Winning Formula. Till Real VCs do us part.

In the general course of listening to pitches and meeting various startups a curious trend is emerging amongst the funded ones. Especially those who were funded locally by local groups. Whilst I do not want to generalise the phenomenon is one that is growing and clearly took me by surprise.

There are multiple categories of local investors lets define a few types so you are familiar.

1. Pathan Loan Shark PE (PLS-PE) Meaning the last generation was involved in Loan Sharking, second generation white washed it with some overseas qualifications and degrees, professionally managed Insta and plethora of awards and accolades/re-branding in progress, taking semi-old money and converting it in to the “House of X” “ This Group” “That Group”, these guys never were the 21, but they sure are dicking every one over with their sub 21% loans++)
   
2. Returning Allegedly Successful Serial Investor – Pakistani From Abroad (RASSI-PFA). This is about a 5 year old phenomenon give or take. Unverified Overnight Pakistanis who no one knew in Pakistan before they left, who no one really knew after they re-emerged, come to town with 1-2 White Guys, slowly started hosting events, did a few first deals three under 200k around- Boom they arrived. Offshore shell companies galore, likely their source of funds is all Pakistani Money Parked Overseas. (PMPO) . They aren’t the JP Morgan returning types, details are sketchy, most ppl know its local money being funnelled back but since it is some form of funding in the absence of real VC money people will take what ever comes their way. Plus bro they have white guys.
   
3. Daddy’s Umm Money Daddy’s Umm Marzi.(DUMDUM). This is a cross over between the above two, young scion comes back with a degree, figures out they have a better deal in PK because daddy has privilege, daddy is typically and industrialist but, in most cases{پیچھے سے امیر}, rich from behind. (RFB). Money comes from textiles, agri, oil, govt concessions, construction, export oriented generational family money. Some political types also in this, best to stay away from those and the ones that have Rawal-P (R)  blood line.. Those are also emerging.  The core game has been to take as much equity as possible and then go into acqui-slave models. Daddy’s political cover and access to easy regulatory approvals would have one imagine that this variety would have created dominance by now, but the apple has truly fallen far from the tree and the second generation is still pretending to invest with real money and since they have limited insights need daddy’s blessings in the end. They may wear the big boy pants and suits, but the fear of daddy’s chittar makes sure the real decisions come from Abba jis office and his trusted munshis.
   
4. A – Usually New Technological Yuppie (AUNTY). This is what one would classify as the AID based Islamabad/DC/London centric crowd. John Perkins in his book Confessions of an Economic Hitman Describes them as “Economic hit men(Not all are men though esp in this category) (EHMs) are highly paid professionals who cheat countries around the globe out of trillions of dollars. They funnel money from foreign “aid” organisations into the coffers of huge corporations and the pockets of a few wealthy families who control the planet’s natural resources.” Domestically this follows some part of type 2 above, a seemingly new face shows up on the ground, with “its complicated” on their fb status, a closer look shows that , before they became a VC/fund organiser their LinkedIn goes from  community developer of some tier 4 fashion boutique or such or Bank Teller at “first community bank” to Chief Disruptor of this NewHipCo in PK. Source of funding un known. Dinners and bottle service galore.. They engage in quality content production and high-fiving liberals, if you get in their path you get labelled as backward or movli-tech. They continue to aspire a generation of startups in a completely mis-guided fashion.

But I digress, enough explanations, each of these categories and some more; deserve an entire post on their own. But what is worrisome is not who is doing the pretend VC game, it’s how it’s being done.

So local VC type 1-4 above, invests in a PK Pvt limited company. Say 100k USD in PKR, some times not all cash either, in kind or services, or charge the Startup for use office, utilities, legal services, sundry items etc all provided in kind or letting them use their profile as a board member against future considerations.

Typical target companies are where local PRK is spent on the startup (health care, agri, agri tech, services, product and companies building tech for other companies and a host of logo shops + content shops). The founder then is encouraged to open a Singapore Entity by the VC. Up to this point there is no real traction in the business it is largely fuelled by Aids/Grants/Other competitions and typically has some element of social enterprise or is minority led etc.(not always but more  times than none). These 1-4 connected types get them free media exposure, access to grants and special monies the common man has no access to in the right circles to create Visibility and an illusion of success sans balance sheet data.

5000$S Later a New Hold Co is setup in Singapore that owns 100% of PK Pvt Limited. In that NewCo, the investor owns their share. The founder goes to all incoming investors (largely introduced by grant giving organizations or development funds) and proposes the following:

1. My seed investor wants out this is not their core; my valuation is now 2x 3x as we have a term sheet they have gotten from a 3^rd party(wink wink). You can invest into the Holding Co in Singapore and we can clean out the investor and you can get majority. In-fact we will help you do it, our  seed investor has agreed.
2. My Seed investor is willing to put in another 50k at a new 2x Valuation, but I have an option to buy his share out but for the new valuation, hes happy to stay too. But if You  want, you can just invest in Hold Co I will talk to them and  will take them out and you can own 100% of what they have up to the point. They are happy to continue, but you see; if they stay, they back my valuation as should you. If you are interested.
3. My Seed investor is happy to dilute down, you can come in at the original valuation but I had a consulting arrangement with them for which they need to be paid 100k USD, because I had a separate contract with them on this “sorry”. But they added so much value and funded all my travel to these grant competitions and my SanFran visits and insta posts really I have to make them whole.
4. Unknown to the startup the money coming in from SG into Holdco, is the investor just repatriating previously un-accounted for FX from PK, on the way in, they will register it and then have the option to legally make it all white. Since they own Majority, and the startup has say less than 15% its still cheaper to route the money through this system than other less than kosher means. Plus if the startup works it kills two birds with one stone.

If you haven’t figure it out, the Pakistani investor is investing in Pakistan, in PKR, the new investment coming into Singapore is giving them the ability to retain their 100k USD in Cash in Singapore. Effectively doing a PKR to FX Swap. Who knows if they had originally invested the 100k equivalent in PK or not, but they are cashing out offshore.  None of their share will come back to PK, they are essentially helping startups to create opportunities to either:

1. Clean funds offshore if there local funds were sketchy or undocumented/esp if they provided in kind services at a value of 100k vs actual money
2. Create a larger upside as their in-kind stuff cant be measured
3. Splitting the difference with some founders and finding a way to both take out the tech and the company and its future investment and revenues out of PK. Whilst re-patriating some %age back and showing that as FDI and having it repatriable over time as its registered on the way in.

Trust Desis to find a way to have a value lever on even these startups. 95% of starts Are Not doing this, but the ones that are; are on a glamour ride and winning contests and jet setting actually don’t have business fundamentals. These 4 types of investors are driving them to their own agendas. By the time real investors and real VC money shows up people will be so tired of having being taken advantage of and the startup community will have such a dodgy reputation that people will be afraid. Because the other 95% aren’t really getting the exposure, it’s the so called funded and 1-4 aligned ones that have visibility and so called traction its this 5% that will shade the view for all others. Lets hope that some of the 95% variety get real funding and re write the story the way its supposed to be.

I used 100k USD as an easy example to illustrate the mechanics of the transaction

The more responsibility I gain,
Further away I want to run.
Life pushes on my shoulders,
And it no longer seems like fun.
Coleen Brown.