Profile: Zayn Venture Capital's Faisal Aftab

Faisal Aftab, founder of Zayn Venture Capital, is arguably the architect of Pakistan’s fledgling VC and start-up scene. So, when the arrest of former prime minister Imran Khan last month triggered a paroxysm of protests and a government shutdown of the internet, including nationwide social media services, he had a fair excuse to be rattled.

As a member of the Venture Capital Association of Pakistan, Zayn participated in a joint statement condemning the suspension of mobile broadband usage. The statement noted that this tactic – used to curb protests – exacerbated negative investor perceptions at a time when the country’s stock as an investment destination was already at a low point.

Still, Aftab seemed to navigate the situation with an unlikely sang froid. Indeed, Zayn agreed its latest investment, Karachi-based B2B payments platform Haball, with international co-investors in the midst of the shutdown.

He pointed to historical precedent: similar political upheavals rocked Pakistan in 2007 when former prime minister Benazir Bhutto was assassinated. Then also, the internet was shut down, along with some television service. Getting comfortable with the passing nature of these events means interpreting them as merely local outcomes of global issues.

“When the US does a rate hike, it causes inflation to come straight to us, so we are the frontline of the crisis,” Aftab said, comparing the pre-global financial crisis macro environment to today.

“It’s a vague geopolitical time in the world right now. These are not organic, domestic things that are happening. It’s a tussle for whether Pakistan is going to be a US-tilting economic zone or a Chinese-tilting economic zone. That’s the real battle.”

Entrepreneur to investor

Global perspective is Aftab’s biggest contribution to Pakistan VC. A Pakistani-American, he grew up in California, mostly in the Bay Area, until high school, when he lived in Pakistan. College and early career moves were back in the US, including professionally formative years learning the ropes of business as a consultant at Deloitte.

In the early 2000s, Aftab put some of these learnings into action by launching several businesses, perhaps most notably MTV Pakistan. These were the early days of digital TV, a premium service opportunity set largely ignored in developing markets.

“I’m a moonlighting type of guy. That’s my nature – the overactive mind. That’s why venture capital is perfect for me. You have so many portfolio companies and you get to work with different businesses,” he said.

Aftab got serious about finance following the global financial crisis, went to the University of Oxford, and received an MBA in 2010. He became absorbed in geopolitics, monetary policies, and macro cycles – the patterns of credit expansions and contractions, and their impacts on developing markets.

Gradually, he formed a thesis that the next credit expansion would involve the “next billion” internet users in the so-called Next Eleven countries: Pakistan, Bangladesh, Philippines, South Korea, Vietnam, Indonesia, Turkey, Egypt, Iran, Mexico, and Nigeria.

Aftab began to invest some of the earnings from his entrepreneurial work, becoming an early LP in 500 Startups, now 500 Global, an early mover in frontier Asia. Around 2016, he moved to Pakistan to participate in the regional groundswell of investment but was still torn between taking a private equity or venture capital approach.

“I realised what I didn’t like about private equity is that everybody has two sets of books. It’s really difficult to invest in a company and get your capital out safely because it’s difficult to turn around a big ship,” Aftab said. “In tech, you can set the ethos and the systems right from the start. So, it becomes easier.”

By 2017, Aftab had helped establish Lakson Venture Capital as a division of local conglomerate Lakson Group and was awarded the country’s first VC license within the year. In 2019, following a less than 12-month process, a debut fund closed on USD 10m with contributions from the Lakson family and some of Aftab’s personal connections locally and globally.

Standout investments included online ticketing platform Bookme, lifestyle e-commerce service Bagallery, and hotel portal Roomy. All three were backed at valuations of USD 3m-USD 5m and are now said to be worth north of USD 50m each. Total value to paid-in (TVPI) for the overall portfolio is 4.5x.

This was Aftab’s first time investing in Pakistan; his angel investments were predominantly in the US. There was a conscious decision to keep the portfolio compact – five or six good companies that get enough support to scale rather than small cheques for dozens of lower-percentage shots.

“I was very impressed by the talent. The talent was exactly the same as in India, but because it was a more nascent market, they just needed more handholding,” Aftab said.

Launch, reboot

When about 75% of the fund was committed – the rest was reserved for follow-on rounds – the pandemic had become a global event. Aftab decided revisions to his Pakistan thesis were required. He also felt inhibited by a lack of tech experience on the Lakson investment committee and subsequently set up Zayn with Faisal Chowdhry, a former Goldman Sachs executive and fintech specialist.

Originally conceptualised as a more diversified GP, Zayn was launched with a venture debt fund led by Chowdhry. However, it soon proved that local companies couldn’t service prevailing borrowing rates in a rising interest rate environment, and Chowdhry consequently shifted his focus toward consulting work.

Citing potential conflicts of interest juggling competing start-ups in the consulting and VC ends of the platform, an amicable separation was recently finalised with the rebranding from Zayn Capital to Zayn Venture Capital. A venture debt fund may be re-added in the future, but the consulting-VC combination was hurting optically.

Zayn’s first venture capital fund closed on USD 25m in 2022, and about 20 seed-stage start-ups have been backed to date. In addition to Bookme, Bagallery, and Haball, some of the better performers include lending platform AdalFi and logistics provider Bazaar, which has raised USD 100m in the past two years. The fund is currently tracking a TVPI of 2.4x.

Aftab retained his entire team following Zayn’s reboot – the VC and venture debt units were always independent – including Zeeshan Gondal, formerly of Morgan Stanley, as head of strategy and investments. The four-person investment committee (including Aftab) features fund managers across the US, Asia, and the Middle East. Two of them are former 500 Global executives.

“They’re a great soundboard. I’m on the ground in Pakistan and these guys are all over the world in frontier markets, so it’s easy for them to relate when we’re looking at certain business models,” Aftab said. “That’s a bird’s eye view that helps to navigate volatile markets.”

Navigating Pakistan has been no simple matter in recent months, internet shutdowns notwithstanding. VC investment in the country averaged USD 28.4m a year between 2015 and 2020, according to AVCJ Research, before jumping to USD 195.4m in 2021 and USD 232.4m in 2022. That momentum has completely evaporated.

AVCJ has records for only three deals this year, not including Zayn’s investment in Haball last month and its participation in a USD 7.5m seed round in February for AdalFi as part of a syndicate of Middle Eastern and Pakistani investors.

Again, Aftab views the vacuum with a global stoicism, but he doesn’t expect the Pakistan tech scene to regain its momentum until at least the second quarter of 2024. Fund II won’t be launched until 2024 at the earliest, after the US Federal Reserve is forecast to cut interest rates and a new cycle of money being pumped into developing markets gets underway.

“Last September, I was telling founders in public forums that no one was going to be investing. Most people didn’t understand, and most investors didn’t agree with me at the time. They thought the bottom of the market was then [September],” Aftab said. “This recession is going to be deep. I’m pretty bearish on the short term, very bullish on the long term.”

The party’s over

Aftab expects Pakistan to maintain its relationships with both the US and China as the cycle plays out, simultaneously working more closely with Gulf Cooperation Council (GCC) countries to attain a balance. He sees Zayn doing more as part of an emerging Middle East North Africa and Pakistan (MENAP) zone.

“The split of Sequoia along geopolitical lines – US, China, and India – shows we have entered a new investment paradigm. We must take these factors into account when making investments,” he said.

On the ground in Pakistan, the circumstances of the current stagnation are decidedly more prosaic. Investors were excited and poured in too much money. Companies suddenly materialised to take that money. They failed. Now the party’s over.

The poster child for Pakistan’s VC boom in 2021 and 2022 was Airlift, a last-mile delivery app that raised a USD 85m Series B round during that period – said to be the largest-ever start-up investment in the country. That followed a USD 19m round in 2019 described as the largest Series A.

Airlift cited pandemic-related pressures when closing its operations less than a year after what was perceived as an ecosystem-creating deal. However, allegations of mismanagement and poor oversight quickly surfaced. The matter-of-fact mantra circulating locally is that a start-up simply can’t misspend USD 100m in an economy like Pakistan, implying the implosion goes beyond sloppiness or bad luck.

“I don’t like calling it the poster child of our ecosystem. We have had better founders and companies that didn’t opt for a pump and dump,” Aftab said.

“I passed on Airlift the first look because the founder couldn’t answer basic scaling questions straight. Any time somebody asked to do detailed due diligence on the numbers they were quoting, you would just get a message saying, ‘Thank you very much. The round is full.’ And they kept on doing that until they couldn’t do it anymore.”

Aftab estimates that at least 30% of start-ups in Pakistan are going to fail between 2023 to early 2024 but stresses this is all part of the early development of the market. He pegs appropriate IRR expectations for Pakistan VC funds at around 40% in the near term after factoring in a 10%-12% devaluation of the rupee versus the US dollar.

The unicorn hunting playing out in Southeast Asia and India – whether by scattershot investing or precision strikes – could be misguided in this market. Instead, investors have a plethora of solid companies with valuations of USD 150-USD 200m and a massive blue ocean in front of them.

“The smart investors know the equation – 250m population, penetration of e-commerce and technology is 1-2% of the overall market. The growth potential is astronomical,” Aftab said.

“That’s decoupling from the brick-and-mortar economy growth. Maybe 1,000% growth over the next year or two. People are still going to go online no matter how bad things are on a macro level. That opportunity is what we’re betting on.”

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• Topics
• South Asia
• GPs
• Expansion
• Early-stage
• Pakistan
• Zayn Capital