Pakistan’s startup ecosystem, once a headline-grabbing post-Covid-19 success story that attracted aggressive venture capital chasing growth and buzzworthy “disruption,” is now entering a more cautious and structurally different phase.

With investors increasingly prioritising risk-adjusted returns and shifting capital towards safer assets such as gold, the funding landscape is undergoing a transformation marked by a decisive move away from speculative equity rounds towards hybrid financing structures that now dominate capital flows.

The shift was highlighted during Invest2Innovate (i2i)’s “Ecosystem Signals 2026” event, where industry leaders discussed the findings of Pakistan’s Capital Landscape Brief 2024-2025 and outlined emerging investment trends shaping the ecosystem. Aleena Khan, Deputy Director Growth & Strategy at i2i, highlighted that total startup funding doubled to $74 million in 2025 from $34 million in 2024, while deal activity also increased from eight deals to 16 deals. However, the nature of capital changed significantly as hybrid financing, combining equity with debt, surged dramatically and accounted for nearly 89% of all capital raised in 2025, underscoring a structural shift in investor behaviour rather than a broad-based revival in venture capital.

During the period under review, hybrid financing surged from just $1 million in 2024 to $66 million in 2025, representing 89% of total capital. Misbah Naqvi, an early-stage investor, noted that Pakistan’s evolving funding environment reflects broader trends across emerging markets. “Pakistan’s landscape has changed, but many of these changes are not unique to Pakistan,” she said, adding that investors globally are adopting diversified financing mechanisms to manage risk exposure.

Naqvi highlighted that Pakistan already has venture debt criteria and instruments that founders can utilise, providing alternative financing channels beyond traditional equity rounds. However, she cautioned that the ecosystem remains incomplete without successful exits. “A full venture cycle has not yet been completed, as meaningful exits have not been seen within the startup ecosystem,” she said, emphasising that exits are critical for recycling capital and strengthening long-term investor confidence. The report noted that the funding recovery was not driven by a revival in traditional venture capital equity rounds, which remained subdued, but instead reflected founders’ growing reliance on diversified capital structures amid cautious investor sentiment and tighter risk appetite.

Analysts highlighted that hybrid structures offered investors downside protection while enabling startups to secure growth capital without heavy dilution, marking a structural evolution in Pakistan’s startup financing landscape. Despite the rebound, equity funding continued to contract, signalling that investor confidence in high-risk early-stage ventures remains fragile. The briefing suggested that whether equity markets recover or hybrid financing continues to dominate will be a key trend to watch in 2026.

Experts cautioned that while diversified funding channels improved capital access, long-term ecosystem sustainability will depend on restoring balanced capital flows across equity, debt and alternative financing instruments. Panellists also underscored a fundamental shift in venture capital philosophy heading into 2026. Kasra Zunnaiyyer, Co-Founder of logistics platform Trukkr, said investors have moved decisively away from funding speculative ideas and are now demanding capital efficiency, proven business models and measurable performance metrics.

There is a growing focus on service-based startups offering must-have solutions with strong financial sustainability, Zunnaiyyer said, noting that founders must demonstrate profitability pathways and robust unit economics before seeking additional capital. He added that AI-enabled service companies are becoming particularly attractive to investors because they can scale efficiently, automate operations and deliver personalised services with reduced labour intensity.

Omer Bin Ahsan, founder and CEO of fintech firm Haball, emphasised the broader macro-financial context influencing capital flows. He said capital naturally avoids environments perceived as unstable or high-risk, saying “capital is coward,” but pointed out that Pakistan currently has surplus liquidity within the private sector as government borrowing requirements have moderated compared to previous years. “This surplus provides an opportunity for the local banking system to lend to startups,” he said.

Angela Rayner has called for Sir Keir Starmer to appoint a dedicated night-time economy minister as she warned “more needs to be done” to support the industry.

In a challenge to the Labour Government, the former deputy prime minister suggested venues face a “triple whammy” of costs with business rates, VAT and a minimum wage increase, on top of other pressures.

Speaking at a summit on the night-time economy in Liverpool, Ms Rayner said the sector should have a “true champion on the national stage” to represent its interests.

The Labour MP, who served as Sir Keir’s deputy and as local government secretary until resigning last year after a row over her underpayment of stamp duty on a new property, told an event in Liverpool: “We need to do better.

“We need to recognise the value of this industry, economically, culturally, socially.

“We need to design policy with the industry and not for it.”

She added: “I would support the Government in having a named minister with responsibility for the night-time economy to champion the sector inside Government and ensure that the voices of small and medium businesses are heard loud and clear.”

In a Q&A following her speech, Ms Rayner said “the ministerial position is really important” and urged Labour to avoid a “one-size-fits-all” approach to the sector.

The MP, who also previously oversaw Labour’s workers’ rights package and is widely seen as a potential successor to Sir Keir amid recent speculation about his future in No 10, also lamented the “challenges” to business of rising costs.

“I think we’ve got to recognise, it’s not even a double whammy, it’s not even a triple whammy, I talk about the challenges on business rates, the challenges on VAT, the challenges of the minimum wage going up and the living wage going up,” she said.

“And the cost of energy – we’ve got to start looking at the intersectionality of all these challenges and start relieving some of them.”

In her budget last year, Chancellor Rachel Reeves slashed a discount on business rates for pubs introduced during the pandemic.

Following anger from landlords, a £300 million “lifeline” for pubs was announced in January in a bid to ease concerns.

Also coming in April are new rateable values of business properties, which have been revalued to reflect changes in the property market.

Labour needs to “put rocket boosters on what we promised at the election and start delivering now”, Ms Rayner added, arguing that firms also need a “more permissive approach to licensing”.

“If we’re serious about recovery, then we must fuel the recovery of them (businesses),” she said.

“That means recognising the value not just in rhetoric, but in policy. And this is where we must be candid.

“There is, without doubt, a clear divide between policy that truly understands the night-time economy and policy that simply applies a one-size-fits-all approach.

“Too often, policy is done to this sector, not with it. And I recognise clearly and openly that more needs to be done to engage the industry directly and consistently and respectfully, to listen, to co-design, to recognise expertise where it exists.”

Responding to Ms Rayner’s speech, shadow business secretary Andrew Griffith said she had “finally realised the cumulative impact” of the Government’s “anti-business policies” on the economy.

“But these words will ring hollow for many, given she was one of the principal architects of the job-destroying Employment Rights Bill,” the Tory frontbencher added.

Several Labour figures have suggested changes should be made to the way Government operates in recent days following the fallout from the Peter Mandelson scandal.

Her recommendation of a new ministerial post follows calls from female Labour parliamentarians for Sir Keir to appoint a woman as his de facto deputy after a series of controversies which critics say has exposed a “boys’ club” in Downing Street.

No 10 has rejected the accusations about the way it has been run, but the Prime Minister has said he would consider a suggestion from Baroness Harriet Harman to revive the position of first secretary of state, which functions in practice as a deputy prime minister, and give the role to a woman.

A Government spokesperson said: “Thriving nightclubs are often at the heart of communities and play a key role in supporting economic growth across the UK.

“That is why we are taking action to support the sector including tackling late payments, speed up licensing reforms and cut red tape while our £4.3 billion support package will cap big business rate bill hikes – and we are publishing a new high streets strategy later this year to renew our neighbourhoods.”