Pakistani tax residents were not allowed to set up holding companies outside of the country. So, if an investor wanted to invest in a startup operating in Pakistan, they had to invest in an entity within the country. That was a very big risk, as many foreign investors felt they didn’t know how to invest in Pakistan, and the process felt very opaque. In 2021, the State Bank of Pakistan changed that legislation, which meant that international investors could easily back an entity in Singapore or Dubai or Delaware [which operates in Pakistan]. At the same time, the pandemic forced a lot of international investors to get comfortable with investing without having been to a country. The idea of remote diligence became a thing.

“Every single company coming up in Pakistan probably has an Indian comparable at this point.”

Then, there was a lot of liquidity, and people were looking for avenues to invest, and if you wanted to put your money in places that are still relatively untapped, Pakistan is one of those markets. It’s the fifth-largest market in the world, and the addressable market is getting significantly larger with the consumer middle class growing.

Finally, the sophistication of founders in Pakistan has also improved pretty significantly. A lot of that has to do with Uber’s acquisition of Careem. Many people who worked at Careem started their own companies, and they already have a network to reach out to. There’s a massive network of ex-Careem people that are angel investors now. These young people have had significant experience working in a high-intensity, operationally heavy business and the exposure that others before them did not have. I’ve invested in two ex-Careem companies and [am] potentially investing in a third, hopefully, today.

Do you think the boom in Pakistan has any connection with startup valuations in India becoming too high?

Compared to India, Pakistan is significantly cheaper. But I feel even Pakistani startups’ valuations have gone up significantly. What I would have laughed at a year ago is the norm now. I keep wondering, when did we become comfortable with valuations like these?

The comparatively lower valuations are what flooded the market initially, but, right now, given the global macroeconomic situation and the political turmoil in Pakistan, a lot of people have a “winter is coming” mindset. They are raising money for the next 18 months to be ready, just in case things go bad. I think that’s good.

Are there lessons that Pakistani startups should learn from their Indian counterparts?

Every single company coming up in Pakistan probably has an Indian comparable at this point. So we can look at their trajectories and learn what to do — and what not to do. It’s almost like looking to the future. For example, Khatabook in India raised hundreds of millions of dollars and monetized really late. It had the luxury to do that because there was a massive influx of capital that could keep the company afloat. But that’s not the case in Pakistan, so CreditBook, which is a Pakistani competitor to Khatabook and in which I am an investor, started to crack monetization really early. They haven’t even done their A round yet, but they are already monetizing.

You’re in the U.S. right now. Do you hear a buzz about the Pakistani startup space among the investors you meet there?

There is a general buzz, but no one is thinking about the country strategically. They are just dipping their toes, and it’s not like Pakistan is a part of their mandate.

This [attitude] is right to some extent because Pakistan is an unproven territory. We have not had real exits yet, and we haven’t seen a company raise a series C round since 2015. The VCs are excited to come early into deals in Pakistan right now, but not many investors are entering into someone’s A or B rounds. We’ll need that kind of growth-stage capital to succeed, but where is that going to come from?

What is the one thing you would want to warn a first-time investor in Pakistan about?

I would tell them to do their diligence, ideally with a trusted party who knows the market better than them and to not look at a deal in a vacuum. They must ask questions, like what are the regulatory challenges or barriers the startup may come up against, who their competition [is], and do the founder’s references check out.

What is going to happen in the next six months?

In the next six months, we are going to see announcements of some pretty significant funding rounds. We’re going to easily surpass what we did in 2021 [in terms of fundraising]. In the next six months, I would be concerned for the companies that are bleeding too much money. Some of those businesses may shut down.

Will Pakistan get its first startup unicorn in the next six months?

There will definitely be one unicorn in Pakistan in the next few months — there might even be two. I think it’s going to be a player in the B2B e-commerce space. All the companies in the sector are growing, and the market opportunity is really large. There could also be a unicorn from the fintech space, but I don’t know who that’s going to be.

“There will definitely be one unicorn in Pakistan in the next few months — there might even be two.”

Is the recent spurt in funding encouraging more people in Pakistan to launch their own companies?

It’s definitely happened. I’m seeing a significant inflow of good new companies — not just people that are young but also seasoned people who are building businesses [instead of taking jobs]. We’re seeing ex-Airlift and ex-Careem founders on many company decks. But there’s a challenge — there is a massive talent shortage in Pakistan. If all these people are wanting to run the ship, who is going to service them? If everyone wants to be the captain, who will be the people who support them? We have a massive shortage of good talent to work at these companies.

What are you most nervous about in Pakistan’s startup scene?

I’m really worried that one bad story — one company that blows up or where investors realize that they never looked under the hood — will be bad for the entire ecosystem. There are so many negative perceptions about Pakistan, and it is not an easy market. So if anything negative happens, that will be like a nail in the coffin.

Also, I am worried about people who want to take advantage of the fact that there is a lot of money coming in right now. I’ve noticed a frenzy in some rounds, where investors don’t ask questions and just sign a check. My partner and I make sure we never invest out of FOMO — we don’t want to be part of these rounds where people make you feel like you “have to” invest in them. We never “have to” do anything.

Lastly, I’m always worried about people who are jumping from round to round without necessarily being mindful. These companies are raising because there’s money on the table, and they’re great at fundraising, but are they actually good at execution?