Strategy Note /

What Pakistan’s biggest start-up failure means for the country’s tech ecosystem

  • Airlift, one of Pakistan’s best-funded start-ups, announced a complete shutdown of its operations earlier this week

  • The company’s high cash burn and weak path to profitability made it vulnerable to the global VC funding crunch

  • Airlift’s demise indicates that only the most sustainable businesses are likely to survive the macro downturn

What Pakistan’s biggest start-up failure means for the country’s tech ecosystem
Rohit Kumar
Rohit Kumar

Global Financials/Thematics

Rabail Adwani
Rahul Shah
Tellimer Research
14 July 2022
Published byTellimer Research

Pakistan’s booming start-up ecosystem took a hit this week, when one of the best-funded domestic start-ups, Airlift, announced it would completely shut down, after failing to raise additional funding.

In this report, we examine Airlift’s three-year journey, which has had many twists and turns, along with the key takeaways from the company’s demise and why it doesn’t derail Pakistan's broader digitalisation story.

Pakistan's booming start-up ecosystem

Airlift’s journey

Started out as a ride-sharing platform, but failed

Airlift commenced operations in 2019 as a ride-sharing company, focusing on mass transit rather than copying Uber. Airlift rented out buses and ran them on different routes, managing the whole thing through its digital platform.

Benefiting from the underdeveloped nature of Pakistan’s mass transit system and weak purchasing power, Airlift got off to a great start as it offered superb value to its customers, with comfortable travel at affordable rates. The company raised US$14.2mn (US$2.2mn seed and US$12mn Series A) in 2019 to fund its operations. However, with Covid-19 lockdowns affecting demand, Airlift sustained significant losses and announced a complete suspension of its mass transit product.

The company was also facing severe competition from Swvl (a UAE-based ridesharing company) and was burning cash at a very high pace to attract both customers and bus drivers. The tough competitive and operating environment contributed to the demise of Airlift’s ridesharing foray.

Pivot to quick commerce – another failure

After exiting the ride-sharing business, Airlift shifted to 'quick commerce' (delivering essential items quickly to customers). Covid-19 was the ideal time to enter the sector, and this allowed the firm to raise additional funding. Airlift was able to grow rapidly in a short time but, as with the mass transit business, the growth relied on a heavy cash burn.

Airlift closed its Series A-1 funding round of US$10mn in June 2020 and its Series B round of US$85mn in August 2021 (although the actual disbursed amount was perhaps lower than this) and spent aggressively to acquire customers and expand operations. With the global funding environment becoming significantly tougher this year, the company struggled to raise additional funding, which led it to initially limit its operations in May 2022 and then announce a complete shutdown earlier this week.

Key takeaways

  • High cash burn with no clear path to profitability is a recipe for disaster. Airlift raised and burnt through cUS$110mn in the past three years (ie c25% of Pakistan’s total start-up funding during this period). It was incurring losses even at the gross margin level until very recently, on top of which operating and marketing expenditure was very high. The company’s claim of achieving profitability in the next 6-9 months was apparently not convincing enough for existing shareholders and/or any new investors to pour in more cash.

  • Competing against better-funded international start-ups is tough. Airlift had a good start in its ride-sharing business and was gaining popularity. But the entrance of Swvl, a more established global player with better access to funding, increased the competition and cash requirements significantly. Airlift, with limited funding sources, was already struggling in this business segment – Covid-19 put the final nail in the coffin.

  • In a more challenging environment, funding will gravitate to the most sustainable, best-run firms. Most start-ups in the past few years have been able to spend heavily to acquire customers due to abundant funding. A more constrained environment will shed light on those firms whose offerings genuinely add value to customers, rather than those that need to offer costly enticements to attract business. Companies that are well-managed, with sustainable cashflows and strong unit economics, are more likely to survive.

  • Airlift’s failure doesn’t derail Pakistan’s digitalisation story. Airlift was one of Pakistan's highest-profile start-ups, but its failure doesn’t necessarily indicate that the whole ecosystem is unsustainable. Profit magazine raised concerns in December 2021 about how the company was being run and our discussions with stakeholders point to mismanagement issues, such as inefficient resource allocation, unwarranted expansion and business units suffering from high cash bleeds. Ie company-specific issues, in addition to the tight funding environment and macroeconomic challenges, all contributed to Airlift’s failure.

We think Pakistan still represents a strong digitalisation opportunity, given its huge and youthful population. Start-ups will continue to find creative ways to capitalise on this, but they will now need to be much more calculated and targeted in their efforts.