Profile: Sarmayacar's Rabeel Warraich

Nearly 10 years ago, during a job interview with GIC in London, Rabeel Warraich was asked where he saw himself in five years’ time. Asking if he could answer for a 10-year timeframe instead, Warraich told the interviewers that if he hadn’t figured out a way to return to his home country of Pakistan then his career would have gone off track. Fortunately, GIC was convinced by his determination to work hard in the interim.

Six years on from that interview, Warraich submitted his resignation to the Singapore sovereign wealth fund and relocated to Lahore. Having made a trio of early-stage investments in Pakistani start-ups, he was ready to institutionalize his operation. Sarmayacar should shortly become the first independent manager in the country to close a venture capital fund.

“The most important decision was the one to move back. The view was this couldn’t be done on a fly in-fly out basis, while the size of the opportunity was such that any formal structure would go beyond my financial capacity and that of the immediate syndicate members,” Warraich recalls. “A friend at GIC said to me: ‘If you don’t find out how this could have gone, would you regret it in five years’ time?’ And the answer to that was a resounding yes.”

It helped that the response to those initial investments was overwhelmingly positive – both from local entrepreneurs and prospective international co-investors.

Gaining momentum

Warraich set aside $250,000 of his own money to create a portfolio of approximately 10 start-ups. Additional contributions would come from an informal network of likeminded individuals within his network. A debut investment in Patari, a Pakistani equivalent of Spotify, closed at the tail end of 2016. Within a week, Warraich started receiving calls on his landline at GIC in London.

“They were from media outlets based out of Pakistan that had a presence in London,” he explains. “They asked to interview me outside my office. I said, ‘I’m in London.’ They said, ‘We’re calling from London.’ ‘But I’m in Marble Arch.’ ‘We’re sitting in the Starbucks below your office.’ There is still a video clip on YouTube of me being interviewed in Starbucks.”

Meanwhile, he received unsolicited approaches from more than 100 individuals all over the world who were interested in joining the investor syndicate. The informal setup quickly began to resemble a curated equity crowdfunding platform and Warraich started to think that what began as an opportunistic, see-where-it-goes project could become something more substantial.

He also received plenty of unofficial encouragement from colleagues within GIC who were interested in seeing how the initiative would develop. His departure from the sovereign wealth fund was amicable, with his immediate superior and various other colleagues agreeing to commit to Sarmayacar’s fund. GIC also made an introduction to the International Finance Corporation (IFC), which ended up participating as an anchor investor.

In November 2018, one year after leaving GIC, Warraich hit a first close of $8 million. In addition to the members of the original syndicate, LPs include family offices and high net worth individuals. Prominent among them is Jan Bolz, a German media executive who sold his latest venture, sports betting business Tipico, to CVC Capital Partners. The families behind three of Pakistan’s largest conglomerates are also represented.

Sarmayacar received $15 million in commitments but scaled back certain allocations so LPs wouldn’t be oversized. Approximately one-third of the investor base, including IFC, is contributing more capital at the final close. The firm will have $20-25 million to put to work.

One of the syndicate members ended up joining full-time as a general partner. Bernhard Klemen, an Austrian who worked with Warraich at Morgan Stanley, had embarked on his own early-stage investment endeavor in Europe. He was one of the first co-investors Patari and never looked back. “He could either be part of the 30th seed fund in Europe or the first in Pakistan,” says Warraich. “There was more risk, but the opportunity was different as well.”

Early learning

Warraich credits GIC with teaching him direct investment. On graduating from Massachusetts Institute of Technology (MIT), he was determined to pursue a career in PE – perhaps the result of inadvertent paternal influence. Warraich recalls receiving a game console after coming top of his class at school and reaching an agreement with his father that outperformance would elicit more gifts. “What I do now is much the same – align incentives with entrepreneurs,” he notes.

He also watched his father, who ran a travel agency, doing deals in Pakistan. The family was middle class, with an emphasis on hard work and self-improvement, so the business activity he observed was far removed from formal finance as practiced in West. “I learned basic arbitrage deals from my father,” Warraich says.

Graduates with aspirations of joining the buy-side were generally encouraged to begin their careers in a feeder industry such as consulting or investment banking. Warraich duly joined Morgan Stanley as an analyst but stayed only three years, having resolved to enter private equity sooner rather than later. In 2011, GIC was making the transition from solely backing funds to pursuing direct deals. As part of a relatively nascent team, he got a lot of immediate transaction exposure.

At the time, technology investment in Pakistan was essentially dormant. Around 2013, the country’s first batch of incubators and accelerators emerged. Plan 9 was established in Lahore with support from the Punjab provincial government, while Google and Samsung backed Nest I/O in Karachi, assisted by a grant from the US State Department.

“These were auctions for people who were in their final year of university. They were communities that provided introductions into entrepreneurship and company building. The focus was on the basics of company formation and presenting to investors, but traction didn’t come until 2015-2016,” says Warraich. “Many of those initial businesses disappeared and the more resilient entrepreneurs moved on to their second ventures. This made them better entrepreneurs, they had some learning.”

The force responsible for that traction was the introduction of 3G and 4G mobile connectivity. Pakistan already had scale and demographic appeal – two-thirds of its 220 million population is under 30 – and smart phones served to release pent-up consumer urges. The country remains a mobile-first economy, with 90% of people going online through handheld devices – adding one million smart phone users every month. There are 80 million nationwide, up from 10 million in 2016.

While still a nascent ecosystem, the technology and talent pieces seemed to be falling into place in Pakistan. What it lacked was risk capital. Warraich describes a market dominated by investment arms of family conglomerates that sprinkled money around almost at random. They would take large stakes in start-ups, often to the point of assuming control, and flit in and out of funding rounds, offering little consistent support. Sarmayacar was intended to occupy the professional vacuum.

“We wanted to put capital in and provide handholding at the early stage, helping companies interpret some of the responses they were getting from customers and think about customer acquisition cost and lifetime value to customer acquisition cost,” says Warraich.

Familiar models

The three initial investments were rolled into the fund at cost and since then four more have closed. Technologies and business models proven in other markets that can be applied in Pakistan is a consistent theme. Patari is a good example, with the Sarmayacar team reasoning that global platforms couldn’t compete locally without local content. The start-up had the largest collection of Pakistani music in addition to its streaming platform and was moving towards monetization.

“We continue to believe it represents an attractive acquisition candidate for larger players looking to enter the market. We looked at the market potential in-country and outside in places where there’s a large Pakistani presence in the diaspora,” Warraich says. “Anghami, a Middle East streaming platform, cannot appeal to the 2.2 million Pakistanis in the Middle East without Pakistani music.”

The poster child of Pakistan start-ups is Bykea, a ride-hailing and delivery platform with a fleet of more than 30,000 drivers, that closed a $12 million Series B round last October. Sarmayacar led the company’s Series A in 2019. However, Warraich also points to payments player SimPaisa, which has seen a 13x increase in transaction value in the past nine months.

“We entered at a valuation of less than $1 million, and they are now doing $25 million in annualized transaction value on which they make 4.5%,” he says. “They are also EBITDA positive, cash positive, and they have only raised $200,000 in total.”

Competition in the early-stage space has intensified in the past 18 months, with Warraich estimating the amount of capital available has grown tenfold since 2017. Several VC firms have launched formal funds, among them Gobi Partners, Karavan, Indus Valley Capital, and i2i Ventures. Corporates and family offices are also participating with more gusto. Some groups approached Sarmayacar as prospective LPs, gathered whatever information they could, and then established their own funds.

Much like other emerging start-up ecosystems, there is a dearth of growth capital participating in Series B rounds and beyond, but interest is building. Prosus Ventures – formerly a VC arm of Naspers, led Bykea’s Series B. With Pakistan off-limits for most technology investors targeting India, there are opportunities for venture capital players out of the Middle East, in keeping with a general tendency to extend the scope of MENA to MENAP.

Moreover, US investors pop up intermittently, usually through referrals from local managers. This was what prompted First Round Capital to lead a $10 million Series A for grocery delivery start-up Airlift. Quiet Capital subsequently provided a $12 million extension, supported by UK-based TrueSight Ventures and RT Ventures, Abu Dhabi’s Shorooq Partners, and Taiwan’s ACE Capital. It is said to be the largest-ever Series A round in Pakistan.

Maturing ecosystem

Warraich would like to see greater participation from Pakistan’s expatriate entrepreneur community, including those who have found success in Silicon Valley. He has even coined a phrase for returnee talent: Wapastanis – a compound of “wapas,” which means back in Urdu, and Pakistani.

“You need to bring some of that knowledge, capital and learning into the country. It has started with people moving, making commitments to funds like ours, and doing direct investments. But they need to train and prepare the next generation of managers and entrepreneurs and spin-offs,” he explains. “We see acceleration on the funding side, and it might result in the top start-ups competing for a limited pool of talent. A shortage of people could impede the growth of start-ups.”

Another consequence of this acceleration is an escalation in valuations, which inflates expectations within the founder community of what they can ask of VCs. Warraich’s concern is the potentially explosive combination of capital and conflicted interests. Investors launching new funds might turn a blind eye to start-ups plowing capital into customer acquisition because rising gross merchandise value leads to higher valuations, but ultimately it damages the ecosystem.

“Pakistan will not have hundreds of millions of dollars available for every company to burn through to get to that next round and hope for some profitability or sustainability in the future,” he says.

It points to immaturity in the ecosystem, which is understandable yet also unhelpful given the government, looking to fill gaps in its knowledge, relies on industry input when making decisions. In launching its fund, Sarmayacar had to navigate all kinds of obstacles, from a local tax and legal regime unsuited to GP-LP structures – the firm ended up domiciling offshore – to a lack of familiarity with venture capital among government, regulators, and local service providers.

Sarmayacar’s market education efforts range from participating in briefings to Prime Minister Imran Khan to sessions with law firms on why Mauritius might not be an appropriate jurisdiction of incorporation for tax reasons.

“There is a risk as to who is truly playing the long game and what we need to do to develop the ecosystem overall versus the considerations of individual funds,” Warraich adds. “One of the challenges is no bridge had been built to where knowledge could come from. We didn’t have a playbook for raising a first VC fund for Pakistan, so we try to pick up knowledge wherever we can.”

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• Topics
• South Asia
• GPs
• Fundraising
• Venture
• Pakistan
• GIC Private
• Sarmayacar
• Emerging Markets