VENTURE CAPITAL AS THE MODE OF BUSINESS FINANCE IN PAKISTAN: CHALLENGES AND OPPORTUNITIES

Abstract

This thesis starts off with an analysis of the importance of venture capital, first from the point of view of investors and then entrepreneurs. The importance is further looked at from the role of VC in enterprise development in developing countries; how micro venture capital is more advantageous than micro financing; Islamic venture capital….the importance of each of these has been looked at from Pakistan’s perspective. This research then takes off of the developments in venture capital industry that have taken place in Pakistan. Potential sectors have then been identified and major opportunities divided into three sectors: (1) Technology (2) Media and (3) Telecom sector. Technology sector in Pakistan from the VC point of view was focused ahead in this thesis. The last section of the thesis analyzes emergence and pre-emergence stages of Israel, India and United States. Finally, this thesis makes policy recommendations for Pakistan based on studies of policies in other countries that are applicable to Pakistan and have proven to be successful over time. Currently Pakistan is still in its pre-emergence stage. The initiatives that have been taken up till now consists of the modification of the “Venture Capital Companies and Venture Capital Funds Rules, 2001” and different incentives (Fiscal & Corporate Incentives; Efforts to boost the IT Infrastructure) for the development of the software industry. Although Pakistan continues to accomplish, there is still a lot of room for improvement. This can be found out after analyzing the venture capital models of Israel, United States and India). As a lesson from other countries, Pakistan, in its pre-emergence stage should allow for Limited Partnerships; allow banks, mutual and pension funds to invest in venture capital; Government can liberalize the computer and software industries by encouraging Exports and give more relaxation to relaxation of IPO guidelines as this would create a more favorable environment to VC. However, it is very important to 10 10 ensure that only qualified and experienced venture capitalists are allowed to practice. Otherwise, the outcome could be devastating to individuals and the economy of the country as a whole. In USA and Europe, new VCs align The dot-com bust in USA is evidence that a relaxed VC environment can have negative impact on the economy. Hence, the government should only relax IPO guidelines once the rules and regulations for VC practice are in place. Pre- emergence conditions enable an appropriate design of targeted VC policies. From the Israel model, we learn that a program like Yozma Program should be introduced. From the India VC-emergence-model, we observe that the Non-Indian- residence have played a major role in the growth of VC. In Pakistan a similar strategy can be adopted. Pakistanis in Silicon Valley can be offered incentives (example through favorable pre emergence factors), to invest in Pakistan. They can invest as angel investors (just like many NRIs). A VC industry can thrive on a sustainable basis only if new scientifictechnological based innovation & business opportunities are continuously being created in the system. Thus it is important for Pakistan to create a solid pre-emergence base. Further recommendations and details from the lessons learnt from other countries have been mentioned in this thesis. In summary, there are many opportunities of venture capital in Pakistan. There is progress but it is not enough. More can be accomplished through realizing its importance. Major opportunities lie in applying the lessons learned from successful VC companies. These opportunities themselves are a major challenge which Pakistan faces.