As originally published in Synergyzer Issue 4 – 2018
Jehan Ara, The Big Bird at Nest i/o
Where did the idea for The Nest i/o come from?
Working for P@SHA, I came across several small companies across the country that were working on innovative ideas but were not recognized. In order to acknowledge the work being done in technology locally, P@SHA started its ICT Awards in 2009. Initially, this was done domestically, and we later expanded to a regional level to enable local businesses to sell their products abroad as well.
During this time, we realized that Pakistan’s IT sector hardly showed any growth. And there were two possible ways it could; one, the existing IT companies scale and create enough employment to make an impact, or two, new companies emerge.
Since there were no new IT companies emerging, we conducted roundtables in Karachi, Lahore, and Islamabad to investigate. We asked people why they preferred looking for employment rather than forming their own companies. We found out that most graduates seek employment because they expect a return on the investment made in their education, and although they have good ideas, they do not have the knowledge, the access to domain experts or a network of people to learn from in order to turn them into lucrative businesses. Thus, the idea for The Nest i/o came about to give these kids a space to foster technology-based startups.
What kind of effort did you put into setting up the Nest i/o?
Initially, we did not have the funding to execute the idea, and so we approached multiple sources for investment. At that time, local people and institutions did not realize the potential impact the incubator could have on the economy, and thus hesitated to invest.
We pitched our idea to Google’s Google for Entrepreneurs division and told them that Karachi needed a tech incubator for its IT sector to grow. They agreed to invest 50% of our budget because according to them, if they invested all of it then it would become a Google-owned space. Thus, we had to look for other sources for the remaining 50% of the amount, which Samsung agreed to invest.
We used that investment to create The Nest i/o and launch the incubation program. Since we were aiming to cater to young people, we wanted to create an aesthetic space they could be creative in. We also ensured that we have a range of facilities such as The Studio that has audio and video recording equipment, the Media Lab that doubles as a device library and a test environment, and The Cube which can act as a conference room or a working space.
We created an atmosphere that could be appreciated by the people incubated there as well as our investors because we felt that you cannot just have one small space with a few tables. The way the space has been setup needs to reflect that investment is being used suitably.
What does The Nest i/o look for in the startups that are applying for incubation?
For the initial screening, the startup founders are required to fill in an online form with questions that provide us with information about the startup idea, the problem they are trying to address, and details about their team so that we know if the idea has been thought out and how well the team gels. We also ask them for their motivations, which allows us to know how invested they will be in the project in the long term.
And how does their motivation play a role?
Let me give you an example. One of our cohorts had a startup called WonderTree which started as a project for children with special needs. One of the founders of WonderTree had a brother with special needs who inspired the idea for the startup. He noticed that when his brother interacted with mobile devices his attention span and mood improved. Hence, he decided to develop games that were specifically designed for children with special needs.
This idea employed cutting-edge technology such as augmented reality and deep learning, and thus required time to convince people of its viability to gain investment. Like most initiatives in our country, startups also often have to attain global recognition before they can get accepted locally. So WonderTree participated in international contests and won awards. They placed third for The Global Innovation for Science and Technology Award at Stanford, and first for The Asia Pacific ICT Awards. It was after that they received a grant of USD 275,000 from the Ignite Fund.
The founders realized that their target market could be expanded to older people and people who have been in accidents because their needs, such as physical therapy, are similar to those of their initial target audience. WonderTree is now installed in 7 schools, at Agha Khan Hosptial and can also be used at home due to the convenience it offers.
Therefore, it was WonderTree’s motivation that allowed them to push their vision forward.
How do you finalize what startups to incubate?
After the initial screening process, we invite founders to pitch their ideas to an expert panel of judges. The Nest i/o does not get directly involved in the judging process because we often know these kids personally and therefore, do not want the decisions to be biased.
The panel selects 20 startups and we incubate them.
Why are certain startups rejected?
When we give advice to startup founders, we encourage them to conduct research and get some customers before they come pitch to us. Even if they talk to around a hundred unbiased people they can estimate how well the product is going to be received. The research helps them learn if people will use their product, pay for it, and how much are they willing to pay? This kind of effort shows us their commitment to the startup.
When applicants do not conduct the necessary research, it shows that their ideas are not thought through and they are rejected. Such applicants can refine their ideas and apply again.
“The Nest i/o has become a community and a support center where even after graduating they can access the mentor network, get advice, and even hold their meetings.”
How does the incubation program work?
The Nest i/o runs a four-month-long program where startups are given a rent-free space, mentorship, guidance and connections who can potentially become their mentors, investors, or even first customers. We never charge kids, nor do we pay them stipends.
We always keep in touch with our graduates. The Nest i/o has become a community and a support center where even after graduating they can access the mentor network, get advice, and even hold their meetings. For example, if they have an interested investor, but do not understand if they should agree to the terms, they come to us for guidance on what to do.
Each graduating cohort is asked about their experience so that we can keep improving the program and continue to meet their requirements.
How does The Nest i/o earn?
Our initial goal was to make the program workable, not to earn and therefore, as I have mentioned before The Nest i/o is mostly run via brand funding.
We are attempting to make ourselves sustainable and so, we now have other streams of income which include running programs in the corporate sector such as conducting trainings, holding hackathons and handling social media campaigns for organizations and professionals. We also charge a fee when we invite trainers from abroad to conduct programs. However, we provide scholarships for the startup teams at The Nest i/o if they cannot afford to pay.
Here I should mention that running an incubator is mostly voluntary work. It is never going to be very profitable but is rewarding in its own ways.
What guarantees the success of a startup?
There are two major things that play a role in the success of a startup other than the incubation or acceleration program it is in.
The first is the mentor network connected to the incubator. Here in Karachi, we have a mentor network comprising of professionals who offer their time to startups to guide them according to their areas of expertise. For example, if someone is working on an e-commerce startup a professional from Daraz.pk or Amazon.com can give them more valuable advice.
The second and even more important factor is the startup founders. The more hard work they put in, the more they succeed. Their passion for learning and their imagination is what gets them ahead. We are just the facilitators.
How do startups get investment?
Each graduating batch has a demo day where startups first pitch their business ideas to potential investors from all over the country. After that, startups have the opportunity to meet those high-net-worth individuals one-on-one.
However, not all ideas that graduate may be able to acquire investment. People often hesitate to invest in social ventures because while they make an impact, there are no short-term returns. Although, new investors entering the ecosystem realize that social ventures also require support and so, at times they divert their charitable funds to social startups.
We do see interest from foreign investors now. However, if one or two startups in the country reach a unicorn level (privately held startup valued at USD 1 billion), then this entire process will speed up.
Besides that around 25% of the companies that have graduated from the Nest i/o have either gotten investment or bootstrapped themselves, reaching a level where they did not need investment from outside.
And how is it usually utilized?
Mostly to hire more people or to scale operations so that the returns can increase. The founders do not take big salaries with the money, but they do need a limited amount that they can take home.
What is the impact on startups when angel investors take 90% and leave the entrepreneur with 10%?
Doing that kills the startup. The custom is to take 7-10% at the first level of investment. If anything over 20% is taken, the entrepreneurs will have a difficult time trying to find more investors to scale because it will be a minority stake. It is only recently that people who understand this have started investing and hopefully, this will allow the startup ecosystem to grow.
Do you plan to launch a fund to invest in startups?
We plan on creating a fund for startups that have come out of incubation. Startups need investment at different levels to succeed, otherwise, they will either shut down or become almost stagnant. SME’s and startups have a much bigger impact on the economy than major corporations, and timely investments will help them flourish and have a huge impact on the economy.
The first level of investment they need is seed funding which can include friends and family funding, and angel investment. This is a very early investment that is meant to support the business until it can generate cash of its own and is usually made in exchange for an equity stake in the company.
After this, they must raise series A and series B funds. Series A funds are the company’s first significant round of venture capital financing and the first series of stock sold after the company goes public. Series B funds are used to acquire a stronger foothold in the market.
The fund we are planning will be outside The Nest i/o because we want to invest in good startups that show promise, not just the ones affiliated with The Nest i/o.
What should be considered before giving startups initial seed investment?
I believe that startups need seed investment of about USD 20-30 thousand when they graduate. However, this investment should not be guaranteed because if they know that they are going to get the money then they might fall into an employee mindset and lose the motivation to work hard and become laid back.
Once the startups graduate the incubation program, they must reassess their commitment to their business. If they are still motivated to make it a success, then they should look for seed investment to take it further, otherwise, that investment is wasted.
The Digital Entrepreneurship Ecosystem in Pakistan 2017 report by Jazz VEON stated that the success rate of startups in Pakistan is less than 2%. What does this say about our startup ecosystem?
I believe that it is too early to label startups as successes or failures because we cannot determine how many will become multi-billion dollar companies or phase out in the long run.
Out of the 139 startups that we have incubated for the past three years, 85.6% continue to function still. That does not mean they are successful, only that they have not failed yet.
“I believe that it is too early to label startups as successes or failures because we cannot determine how many will become multi-billion dollar companies or phase out in the long run.”
The report also says that the lack of entrepreneurial approach Pakistani youngsters have is an issue, that they are not willing to invest hard work.
Most entrepreneurs that I work with at The Nest i/o are in it for the long run, they work hard and want to succeed. Of course, there are some who give up because it is difficult, but the majority are out to make a real difference.
The number of social ventures that these entrepreneurs take on is proof that they see problems and want to solve them. They understand that anything that happens today will impact their future so they are working on projects addressing education, health care, people with special needs, the environment etc.
In most cases, it is familial pressures to provide an income that makes their motivation waver. This leads them to scale down and try to find a job or freelance.
Yet one thing I have noticed is that most youngsters I am working with watch videos, read articles, and learn by experimentation or trial and error, but they do not read books. Most of them do not even read the manuals of the software they are using. I strongly believe that they need to read a variety of things to increase their depth of knowledge and become better communicators.
Do startup founders at The Nest i/o mostly come from tech-related backgrounds?
The term ‘tech startup’ is broad, and merely refers to all those startups that use technology for delivery. Here I should mention that without using technology, it is difficult to scale.
Other than IT, startup founders who register at The Nest i/o are from a range of areas such as business, engineering, law etc. There are no restrictions; professionals, fresh graduates, and even homeschooled kids can apply with their ideas.
For instance, in our last batch, we had a group of three brothers aged 11-18 who were homeschooled. Their startup was aimed at creating awareness regarding STEM (Science Technology Engineering Math) using 3D printing. Their goal was to educate young children for which they made a product called Thinker Box which can be subscribed to. Subscribers receive a product each week that teaches children a new STEM concept.
Tell us more about diversity in the startup space.
While The Nest i/o now has a lot of diversity in terms of age, gender, community etc., when we took in our first batch we had only one female founder, and that really disconcerted me. To find out what the problem was, I visited universities in the city and spoke to women there. I realized that while they had ideas for businesses, they simply did not know they could pursue them. This not only applies to women but also men in our country.
We decided to address this through The Nest i/o and held workshops at schools to encourage entrepreneurship because we felt that this needs to be instilled at an early age and the best way to do so is via our educational system.
In our last cohort, 55% of the founders were women which shows the progress that we have made. I believe that many of the women founders at The Nest i/o are going to be very successful in the long term because they are focused, determined and tend to see specific problems that not everyone else might. For instance, one of our cohorts had two women who started a wedding registry. The system was designed so that anyone who is getting married can post what they want on the portal and people can buy them gifts that they actually want. Such systems are common aboard, but new to our country.
What sectors do the startups incubated at The Nest i/o work to improve?
We have startups that cater to agriculture, e-commerce, health, education etc. where applications such as IoT can make a huge impact.
For instance, startups such as Food Panda are not tech startups, but they make use of technology for the delivery of their service.
Do you think sectors other than those related to IT should work towards encouraging entrepreneurship?
I believe it is the responsibility of the government, the private sector, educational organizations, other institutions, and even individuals to conduct programs that encourage an entrepreneurial approach. This will not only help the sectors to grow but also the individuals.
With their contributions, incubators that focus on specific areas and target specific demographics of founders can be created. For instance, other countries have incubators for women, people of color, retired people etc. because this has been happening there for a long time. So there is a lot of scope for us to grow.
