A Bloomberg Story:

After banks in Pakistan turned down loan applications for his fledgling advertising company seven years ago, Faraz Khan found plenty of private investors willing to back his vision — with a catch.

A lot of the cash was illicit and accepting it would have turned his Gizelle Communication Ltd. into a money launderer. “There were investors with blank checks and investors who were like ‘take as much money as you want,”’ he said over coffee at the Movenpick Hotel in Karachi. “You have to sift through very carefully the ones that are dirty money.”

Khan instead turned to other businesses and an international bank to build the company, which he is considering listing on the Pakistan Stock Exchange this year in what would be a first for a startup in the country. Stung by the reluctance of banks, he’s taking on more of an angel investor role to get hundreds of other businesses off the ground across Pakistan as the 42-year-old seeks to replicate his success with Gizelle through his Seed Ventures incubator.

It’s not an easy task. While larger neighbor India has long had a vibrant venture capital and startup scene, that’s not the case in Pakistan. It’s South Asia’s second-largest economy and home to about 200 million, yet the country is looked at with caution by foreign investors given power shortages and security concerns. Most of the country’s commercial banks are risk averse, making money through investments in government notes and bonds and preferring loans to traditional manufacturers and industries run by well established families.

In an attempt to boost entrepreneurship, Prime Minister Nawaz Sharif set up a loan program for those under the age of 45 to set up businesses, providing interest free loans to more than 260,000 people since his election in 2013. That’s critical in a country where nearly two-thirds of the population is under 30, according to the Jinnah Institute, a Islamabad-based think tank.

Home grown organizations like Seed Ventures and Planet N Pvt. are attempting to change the status quo. Young Pakistanis that Khan meets at university roadshows are often resistant to becoming entrepreneurs. They say “it’s risky, there’s a chance of failure, there’s a lack of access to finance and we’ve got great expectations from our parents to actually become doctors, engineers, lawyers and that is a safer option,” Khan said, whose firm, Seed Ventures, has invested 78 million rupees ($745,000), supporting 135 startups. “That’s the cultural mindset.”

Despite the growth of incubators and accelerators, startups will continue to stumble without wider access to seed finance, said Nadeem Hussain, the founder of Planet N. While his firm has invested $8 million in 41 companies, most of them startups, he estimates that at least $1 billion of seed money is needed in Pakistan to help new businesses take the next step.

Google has just renewed Nest’s grant for another three years and is now looking to open an accelerator program and enter the race with Seed Ventures and Planet N for Pakistan’s first unicorn, a startup with a value of more than $1 billion. To get there, more will have to be done. “It’s sad if I’m the largest angel investor in Pakistan because I know groups sitting with half a billion dollars of liquidity which aren’t coming in this space,” said Planet N’s Hussain.

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