TMT Ventures is Pakistan’s pioneering venture capital company that has been funding start-ups in technology, media and telecom sectors since 2001.

The innovative demands of knowledge economy present an interesting Opportunity Set for investors and entrepreneurs alike. To capitalize on this opportunity, we launched an Incubation Fund – the first in Pakistan – in December 2002. The Fund has invested in seven companies to-date, and exited one.

AKD Securities, Habib Bank and SME Bank are the main sponsors of the Incubation Fund.

To view TMT case study please click here

venture capital in pakistan
BACKGROUND

Current low base (under-penetration), deregulation drive, trend towards automation, improving purchasing power and increasing awareness about new information, communication and entertainment tools are the reasons that convince us of Pakistan’s tremendous TMT potential. A 140m strong population growing at 2.3% per annum means that scale economies are there. The trigger is provided by deregulation which is now in full swing in telecom and media sectors, suggesting super-normal growth in the next few years when Pakistan catches up to its regional peers. TMT-PKIC Incubation Fund is positioned to capture this growth.

A comparison with other Asian countries highlights that the technology, media and telecom potential is much higher than existing penetration levels depict.

TMT potential in selected Asian countries.

Country

Population

GNP per capita

Access lines

Penetration

Desktop computers

Penetration

(Million)

(US$)

(000s)

(%)

(000s)

(%)

China

1,261

750

134,100

10.6

20,600

1.6

India

1,014

440

37,900

3.7

4,600

0.5

Indonesia

204

640

7,000

3.4

2,100

1.0

Pakistan

140

429

3,575

2.5

1,000

0.7

South Korea

46

8,600

22,500

48.9

9,000

19.6

Country

Internet users

Penetration

Mobile phones

Penetration

Cable subscribers

Penetration

(000s)

(%)

(000s)

(%)

(000s)

(%)

China

22,500

1.8

120,000

9.5

61,000

4.8

India

5,000

0.5

5,000

0.5

18,400

1.8

Indonesia

1,450

0.7

5,000

2.5

Pakistan

1,300

0.9

836

0.6

1,800

1.3

South Korea

19,040

41.4

30,800

67.0

1,700

3.7

Source: ITU, Internet: New Media & eCommerce & PC Software 2001, MSDW, Economic Survey of Pakistan, CLSA Emerging Markets and AKD estimates

TELECOM SECTOR

The telecom sector in Pakistan can be divided into five major segments:

  1. Basic landline telephony
  2. Mobile cellular telephony
  3. Card operated landline and wireless telephony
  4. Internet and data communication services
  5. New services after PTCL’s monopoly ends in Dec 2002 (eg Voice Over IP)

Annual revenues from this sector cumulate to over PRs80bn. The breakdown is as follows:-

  • PTCL: (Rsbn)               65.0
  • Mobile:                        9.0
  • Payphones:                  2.5
  • ISPs:                          1.8
  • Data communication:     1.0

The subscriber base for these services is still low – 2.4% fixed line penetration, <1% mobile penetration, and similar Internet penetration. This indicates significant future upside as deregulation unleashes a wave of competition driving down prices and improving service availability.

 

 

 

 

 

 

One should not, however, believe that all this is a mere future promise. We have already seen the early signs in the form of explosive growth in these service over the last three years (see graph below). We should see more of the same and at an accelerated pace in the next three to five years.

 

 

 

 

 

 

The strength of market forces as exhibited in the above graph will play out in Pakistan after December 2002 when Pakistan Telecom will lose its monopoly over fixed line voice communication. While it may face little competition in the domestic segment (as has been the case in Hong Kong and other Asian markets) it is the international revenue that is under serious threat. The entire PRs23bn or US$400m will be up for grabs.

In addition to this totally new avenues like VOIP, broadband ISP, corporate data communications, next generation mobile cellular services and Internet networks are also expected to open up in the near future.

MEDIA SECTOR

If one adds together the TV and print advertising spend in Pakistan as well as subscription revenue from more than 2m cable subscribers the media sector generates PRs12bn annually. But we do not believe this figure reflects the true potential of media market size in Pakistan. Deregulation has opened not one but several new doors including new TV and radio channels, production houses (for content development), animation studios, etc.

The electronic media in Pakistan had until recently been dominated entirely by the state owned Pakistan Television. Beginning in early 1990s, the government allowed private channels to operate. Five new channels have started or are in the process of starting operations. These smaller, largely under funded channels could not afford to produce content on their own. They turned to private production companies for content. This effectively split the industry, as well as cost base, in two: content provision and broadcasting.

The last decade has seen mushroom growth in these private production companies. These companies, usually independent operations from veteran PTV producers and directors, rely on procuring advertising revenue to make these productions viable. So far, they have largely been successful and the industry has seen a marked increase in competition and quality.

The government has recently established Pakistan Media Regulatory Authority (PMRA) to oversee the functioning of this sector.

In direct contrast to electronic media the print media is well into its maturity phase. The industry is highly fragmented with 2-3 industry leaders followed by a number of smaller publications. Most of these publications are basement operations rely on black mail/money and official patronage to survive.

The fastest growing sector in the industry is cable channels. Still largely concentrated in urban areas, cable subscription represents significant under-representation compared to other countries in the neighborhood like India and China (see graph below).

TECHNOLOGY SECTOR

While TMT Ventures believes in Pakistan’s enormous IT potential, its approach to realize this is different from the typical software service export model most people have tried. We believe the opportunity exists in the high-end market where fewer players venture and opportunities for export are there only after the company has tested out its product locally and perfected its delivery system as well as built up a local client base.

Being a recent phenomenon software / technology is currently Rs8bn (US$142m) industry in Pakistan. More than 700 software houses are competing for this small market. It is only in the last three years that the government has taken steps to facilitate the growth of this sector. This includes putting IT visibly on the government’s priority list, building of backbone infrastructure, slashing backbone prices, penetration of Internet services in smaller regions, manpower training and enactment of necessary regulatory framework. These measures have resulted in significant growth in the tech sector as shown by the graph below.

 

 

 

 

 

 

The market is largely service oriented with a bulk of software houses providing low-end services like web designing and hosting. Most of these houses are under funded and lack the expertise to compete for high-end, value-added business locally and internationally. Because of the availability of low cost technical manpower, these houses are able to work on almost all available platforms. The downside to this approach is that these houses lack focus and are largely unable to achieve critical mass.

Because of these inherent weaknesses, the industry as a whole is largely unable to withstand shocks. This has been evident over the last year as many houses shut down in the face of reduced IT spending by major companies and a general IT slump worldwide. Even the more reputable names had to scale down their operations. TMT Ventures’ portfolio companies have been relatively less affected due to their different approach and business model.