moneyPakistan, often described as a failing state, isn’t failing where it matters. That’s my assessment from my recent visit to a country that Washington, D.C. has buoyed with aid.

The prospect of Pakistan’s collapse terrifies America’s politicians. To prevent that, they have committed $9.5 billion in assistance to their quasi-ally over the past two years alone. That may make sense, since Pakistan is nuclear-armed and afflicted by a host of plagues including insurgent violence, unemployment, inflation, corruption, weak governance, and crumbling infrastructure, made worse by this past summer’s devastating floods.

But my recent trip convinced me while Washington’s aid is well-intentioned, it misses the point.

Aid is a stopgap. It’s money to fill a void. In Pakistan it is not contributing to development, job creation, or growth, which is what it really needs. If we’re serious about helping the country, then we should stop throwing donor dollars at it and instead start investing in its promising entrepreneurs. Really investing, so that its entrepreneurs can fail, which most will do, in order to eventually succeed.

Confidence capital

Pakistan is not starved for capital. The country has money. Pakistani banks and businesses as well as foreign companies such as Honda, Hewlett Packard, Motorola, Microsoft, Cisco, Oracle, IBM, McDonald’s, Coca-Cola and The Body Shop generate profits. Migrant remittances, which totaled $10 billion in the past year, sustain millions of Pakistanis.

The problem is that these profits and remittances are not circulated within the country. Profits are taken out of the country. Remittances are used to cover day-to-day expenses. Neither is used as leverage to create new enterprises and, most importantly, jobs.

Investment and financing are Pakistan’s problems. For that reason, Silicon Valley can offer it far more effective help than Washington.

Valley insiders such as Reid Hoffman, Mark Pincus and Joe Kraus, along with Draper Fisher Jurvetson (DFJ) and EPlanet Ventures have already started. In 2003, Hoffman, Pincus and Kraus invested in Monis Rahman, a gregarious Pakistani-American who traded chipmaking at Intel for entrepreneurship.  Rahman had successfully launched and sold a start-up in the Bay Area, eDaycare.com.

Interested in returning to Pakistan to launch a Muslim matchmaking site, naseeb.com, Rahman sought Hoffman’s advice — and funding. But following a spicy chicken tikka barbecue lunch at Rahman’s house, Hoffman offered to put in $25,000 in equity and raise $50,000 more from Pincus and Kraus.

“Entrepreneurship is key to how societies adapt to the future. Entrepreneurs pioneer the organizations that are the future economic fabric, providing jobs and sustaining communities,” Hoffman told me. He said Rahman is precisely that kind of entrepreneur that could help Pakistan.

While it may seem that perseverance is what is required in Pakistan, my visit there made me realize that the country is in much more need of risk. Because there is so much caution toward the country, there is little room for its entrepreneurs to experiment with ideas. Monis Rahman’s example with naseeb.com, which is the world’s most popular Muslim social network, shows us why we need to toss caution aside.

Catalyze capital

Naseeb.com was definitely the example that led DFJ and EPlanet to back Rahman’s next venture, the Lahore-based online job portal, rozee.pk, in 2007. That was a time “when everything was turning upside down in Pakistan,” Rahman said. The constitution had been suspended, bomb blasts were a daily occurrence and Benazir Bhutto was assassinated. That did not scare the investors who Rahman had bombarded with data on the robustness of Pakistan’s market and the growth projections of his enterprise.

Venture capital is about startups, not countries. Sure, the market the start-up launches in is an important factor and investors must consider sovereign risk. But “if you really calculate the risk (of a country), it’s a rounding error compared to the inherent risk of a startup in the first place,” Rahman said.

Venture capital has always been anchored in taking a risk on an individual and an idea, where the probability for success, as Rahman noted, is “super, super low.” And risk is exactly what Pakistan needs to encourage in order to jumpstart investments and the flow of capital.

Capital in Pakistan is frozen in a different era. Banks balk at extending credit to innovative startups, even where contracts guarantee return.

That is what happened to Shakir Husain, CEO and founder of the technology outsourcer Creative Chaos, when he went in to request a $100,000 loan to expand his business

“Put together collateral for $100,000 and we’ll give you this loan,” he was told. When the entrepreneur replied that he had a $1 million contract from a client based in the United States, he was still refused. “Had I been a textile company where I could produce a letter from my client there would have been no problem. Being a software company, they didn’t know how to collateralize that risk.” He eventually self financed.

He also set out, much like Reid Hoffman, to ensure that other aspiring entrepreneurs have access to risk rather than roadblocks.  He, along with Rahman and other established Pakistani entrepreneurs, has become an angel investor. This has resulted in some progress.

But in a country of 180 million people, where nearly 65 percent are under 25, their $10,000-20,000 investments are only enough to help launch a handful of startups. That’s not enough to create the hundreds and thousands of jobs Pakistan desperately needs. Nor are these angels enough to help those startups scale. That requires larger amounts of financing.

The Pakistan fund

The Acumen Fund, a U.S.-based non-profit which uses philanthropic dollars to make venture investments, is one resource for larger amounts of financing. Self-described as a “social venture fund” that promotes “patient capital,” Acumen has invested millions in several Pakistani “social” enterprises, which have proven to effectively serve the social needs of the poorest.

The Kashf Foundation, Pakistan’s second largest private microlender, is Acumen’s best example. Touching nearly 1 million Pakistani women, Kashf has dispensed $100 million in loans and has closed over $36 million in commercial deals with local and international banks.

Pakistan’s “non-social” entrepreneurs require similar and bold backing.  They require it, not from the philanthropic or non-profit world, but the private sector.  Capital markets cannot be built by anyone else. Nor can Pakistanis build them alone. This is where U.S. venture capitalists can help.

Certainly, firms on Sand Hill Road or Route 128 aren’t in a position to source deals for individual Pakistani entrepreneurs. The levels of financing, which would average around $200,000 to $400,000, would not be worth the exorbitant transaction costs. Pakistan’s weak legal system would require tough term sheets that would be a disadvantage to most Pakistani entrepreneurs. Conducting due diligence, the real value to entrepreneurs, would be a challenge.

What they can do is challenge Pakistani banks and investors to create a Pakistan venture fund that they would then match.  There are already several investment firms in Pakistan, such as the Abraaj Capital Group-backed BMA Capital, that could administer the fund. Last year’s announcement by The Overseas Private Investment Corporation (OPIC), a U.S. government agency, approving $455 million in financing to support the establishment of five private equity funds to invest in Middle Eastern companies provides a precedent and model.

“Give me a lever long enough,” Archimedes once said, “and a fulcrum on which to place it, and I shall move the world.”  Pakistan’s entrepreneurs are the fulcrum.  Will Silicon Valley provide them the lever to move the world?

Elmira Bayrasli writes and works on development issues. She was most recently the Vice President for Policy & Outreach at the global non-profit that support emerging market entrepreneurs, Endeavor.