By: Marina Gamil
Cairo – Mubasher: With the growing number of startups across different sectors, especially financial technology (FinTech), the dynamics of the venture capital (VC) landscape in Egypt have been changing with local and international investors becoming more interested in putting their money into new innovative ideas and helping entrepreneurs to scale their businesses.
VC has growing importance to the economy, by providing small and medium-sized companies with growth financing that might not be available through conventional bank loans. During the first half (H1) of 2021, VC investments in Egypt have increased by 29% year-on-year (YoY), representing 91% of total capital deployed in 2020, according to MAGNiTT's report.
Data also showed that early-stage funding rounds, sized below $500,000, rose by 10% between 2020 and H1-21. Meanwhile, the number of active investors in Egyptian startups has more than doubled in three years to record 69 in 2020 from 31 in 2017, with international firms representing 32% of all investors last year.
One of the top VC investors in Egyptian startups last year was Falak Startups, a business accelerator powered by Egypt’s Ministry of International Cooperation and its venture capital arm, Egypt Ventures.
Falak aims to support startups’ growth through investment and mentorships, so we at Mubasher were glad to have the Head of Programme and Marketing at Falak Startups, Nihal El-Chami, as our guest in the Startup Lounge, to discuss the shift and the challenges in the venture capital landscape in Egypt.
How has the venture capital landscape been changing in Egypt, namely since the onset of the coronavirus (COVID-19) pandemic?
We have a number of famous venture capital companies in Egypt. But lately, we observed that investors from Asia and Europe have become increasingly interested in Egyptian startups because the startup ecosystem abroad began to be saturated. Hence, the focus now is on Africa and the Middle East where big markets, including Egypt and Saudi Arabia, are found.
As per our weekly investment news, in the recent period, huge amounts of money have entered the Middle East and Africa, where markets are growing and different types of startups are emerging. Let’s take a look at FinTech, many people do not have credit cards or bank accounts or know how to pay online, giving many opportunities for startups to launch new and various ideas and get a share of the market.
The landscape has also been affected by the pandemic, which has accelerated some industries such as e-commerce, EdTech, and healthTech.
How could this change be reflected on the tech startup scene in specific, and the technology sector in general, amid Egypt’s efforts for digitalisation?
Egypt has a space for many VCs from different parts of the world, but startups need to know how to approach them. Therefore, we always organise panels and events through which startups are connected with individuals from VCs to raise their awareness about how to attract investors and present their ideas.
Mentorship will help startups to attract investors, have access to funds, further grow, hire bigger teams, enter partnerships, and contribute to the development of the country. So it is a cycle; the change in the VC landscape reflects on the startup scene whose ideas could tackle several problems in our country such as employment.
That is why the Central Bank of Egypt (CBE) supports FinTech companies to address the informal sector by enabling people to have access to financial services, open bank accounts, and use credit cards.
What needs to be done to further enhance this landscape in Egypt and support startups, especially tech-driven startups?
It is not only about money; it is about the support and mentorship. Many startups have brilliant ideas, but they do not know how to apply them or how to be committed to VCs’ criteria to be selected and have access to funds. For example, one of our criteria to accept a startup is building a diverse team in which each member has a different task.
Because the entrepreneurship ecosystem in Egypt is new, VCs should raise awareness among startups about such criteria to help them launch a successful business, form a team, and secure funds. This could be done by bringing them together with seasoned entrepreneurs to learn from their experience and avoid repeating the same mistakes.
What are the obstacles facing startups to secure funds and turn their ideas into action? How could they be tackled?
In some cases, startups could have funds, but they do not have enough experience about the industry their business focus on, and that could affect their growth and performance. For example, when Uber and Careem were launched, many startups have applied to us to enable them to implement the same idea although they have not had any experience in this field or even the knowledge about the regulations to get the license.
The most common challenges facing startups could also be related to problems and disagreement among a team’s members, which could lead to closing the company. Hence, we invest in any business whose team’s members have different skills, knowledge, and tasks. Choosing the right team enables a company to survive any market challenge or economic instability.
In addition, a startup idea could be great, but the market is not prepared for it, forcing its individuals to change the business model.
In your opinion, on which industries does venture capital focus more nowadays, and why?
Each year, the preferences of VCs are changing. I think that VCs are focusing nowadays on [educational technology] EdTech, which has been accelerated due to COVID-19, alongside FinTech.
How does Falak Startups contribute to the venture capital scene in Egypt? How many deals have Falak Startups executed so far in this field?
We have invested in more than 72 startups across different sectors such as transportation, logistics, e-commerce, EdTech, FinTech, and HealthTech. We contribute to the ecosystem by changing what we offer in terms of programmes, networking events, and media. We provide startups support and mentorship by partnering with agencies and companies, such as Amazon, Ghabbour, PepsiCo, and Vodafone.
Our efforts have encouraged market players to change and enhance their offerings to maintain their competitiveness and back startups.
The market is reaping the benefits, as 14 Egyptian startups have secured funding of more than $150 million during the first six months of 2021, which we did not see before.
In the meantime, Falak Startups was launched four years ago as an accelerator to support the growth of any new idea or prototype. Based on our experience and after meeting with startups, we found that there is always a funding gap between the accelerator and VCs. So, we shifted our model to an early-stage VC with a ticket size of up to EGP 2 million.
With you making such progress, could you tell us more about the legal framework for startups and SMEs in Egypt and how it is developing?
Registering a business is no longer a burden nowadays compared to years ago. With the support of the Ministry of International Cooperation, individuals are able to register their business in just a week. So, Egypt has made great progress to facilitate the documentation process for startups. However, more is needed, as the registration in some countries takes only one day.
Meanwhile, some investors reject to invest in startups unless they establish their businesses abroad, where they could resort to a convertible loan, which can be converted at a later point into stock, to invest in a startup. Since Egypt does not have this kind of notes, we are working with the ministry to try to include convertible notes in the law to prevent startups from leaving the Egyptian market and launch their business offshore.
What is your advice for startups seeking investments?
They should have a detailed knowledge of their own businesses and the market they invest in. In order to gain experience in the industry they focus on, they should work in various places within the same field before launching their company.
In addition, networking events are important for them to get connected with industry experts and entrepreneurs to learn from their experience and benefit from their advice and opinion.