It is only relatively recently that Egypt potential as a regional tech hub has been recognized. From relatively low levels of investment, as recently as 2015, the country now competes with regional tech powerhouses in levels of innovation and investment.
As such Egypt’s startup scene has recently witnessed an inflection point of increased attention from local, regional and international venture capitals (VCs) to invest in technology-enabled startups.
The number of VC investments in Egypt rose from $141 million in 2020 to $445 million in 2021 and the latter figure is expected to exceed $1 billion in 2022. In addition, the number of startups that raised funding, whether early-stage seed funding or growth funding also grew to 115 tech-enabled startups in 2021. This growth is driven by a global growth in VC investments, as well as local acceleration of the entrepreneurship support system, enabling government policies, digital transformation, as well as the COVID-19 pandemic.
In the first roundtable of the AUC School of Business forum titled “Investing in Tech Startups: The Road Ahead ” a fireside discussion, featuring prominent panelists discussed the future of venture capital and angel investments in technology enabled startups in Egypt and the region.
The roundtable was moderated by Ayman Ismail, Abdul Latif Jameel endowed chair of entrepreneurship and director of AUC venture lab at the AUC School of Business.
The panelists started with highlighting the speedy development that Egypt has seen in the past few years and the massive potential Egypt has [being such a nascent market] both in terms of levels of startup activity and inward investment.
“At Cubit Ventures we are Egypt focused. We think we are at the right place at the right time. Egypt has the best of both worlds, being Middle Eastern and an African country. Being Middle Eastern gives us a lot of access to capital, talent and international markets. Being African also provides a skate way into Africa but also the African bit in our ecosystem is how nascent the ecosystem is,” says Rafeh Saleh, founding partner at Cubit Ventures.
“It is such a huge market there is so much room for disruption, a lot will happen in the coming very few years and the opportunities are just massive. There is much room for investors from across the world to look at Egypt.”
Saleh explains how the cost per capita in Egypt is lower than most regional and international markets, making it a very attractive one for startup investors.
Based on 2021 figures in Africa, the cost per capita in South Africa is 15.9 cents, 13.3 cents in Senegal while in Egypt its only 5.9 cents. It is even much lower when compared to more advanced markets where it surpasses the 400 dollars per capita in the United States and 40 dollars in France.
Are startups overvalued? A concern for traditional businesses
The short answer is no, according to the panelists.
“VCs does have a different model for how it does valuations in general,” says Bassel Moftah, general partner at Global Ventures.
He explains that this model is not based on traditional valuation methods such as discounted cash flows used by private equity firms but rather depends on the concept of “partitions” or investment overtime to see where the potential of the business may go.
“By trenching you make sure the entrepreneurs and the management team have a lot of skill in the game so that they are incentivized to really grow fast and quickly and use the money wisely. You are not giving them their full capital upfront you are giving them enough typically from 18 to 24 months and the idea is as they hit their KPIs or the different gates that they have set themselves they get to overtime normalize their valuation to where it would be from an industry perspective,” he added.
Elaborating on the same idea, Moftah explains with an example that when an entrepreneur comes with just an idea and the VC puts a valuation of two, three or four million dollars on it, everybody knows that the business is worth zero as it is just an idea. But what happens is the VC invests half a million dollar to get the startup started where they take 20 percent of the company and leave 80 percent to the entrepreneur. If the latter managed to prove the idea is working, then they move to the next stage of investment and then the same thing happens at the next stage and so on.
Overtime, things will normalize so when a company reaches its full maturity, it will reach a certain number with regards to its valuation that is more comparable to what is really happening in the public markets or traditional businesses.
“We are paying for the future, with asset companies you are buying assets and buying the past. With entrepreneurship, we are buying the future,” Ahmed Alfi, chairman and co-founder of Sawari Ventures says.
Alfi explains that one reason for the growth in valuation is that now the opportunities for startups to get follow on investments are higher, therefore the chances of success are higher; and those valuations reflect actual business opportunities.
Second, the talent pool that is participating in management at startups is tremendously stronger than it was. “Senior managers, former bankers, and everybody is seeing the opportunity and many people are taking the lead and taking the risk of participating in that,” he adds.
The last factor is the changing environment where the regulator has become more proactive, encouraging and streamlining processes especially for Fintechs and also the market become more mature.
Regarding the element of valuation Shehab Marzban, CEO and founder of DFin Holding, Camel Ventures further confirms that the ecosystem has evolved heavily and that those valuations only seem high since they are still unrealized elements.
“What will validate these valuations is to see the end of the tunnel in terms of the exits. The ecosystem has to evolve in terms of acquisitions and listings either local listing or cross border listings and all of this will validate and create success,” he adds
Bringing in a Pan African perspective, Hiroki Ishida, director of AAIC Partners Africa Ltd weighed in with his experience on working within the continent. He is optimistic about the future of tech-enabled startups not only in Egypt but in the whole African continent. With the great expansion in health-related investments in the African continent that reached over 800 investors last year compared to 14 investors in 2015 and with the increase in digitization, there are even greater opportunities for health tech-enabled startups to operate and to have more value.
Startups that provide services related to compilation and managing patients’ data will provide a cost-effective solution to an intrinsic problem in the African health sector. Thus, they will attract many investors from the pharmaceutical companies which in turn will be reflected in higher valuations for those startups.
Selection of startups: what is considered a good match?
Venture capital is the business of people, especially at early-stage startups. If the team is capable, they will veer toward taking the business into the right direction even if the business model needs adjustment. Most panelists agreed that this founder premium notion is valid.
“When choosing a startup we look at multiple things mainly founders’ credibility. If these founders have what it takes to create a successful business, then that becomes a very important factor,” explains Saleh.
He further explains the parameters of selection start with finding a good indication of early product-market fit that’s why his VC prefers to look at post revenue companies where customers actually paid for that particular service. Second is to focus on the nature of the problem to be solved by the startup.
“We like a company that is solving an acute problem that is addressing the masses or addressing a real need in the country. We don’t want to see advisors’ validation or mentors’ validation we want to see actual customer validation,” he adds.
Panelists emphasized the importance of chemistry between the founders and the venture capital. Chemistry goes beyond likability between VCs and entrepreneurs. It represents a good sync between the VC and the entrepreneurs in terms of values, the way of doing business, communication style and much more. The relevance of the entrepreneurs’ experience with regards to the problem they are solving is another crucial criterion for selection.
From the VC side there is a number of factors that also affect startup selections such as the VC portfolio, how much energy and support this entrepreneur needs, does the VC has the bandwidth to take this particular investment on, what aligns with the VC’s investment thesis that also includes the portfolio structure and which opportunities fall within this structure. There is also a limitation of how many investments a VC can take at a particular point of time which could affect selections negatively.
Missed opportunities for female entrepreneurs due to gender bias
Another point of discussion was the gender imbalance where less women entrepreneurs exist in the market.
“Not every woman can become a founder and there is a lot of risk for them from career and family and de-risking the opportunity for women is as important whether it’s through the accelerator or ventures,” says Amal Enan, chief investment officer at the American University in Cairo and founder and managing partner at Lotus Capital.
She advises women to see the opportunity of being a part of the growth in the technology startup ecosystem. She encourages them to understand that they do not have to work in a multinational or the banking sector to have a good work-life balance and stability but actually startups offer more flexibility, opportunities for growth and a career trajectory.
“We need to have more women being part of the technology sector not just as founders but across the value chain,” she adds.
Alfi weighs in by mentioning that education enlightenment of the men in women’s lives and social pressure on women are the biggest barriers to their success in our society. “Fathers, brothers, husbands that would not allow them to pursue their dreams is the biggest barrier,” she adds.
The panelists also added that there is more to this issue as women are generally more risk-averse and more rational than men. Usually, women entrepreneurs take more time to start presenting their projects to investors and this makes them lose more opportunities as opposed to their men rivals.
“I think VCs don’t invest from the pitch. They want to build a relationship and this starts earlier than when you are ready to actually raise capital. I encourage female entrepreneurs to build relationships with VCs early by sharing their ideas and discussing it and building that kind of trust that then leads to okay we are ready to invest now,” Moftah advises.
Exits and the road ahead
On the future of exits, Marzban explains several paths from cashouts to acquisitions by regional players. “I see the majority of exits in the local market would come mainly through strategic acquisitions mainly from conventional players who want to get the upside from the tech side. These transactions will be either through cashouts for everyone or what we are currently seeing is more like equity swaps in bigger structures and there are a couple of transactions happening over this year it seems in the market,” Marzban explains
“Also from seed to Series AB Stage, we see a lot of potential acquisitions or exits to regional players mainly from Africa also from the Gulf who want to come into the local market and are requiring a team with existing license or existing infrastructure instead of reinventing the wheel of starting from scratch. This is also an exit path which might exist in the next two years,” he adds.
On the road ahead for Egypt, between growth opportunities and challenges facing tech startups, panelists are generally optimistic regarding the expansion, growth and maturity of the market in the next few years. This maturity will result in seeing more localized data which creates an increased solid basis for startup valuations and thus a more efficient local market with either corrections or validation for both current and future valuations.