Pakistan’s startups face capital crunch, need urgent reforms: i2i report

Pakistan’s once booming startup scene is grappling with a severe funding crisis, according to a new report by invest2innovate (i2i) titled ‘Closing the Funding Gap for Startups in Pakistan’.

The brief, a joint effort by i2i, Telenor, and the Special Technology Zones Authority (STZA), with support from Ignite and the Visa Foundation, notes that the majority of startups fail within their first five years in the country, and while this is due to many reasons, “access to capital remains one of the most critical barriers to startup survival and growth.”

According to the report, “capital is the lifeblood of young firms: it lets them hire talent, build and test products, and absorb early losses while scaling. When funding is scarce or delayed, high-potential ventures either relocate offshore or shut down, taking jobs and innovation with them.”

It outlines a roadmap to unlock domestic and foreign capital, reduce regulatory barriers, and strengthen the ecosystem for entrepreneurs and draws on insights from investors, regulators, startups, and support organizations.

The report, which comes just a day after Careem announced it is sunsetting its services in Pakistan, and warns that without corrective action, more startups will shut down or relocate overseas—taking jobs, innovation, and tax revenue with them.

Four-part reform agenda

To address the crisis, the brief proposes a four-part reform agenda.

The first is to to do with regulations and tax reforms. It calls on the government to introduce a dedicated “startup class” with simplified filings, electronic communication by default and exemptions from AGMs, cash-flow statements and Central Depository Company of Pakistan registration for the first 5 years.

It also recommends a single digital gateway that unifies all federal and provincial regulators and tax agencies, cutting duplicative paperwork.

It says that the legal definition of “startup” should be harmonised across corporate, tax and financial laws and wants to see targeted incentives including salary and withholding tax relief and leaner licensing by the STZA.

The second part is to do with access to diverse funding options, which it said can be achieved by streamlining private-fund licensing, getting rid of the the 50-investor cap and piloting sandboxes that let micro-VC and angel funds launch with lower paid-up capital and operate initially without license.

It also believes extending VC tax exemptions to 7 years, offering 30 percent angel-investment credits and treating syndicates as flow-through entities are some of the many reforms that will diversify Pakistan’s funding options and ensure founders can raise patient capital across all stages of their development.

Part three of the agenda is to create liquidity and exit pathways via capital markets. It wants the Pakistan Stock Exchange’s Growth Enterprise Market (GEM) Board to lower its post-issue paid-up- capital requirement from Rs25 million to Rs10 million, ease profitability and disclosure thresholds for IPOs, and publish clear graduation criteria so high-growth ventures can move smoothly from GEM to the Main Board.

“A vibrant, easier-to-access capital market will recycle domestic capital, attract institutional investors and complete the financing continuum from seed to public listing,” it noted.

Lastly, the report recommends building a strong support ecosystem for entrepreneurs. It said there is a need to shift Entrepreneurial Support Organisations (ESOs) from one-size-fits-all cohorts to tailored, needs-based programmes that prioritise investment readiness - valuation, financial management and due-diligence preparation.

It also said there is a need to provide subsidised legal, tax, IP and talent- acquisition services through National Incubation Centers and STZA.

“Strengthening these support structures will generate a larger, higher-quality pipeline of investment-ready startups that can attract capital quickly and scale sustainably,” the report noted.

“Pakistan stands at a pivotal moment. Coordinated execution—led by federal and provincial governments, regulators, investors, corporations and ESOs—can turn today’s funding crunch into an inflection point for long- term, innovation-driven growth,” it said.

“With bold, sequenced reforms backed by macro- economic and political stability, the country can transform its startup landscape from capital- constrained to capital-empowered, positioning Pakistan as a competitive player in the global digital economy.” it concluded.

Meanwhile, Sarah Munir, i2i CEO, noted on LinkedIn that “the hope is for everyone — policymakers, investors, and ecosystem builders — to engage with it [the report], build on it, and most importantly, act on it.

Because Pakistan’s economic future won’t be defined by policy or startups alone. It will be built when both come together with purpose and trust.“