Shopistan is one of the emerging companies in the Pakistani e-commerce industry, funded by Kima Ventures. It was recently mentioned as a key player in Pakistani Startup Report. We had a chance to sit with two of its three co-founders, Ali and Babar, in their office in Ghalib Market. They lead us through Shopistan’s conception, the various twists in its direction, acquiring funding and winning customers in a fiercely competed for and (locally) new industry.
Since this discussion, Shopistan has chosen to focus more on providing custom ecommerce solutions to Pakistani retailers than on their own marketplace, and Babar and Hammad have left to work on their own projects.
What is Shopistan and what does it do?
Ali: Shopistan.pk is a managed marketplace that allows retailers to easily onboard stock and sell to consumers in Pakistan. It is similar to eBay, but we joke around and call it eBay++ since we also handle all end-to-end logistics of e-commerce. We market inventory that retailers have put up on Shopistan.pk to consumers through multiple channels, and bring customers back to our platform to finalize the sales. The logistics include ensuring the ordered package is ready for pick-up at the retailer’s location (we do not hold inventory), orchestrating the delivery to the buyer in a timely manner, processing payment and taking our cut. However, Shopistan, the company, also handle clients’ ecommerce platforms.
We originally only wanted to manage transactions and sales on the domain, Shopistan.pk, and convince retailers that selling their merchandise through Shopistan would prove beneficial for them. However, pulling in a lot of consumers and retailers to a new platform is a classic chicken-and-egg problem; it requires both a large network effect and lots of funds spent on advertising. That is still the long-term vision for us. However, in the short term, we are applying our e-commerce expertise in marketing, technology, retail, operations, and business intelligence to manage the ecommerce sites of local brands. Maria B is a good example; we handle their merchandising, social media, ads buying and customer service.
Now, we at Shopistan manage e-commerce on both our domain and the domains of other brands.
Was it hard convincing retailers on the value of the idea that you guys would handle their e-commerce completely?
Ali: Not at all. The fact was that when we went to them, they needed someone to help them through the complexity of selling large volumes of stock online. I am not implying that the brands have not tried opening and running their own e-commerce websites. However, they have not acquired the skills needed to run them day in, day out. They make an effort for the first few months. Then, you go to their website and see winter stock in the summer. We offered to solve this problem by handling their websites and e-commerce efforts; they were eager to pay for this service. Usually, brands spend anywhere from a 100 thousand to a million dollars setting up a new retail presence which includes scouting a location, rent, marketing, managers and salesmen and transporting merchandise. Trying out an online channel is a minuscule investment with a possibly high ROI.
Babar: E-commerce is the next big channel for Pakistani retailers to tap into the growing market of Internet users. Consumers now tend to first experience a brand online, usually on social media platforms, since they are plugged in 8 hours a day. We offered to not only help these retailers to access these potential customers, but also fuse brand equity into an otherwise cold online experience.
So you handle other brands’ inventory. How do you do so?
Ali: Good question. There are a couple of core logistical problems that you need to look at when you want to set up a non-physical channel, whether it is our domain or a clients. Inventory Management is one of the key processes that we have had to streamline. There are many solutions, all the way to completely manual to fully automated, depending on the volume of inventory. For some brands, we handle stock completely manually. Inventory reports come in daily and our operatives sitting here plug in the amounts into the platform’s back-end. Once the scale of sales increases, manual entry is not the most efficient method and becomes a headache. In that case, we plug ourselves in their ERP systems. With some brands, we did that from Day One because we anticipated that their products would sell quickly and in large amounts.
How you reconcile orders/inventory changes into your own system is also important. What if the website says that a particular product is in stock and a customers order a certain amount, but it turns out that there is no product to send. The chances of that happening are high if the same inventory is used for online and physical sales. Therefore, we isolate a certain amount of a brand’s inventory for online sales. We know how much stock we can sell at any given time and order more if it is depleted. This may not be the most efficient way to do it, but it is risk free.
Do the people buying these products pay with cash or a credit card?
Ali: Cash on delivery is the primary method of payment at the moment. Not everyone has credit cards, and it will take a few years for credit card penetration to increase enough for it to become the primary payment mechanism. Cash on delivery has been in use for years in this region, and that model works well enough. However, there is a little bit of leakage. Sometimes customers provide incorrect addresses, or refuse to pay claiming that this is not what they wanted. That happens and there is not much we can do about it.
Ali, how did you get the idea of opening up an e-commerce platform in Pakistan?
Ali: I was working at eBay and decided to move to Pakistan at the end of 2012 due to personal reasons; I have a daughter, and most of my family is here. I got the idea for Shopistan before moving back. I was still at eBay when I launched Shopistan.pk as an experiment on August 2012. It was theT-20 Cricket World Cup in September and everyone in Pakistan was caught in that frenzy. It is that time Shopistan got some traction. A friend was manufacturing official Pakistani Cricket Team shirts, and I bought some of them to sell on the platform. I advertised the shirts online, while my friend shipped them. Our sales exceeded Rs 200,000 in the first few days. It dawned on me that Pakistan did have a lot of potential for e-commerce, and I made a few other sales which further validated my idea. I left eBay on October 18th 2012, came to Pakistan and put all my efforts behind developing this model further.
Initially, it was no piece of cake. I had not been to Pakistan in 12 years, so I had no network, no contracts, referrals, clients or inventory. Inventory aggregation is obviously vital to draw in customers. As time passed, I met Hammad and then Babar, who joined this venture. The team started growing, we got some business and investment. Now, we have reached some sort of comfort zone.
Babar: It is kind of funny how that T-20 tournament gave the initial boost to Shopistan, because it was then that Hammad, one of our co-founders, created Howzat Cricket – the Cricket game featured on CricInfo.
Ali: I was leaving a high-paying salary at a respected company. I funded Shopistan with our personal savings. Funny – I had told my wife that that I had two savings, one for entrepreneurial experimentation and one for the long-term. They were the same! Luckily, I did not lose that money. People said that e-commerce would not work here; it is not part of the culture and people have a mental block when it comes to buying online. I was not convinced. Out of 196 countries, Pakistan is the only one where people actively shun e-commerce? How can I accept that statement? Price and convenience drive e-commerce. Even if prices match retail, people still buy online. Let me give you a recent validation. Maria B had a recent launch, and we had someone order a product from their new line that very day. When we looked at the address, we felt our platform was being validated. It was right in the alley next to Maria B’s store! She had gone to the store, seen too many people and decided to just do the convenient thing and order online! People do value convenience when it comes to shopping, and we aim to deliver that.
Can you tell us how you met your co-founders?
Ali: A few months into trying to validate the business model I had in mind, I got a LinkedIn message from a friend of a friend, Hammad Ravda, just to ask me what I was working on. I looked at his LinkedIn profile, and said, wow! This guy created Howzat Cricket and raised $2 million dollars; he has some great entrepreneurial experience. I told him I had to meet him in Karachi very very soon. He said no, no, do not waste your money flying here; we can meet in a few months. I, being as tenacious as I can, insisted on coming that very week. I flew to Karachi for the night and met Hammad at a roadside cafe in Clifton. After going through the whole shebang of Shopistan, I formally asked him to join me and experiment with e-commerce in Pakistan. Hammad was reluctant, since he had a job offer in Dubai as a consultant to a firm setting up an e-commerce platform there. I left Karachi, despondent. However, Hammad rang me up 2 days later saying, screw Dubai and let us set up something in Pakistan. That was a major milestone, and we started work right away. Shopistan had no office, and we worked at my friend’s, Abbas Yousafzai, company, Conrad Labs. We had two beanbags on the second floor. Not the most glamorous start haha!
At that time, we were still developing Shopistan’s model to manage the logistics on the domain Shopistan.pk. However, as I mentioned before, that needed a huge network effort and neither retailers nor consumers would flock to the site without the other. To bring in consumers, we needed inventory, and major retailers would not work with us. The only option remaining was to buy goods in bulk, and sell them to gain traction in the market. However, that was too risky. Abbas then suggested we offer to set up and run the e-commerce platforms of other brands, since we had that expertise and it would give us both contacts and revenue. Hammad and I started visiting brands in Lahore to experiment.
One of the first companies we talked to was StoneAge Jeans, where Babar was Associate VP. After our first meeting, he said that he would gladly let us run StoneAge Jeans’ online boutique. We were in awe of Babar; he had sold a company in America and was exceptional at creative design, marketing and brand management. After a while, I approached him to ask if he would be a paid consultant for Shopistan. He asked for the details of our model, and I sent him all the details. He looked over our numbers over the next two days, and said it made sense to him. We talked a lot and answered a lot of questions from him about multiple aspects of our idea. Within a week, he quit StoneAge jeans and signed up with us. We were downright thrilled! Hammad and I used to joke around before – wouldn’t it be fantastic if Babar would become a co-founder? But he’s making so much there, he would be mad to join us for 1/10th of the salary.
Babar: That guy must have been crazy to do that.
Ali: Luckily we got funded very soon and had a better package for him lined up.
Speaking of funding, you guys raised a significant amount of cash recently. How did that come to be?
Babar: Before we talk about how we got funding, we should discuss the pitfalls of seeking seed funding from investors in Pakistan. Firstly, investors can be notoriously short-term oriented. When you are looking at any tech-driven service startup in such a burgeoning economy, you have to understand that these are precedent setting businesses that could really define some aspects of Pakistan’s consumer markets for a long time, and that will take time. These businesses will grow slowly; they might pivot and changes focus to capitalize on consumer trends in the long run, but there is no need to rush. It is not how many people you hire or profit you have in the first year that is most important, but how you are using new technology to provide for your customers’ needs. Most investors here do not see the value in such a company, and want an ROI asap.
Ali: True. Secondly, exchanging equity for funding in Pakistan is a painful process. Some people want 10X of what a startup can offer, and are only willing to pay 1/10th of what the startup wants. You want to offer 25% of your company for a specific amount, but the person on the other side wants 60+% for the same investment. He wants to fund and own a majority of the company, and you will be there to just run it. The specialized knowledge needed to be a serial investor and mentor is lacking. By that I mean, someone who has invested multiple times, looks at the same company through a different lens at each stage, understand the risks it has to take at this or that point and what kind of support to give.
The funding story started in August 2012, as soon as I launched Shopistan while at eBay. I was thinking, wow, e-commerce will be so hot in Pakistan, and someone will definitely invest in this! So I started combing LinkedIn. Very soon I found someone who used to work at eBay and was at an investing company. Turns out, they were the biggest e-commerce investor in the world! I emailed him, and got a call back immediately. He asked me to come in, and I responded informing him that I could fly in after a few weeks to meet the team. He said tomorrow, and they sent me the plane tickets and lodging accommodation in a few hours. When I got to the meeting, which was 6 hours long by the way, it became evident that they were not looking for a seed stage investment. I wanted $100,000-200,000, and they wanted to invest a million dollars. I wanted $100,000-200,000, and they wanted to invest a million dollars. However, this investment would start in multiple chunks only when we were ready for it. Their interest motivated me and I headed to Pakistan, confident that I would have opportunities there to raise funding.
I first went to potential investors in Islamabad. They were great people, but not in tune with what a technology company needs. They would willingly invest Rs. 100,000,000 in a sugar mill, but startups – not their thing. I do not blame them. It will take time for traditional investors to become acquainted with startup finance, the risks involved and the timeline of business development. We had similar experiences in Lahore as well. Many people were not willing to invest in a virtual marketplace. We had a great Skype call with so-and-so company, and they indicated that they were willing to invest up to $3 million! Excited, all of us flew to Karachi for meeting. The question we could not answer was, why should they invest in us whey they could buy PSO or a national bank? Why not land? Our answer was not satisfactory for them, since they wanted a short-term ROI while we offered more of a long-term return. Personally, I think that there is no right answer to this question since investors differ in what they prefer to fund.
Babar: It is difficult to meet investors who understand how difficult and time-consuming the transition from offline to online can be. Keep in mind, H&M just went online in the US last year. A brand that we grew up with takes so much time to open online stores in one of the most technologically and logistically advanced counties in the world; there must be reasons behind that. We could not wrap our heads around the investors’ question because you cannot compare investing in a fresh startup with a growing market to investing in a decades-old traditional business. The mindset and goals of people working at these respective places, the kind of risks taken, technology innovation employed, stability and singularity of revenue streams at both of these just do not align.
Ali: Anyway, we returned to Lahore despondent. We put in a lot of effort to meet other investors and had meetings with many more. We met a set of investors with one of the biggest funds in Asia, and they offered to pay us over 10 months. We understood that they were trying to mitigate the risk they were taking, but we could not accept because we were taking all the risks now and could not wait 10 months. So they backed out as well. One day, we were having a meeting with a potential client; in the middle of the meeting, he asked if we were looking for investment. He was in retail and understood e-commerce, and it really made sense to them as to how we were creating value by helping brands go from offline to online.
Babar: So this investor stopped the meeting and took Ali to the side for a full hour to ask in-depth questions, and I just sat there talking to the other guys in the room about motorcycles and this and that.
Ali: And voila! In a few days, the deal had been finalized. The guy was on the board of one of the biggest retail groups in the region, and really enterprising. He pushed the board of his company towards the deal, made sure we had meetings with them, and came to our office during weekends to help out and discuss details.
Since these were international investors, we incorporated in Delaware, US, as a C-Corporation because they thought their investment would be better covered this way. Furthermore, the Pakistani entity is a wholly owned subsidiary of the US company. Shares have been issued, we own a certain part of it against our idea, team and traction, and our investors own a certain part of it against the capital they put in. Boom! Shopistan was in business.
Babar: I got a small takeaway from that funding round; even though we had our financial model perfectly made and everything, they invested because of our drive and team. Of course, when pitching to investors, you have to have everything lined up. A good financial model, a strong team profile, 3 and 5 year profitability model all need to be there, but you have to very clear about what you have right now, your long term vision and how you are going to get there. How are you going to deliver goods? How much capital needs to be invested, and what can go wrong? How will you adapt if the economy tanks?
Did you have any problems in terms of Talent? How do you find your talent?
Babar: When looking at candidates for any position in Shopistan, we tend to prefer work ethics over technical expertise, since the later can be taught fairly quickly. Ownership, honesty and the worker’s values being aligned with the company’s are paramount qualities. As a startup, we need employees who will go the extra mile, take ownership of their tasks, and help us reach our ambitious goals.
How did you deal with competition?
Babar: In my opinion, 2012 was the year that e-commerce really took off in Pakistan. A lot of companies started e-commerce sites and even Facebook pages selling merchandise, such as dealtoday.pk. You add incumbent retailers to this equation, and a comprehensive background of ecommerce will begin to develop. That is a great thing, However, the technical expertise to sell online on a large scale is limited. Our core focus is design, user experience, streamlined logistics, a wide variety of products and technology innovation at the moment. All of these try to translate into a better customer experience, which will be our competitive edge when there are more market entrants. End-to-end excellence is needed to compete in an industry where there are no barriers to entry. Competition is the best thing that can happen to us, because it keeps us on our toes and forces us to be better.
Ali: We also contractually mandate that the prices of retailers’ stock on Shopistan have to be the lowest price offered on any channel in the market. So we are competing on price as well as all the other building blocks – customer service, customer loyalty, usability, deliveries, marketing and design.
How is the entrepreneurship culture in Lahore, including funding, VCs?
Ali: The entrepreneurial culture in Lahore is strong and constantly improving. The networking group we are predominantly involved in is called Entrepreneur’s Lunch Group, which consists of the top tech entrepreneurs in the city. They meet at least once a month for lunch, sponsored by a different company involved in the group each time, discuss ideas and offer guidance to each other. There is also PASHA, which is a great resource, but one we are not involved with heavily because of the time crunch associated with running a startup. Plan 9 is great for aspiring and green entrepreneurs. Their recent graduates are very promising, and have opened interesting companies such as HomeTown/Markhor and Groopic. The people over there mentor people on their business models, presentation skills, revenue models etc. It is very useful and I expect innovative ideas and companies to keep coming out of it for quite a while.
Babar: For entrepreneurs coming out of college, it is a very good program. Kudos to Umar Saif and Khurram Zafar. There is also Cloud9 in Islamabad and Seed Ventures in Karachi. I am a mentor at i2i (Invest to Innovate), which is based out of Washington.
What is the future for Shopistan?
Babar: Things are looking up for e-commerce. One of the most skeptical clients we had a meeting with once, came around and asked us to set up their e-commerce website only 3 months after we met first. That is quite a turnaround. Also, retail brands are now being run by a younger generation who are more open to make the strategic decision to invest in online channels. Many of these young executives and managers have been exposed to big brands, and want to apply similar models here. Even in the present, we are doing well. Some of the retailers we partner with generate intense profits and are regional players. Sometime we take them for granted, but I respect them for running such big businesses in Pakistan. We look forward to working with more clients like them, and others as well of course, in the future.
Ali: We are optimistic, and full of ambition to take this platform to the masses. All of us left our previous high-paying jobs to dedicate all our time to Shopistan. Personally, I think we are at the right place at the right time in Pakistan, as both consumers and retailers are increasingly embracing e-commerce. There is a small hitch in payment models still behind the times, but the Cash on Delivery method is working for now. Also, 3G is going to exponentially increase the number of consumer we have access to. However, you never know. Right now, we are focusing on building and refining each component of our model. I would say we are doing well. OLX offered me to become Pakistan’s Country Head, but I am too excited about this right here right now to leave.