AM — Meltdown on Planet Startup: Capiter board fires founders amid allegations of financial impropriety

Good morning, friends, and welcome to a very busy Sunday in which the apparent meltdown of Capiter is the only thing most people are talking about. The board of the high-profile B2B e-commerce startup said it had fired the company’s two co-founders — who are also its CEO and COO — alleging the two brothers had failed to show up for meetings with representatives of the board.

The news comes as Capiter’s meltdown has been chronicled in near-real time through social media posts that have included allegations both conceivable and outlandish. Business failure is messy, but it doesn’t mean that everyone is a crook (until proven otherwise).

It is becoming a pile-on, and we’d ask you to remember this: Building (or investing in, or working at) a new business is risky. All the more so if you’re chasing scale, as the venture capital growth model demands. Businesses were failing long before VC investing was the “thing.” Consider the stats from the US of A: One in five new businesses fail in their first year. Half of all new businesses disappear from the face of the earth by year five. And about 70% of businesses fail to make it to their 10th birthday. And that is in a country that has enough experience with entrepreneurism to have real small business funding products, experienced founders, and meaningful bankruptcy protection laws.

Presuming there has been no financial impropriety on the part of the Nouh brothers (a presumption we have to make until the contrary is proven): “This would not even be a story in Silicon Valley — it would just be another Friday,” venture investor Aly El Shalakany told us over the weekend.

Capiter is the first high-profile Egyptian startup to publicly implode — it won’t be the last. More companies will fail in the coming 6-12 months. Many of them are great businesses in the making, but will choke because of current market conditions in Egypt. Because they miss KPIs that would trigger new tranches of cash from VCs. And because funding for startups is drying up: VCs themselves have less money to invest because their limited partners are looking at much less risky assets. Others will fail because they were simply never good businesses to start with — companies with incompetent founders or dumb business models, for example.

What should you do if you’re running a startup now? First, don’t panic. Second, think about what your staff, your investors, and your partners (suppliers and the like) need to hear. Write out a script for each, then have an all staff. Call all your investors. Reach out to your partners — in person if you can.

Second, huddle with your core team and ask yourselves: What can we do to slash the “burn rate”? Do we have a path to profitability? To becoming cashflow positive? It will mean growing much slower in the coming year — hell, it probably means getting smaller — but it will also mean you’ll have a chance of reaching the other side, where you’ll find yourself stronger (and with much less competition). We previously looked at how local startups are tightening their belts by revisiting their growth trajectories, marketing activities and customer acquisition efforts.

Lamees El Hadidi got it right last night: “This isn’t the first company to collapse and won’t be the last … especially in the current economic circumstances,” adding that it would be a shame if others in the startup community were tarred as a result.

The last word goes to serial founder Mohamed Nagaty, who says he thinks just 10-15% of startups survive. “It’s okay for a company to collapse, and it’s okay to see problems on the condition that this doesn’t affect the entrepreneurship climate, which has brought in the USD equivalent of more than EGP 50 bn in the past 10 years,” he told Amr Adib (watch, runtime: 5:36).

^^ We have more in this morning’s news well, below.

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Are we about to have an EEDC-ish gathering? Prime Minister Moustafa Madbouly will hold a meeting this week with the cabinet economic team, consultants and other experts, we’re told. The PM is preparing for what state-owned Al Akhbar Al Youm says will be an economic conference at the end of this month.

President Abdel Fattah El Sisi called for the economic conference last week, saying in a televised speech (watch, runtime: 4:32) that “there is a pressing need for an economic conference at which economic experts, business leaders, and investors can participate and exchange views. … I know that the National Dialogue has already formed a committee to discuss a host of economic issues, but I think we as a state are in need of a conference in which we can discuss pressing economic issues.”

MEANWHILE- There’s no longer a fixed customs exchange rate, Finance Minister Mohamed Maait clarified to Bloomberg Asharq last week after the Customs Authority announced that the USD would change hands at the border at EGP 19.31 from EGP 18.65 in June. From now on, the customs USD price will fluctuate in line with the official exchange rate, the minister said, ending a six-month period of fixed rates introduced following the devaluation of the EGP in March.

EGP WATCH- The EGP continued to slip on Thursday, hitting EGP 19.36 against the greenback from EGP 19.31 a day earlier. The currency has now fallen 22.7% against the USD since the devaluation in March.

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HAPPENING THIS WEEK-

Our friend Dr. Mahmoud Mohieldin will join the good folks at AmCham for a luncheon tomorrow (Monday, 12 September) from 1-4pm CLT. Dr. Mahmoud will by speaking in his capacity as UN climate change high-level champion for Egypt. The special luncheon meeting at the Nile Ritz Carlton is open to AmCham members and their guests. Non-members can register to watch here.

Consoleya and Cairo Angels will host a business meet-up tomorrow focusing on Nigeria’s tech ecosystem and how it compares with Egypt’s startup scene. Tarek Shahin (CI Capital’s chief investment officer), Biola Alabi Media CEO Biola Alabi, and Ibrahim Sagna (Afreximbank’s global head of advisory and capital markets) and take part in a panel discussion moderated by Aly El Shalakany, CEO of the Cairo Angels Syndicate Fund.

Domty deadline day: Shareholders in cheesemaker Domty have until Wednesday to sell their shares to Expedition Investments, as part of its mandatory tender offer for 34% of the company. Expedition sweetened the deal by upping its offer price by 10% last week, which we cover in more detail in this morning’s news well, below.

B Investments is going to have to make up its mind over TotalEnergies Egypt by Thursday: The private equity player has the right to preempt a bid by Abu Dhabi energy giant Adnoc to acquire a 50% stake in the company, which expires on Thursday.

Check out our full calendar on the web for a comprehensive listing of upcoming news events, national holidays and news triggers.

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SIGN OF THE TIMES- Food nationalism isn’t over: India has imposed a 20% tax on various grades of rice exports, putting further pressure on countries in Asia and Africa already struggling with food insecurity caused by the war in Ukraine, according to Bloomberg.

This isn’t great news for Egypt: India, which accounts for around 40% of the global rice trade, is one of Egypt’s major rice suppliers and provided more than a quarter of the country’s imports in 2020.

IT’S OFFICIAL- We’re in talks with Saudi Arabia to host the 2030 World Cup. Egypt and Saudi Arabia are in discussions on mounting a joint bid for the tournament, Youth and Sports Ministry spokesman Mohamed Fawzy told local sports website FilGoal, confirming a report by the UK Times that was published after weeks of rumors in the local press. Fawzy made no mention of Greece, which was reported to be joining Egypt and Saudi Arabia in the bid.

Things will look different the next time you visit the Giza Pyramids: The Tourism Ministry and Orascom Pyramids Entertainment — an Orascom Investment Holding subsidiary — have launched trial operations for the Giza Pyramids’ new main entrance on Fayoum Road, along with seven visitors’ centers, a restaurant complex, and an electric bus system, according to a cabinet statement. Some 1k electric cars and buses will offer tours on a trial basis, it read. The overhaul of the Pyramids Plateau area aims to boost tourism traffic to the pyramids to over 8 mn visitors annually. Check out our deep dive on the project here.

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THE BIG STORY ABROAD- Queen Elizabeth II — the UK’s longest-serving monarch — died aged 96 on Thursday afternoon. The Queen saw 16 prime ministers come and go during her 70-year reign — during which time the country lost its empire, went through wars and economic crises, and both entered and left the EU. Her son, Charles, was officially proclaimed King Charles III yesterday, though his coronation ceremony is unlikely to happen before next year. The Queen’s state funeral will be held on Monday, 19 September, at Westminster Abbey. It will also be a bank holiday. News of the Queen’s death and reflections on her legacy have been everywhere in the global press for the past couple of days: Bloomberg | FT | BBC | AP | Reuters | WSJ | Washington Post | TIME | the Guardian.

President Abdel Fattah El Sisi offered his condolences to the UK in a tweet, where he also expressed his confidence in King Charles’ ability to “fill the void” left by the Queen’s passing.

Ukraine is making gains on the battlefield: A major Ukrainian offensive has caused thousands of Russian troops to withdraw from the Kharkiv region, with Russia confirming the retreat of its soldiers. (AP | Reuters)

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** What’s Next, our weekly deep dive into the trends and companies that are shaping the future of the business community, is on hiatus this week. Look for it to return next Sunday.

The board of directors of B2B e-commerce startup Capiter has fired the company’s co-founders “effective immediately,” according to a statement (pdf) issued on Friday. Capiter CFO Majid El Ghazouli (LinkedIn) will become interim CEO until “the Nouh brothers return and allay the concerns of employees, suppliers, creditors and stakeholders,” the statement said.

Internal and external investigations are ongoing, the board said. Representatives of investors declined to speak further when we reached out, noting the ongoing investigations also involve “legal authorities.”

The board’s action came as social media exploded with allegations of financial impropriety (including embezzlement) at the high-profile company, which last year raised USD 33 mn from regional and global investors. The board said it moved after co-founders Mahmoud Nouh (CEO) and Ahmed Nouh (COO) failed to meet with representatives of the board and shareholders during the due diligence process for a potential merger. “This action follows the cofounders’ inability to fulfill their fiduciary duties over the past week,” it alleges.

It is clear Capiter has been struggling: LinkedIn posts by former Capiter employees suggest the company has been laying off staff and has failed to pay salaries. Neither of the Nouh brothers have been charged by authorities and none of the allegations have been proven in court.

CEO Mahmoud Nouh told us he denies what he called “the false allegations” that have been circulating on social media, adding, “I haven’t received any official notice from the board regarding us being removed from our positions yet.” He declined to speak further until consulting with his legal counsel.

Mahmoud was more talkative last night, speaking for some 15 minutes with talk show host Amr Adib on El Hekaya (watch, runtime: 14:22). Kelma Akhira’s Lamees El Hadidi also had coverage (watch, runtime: 10:53), as did Hadith El Qahera (watch, runtime: 5:27).

“Until now, I’m the company’s chairman,” Mahmoud told Adib. He blamed Capiter’s challenges on headwinds arising from the Russian invasion of Ukraine, stopping short of unpacking the statement. He also said he and his brother have attended BoD meetings “held virtually” from Dubai, dismissing suggestions that they stopped reporting to the board. “Any spending was made with the knowledge of the board,” he added.

WHAT DOES CAPITER DO, ANYWAY?

Refresher: Capiter caters to micro and small businesses in the food and beverage, FMCG and consumer electronics segments. It has a multi-headed business model: You can think of it as a marketplace in which businesses can order inventory, arrange delivery, and access buy-now-pay-later (BNPL) financing facilities through one app.

Who’s invested? Quona Capital and MSA Capital led the USD 33 mn series ‘A’, with participation from Savola, Shorooq Partners, Foundation Ventures, Accion Venture Lab, and Derayah Ventures.

SO WHAT DOES THIS ALL MEAN?

Cairo’s tight-knit venture capital community has suspected for some time that Capiter could face challenges as VC funding for startups slowed from the torrent we’ve seen in recent years. “The tide is going out, and we’re going to see who is wearing swimsuits and who isn’t,” said one, who is not a Capiter shareholder and who spoke on condition of anonymity.

“We got wind that Capiter was very aggressive in the market, which made them more susceptible to suffer from a correction,” Aly El Shalakany added. El Shalakany is CEO of the Cairo Angels Syndicate Fund (CASF) and also not an investor in Capiter.

What does “correction” mean in this context? For years, VCs and founders have been motivated by the same “growth at all cost” mentality that we’ve seen in the global startup space. In practice, that means raise VC money like crazy and spend all you want — as long as you’re acquiring more customers, often by using VC money to subsidize the product until you reach “scale”: The point at which the unit economics work out on each transaction.

The tide started to turn earlier this year as limited partners soured on venture capital amid fears of a global recession, rising inflation, and a risk-off that saw investors look to assets safer than highly illiquid startup shares. Globally, investments by VCs were down 15-20% in the five months of 2022, we previously wrote.

Here in Egypt, investors are in “wait and see” mode — and those with capital to deploy are often sitting on the sidelines carefully looking for the best transaction they can find, a veteran venture capitalist tells us.

The result: Smart businesses went into cost-cutting mode, laying off employees and renegotiating terms with suppliers. Profitability and positive cashflows were suddenly the name of the game.

Not having the luxury to burn someone else’s cash hits some startups more than others. “These FMCG plays try to motivate people to use your platform with subsidies, with incentives,” El Shalakany explains. “If you’re burning cash and subsidizing the customer below marginal cost, it becomes an unsustainable business model” when venture and other funding stops coming in.

Who’s most at risk? Businesses with exposure to FMCG and food delivery, he suggests. The VC veteran is more sanguine, noting that both startups and brick-and-mortar companies are suffering right now — and that those who make it through this bottleneck will be stronger on the other side (and have the advantage of much less competition).

Inflation accelerated in August to reach a near-four-year high on the back of higher food and beverage prices, according to figures from state statistics agency Capmas (pdf) on Thursday. Urban consumer prices grew at a 14.6% y-o-y clip, compared with 13.6% in July, marking the highest recorded figure since November 2018 as the cost of living continued to rise on the back of the war in Ukraine and the weakening EGP.

Food and beverages were once again the culprits: Food and beverage prices — the biggest component of the basket used to measure inflation — rose 23.1% y-o-y in August, up from 22.4% the month prior. Transportation costs also rose 17.9% y-o-y, while housing, electricity, water, and fuel costs rose 5.6% y-o-y.

But monthly inflation slowed: Urban inflation rose 0.9% m-o-m in August — a slower pace from July when it rose 1.3%.

Core inflation continued to climb: Core inflation — which strips out volatile items such as food and fuel — climbed 16.7% from a year earlier, up from 15.6% in July, according to central bank data (pdf).

Some analysts saw this coming: “August figures came in close to our expectations of 14.7% y-o-y and 1.0% m-o-m,” CI Capital Senior Economist Sara Saada told Enterprise.

We probably haven’t peaked just yet: Inflation is “likely to rise a little further” through the end of the year and “to peak at around 17%,” Capital Economics MENA economist James Swanston wrote in a note on Thursday. Swanston expects the EGP to depreciate further in the months ahead, which will fuel inflation, he notes. Saada predicts headline inflation will “accelerate to 18% in 4Q 2022 given the current FX directional trend.”

Analysts and economists widely expect the EGP to weaken further against the USD in the coming weeks and months as the government tries to seal an agreement with the IMF for an emergency loan. The Fund is likely to want to see increased exchange rate flexibility before signing off on a new program. The currency has fallen 22.7% against the greenback since March.

There are signs that inflation could be slowing for producers: PMI data out last week showed that input prices faced by the non-oil private sector slowed in August, though raw material and fuel prices continued to rise.

What this means for interest rates: A more flexible EGP could see the central bank resume its tightening cycle when it meets later this month. “If 2016’s sharp currency movement which filtered through inflation is any indication for the future, we expect to see the central bank either front-loading or slow-pacing a hike in interest rates by 300 bps through the end of the year,” Saada said.

Capital Economics expects less by way of interest rate hikes, penciling in a total increase of 150 bps until the end of 2022, which would bring the overnight deposit rate to 12.75%.

The CBE has hiked interest rates by 300 bps since March to tame inflation and curb outflows but kept rates unchanged in its previous two meetings, with the justification that deviations from its target of 7% (±2) are “transitory.”

Also taking note of the story: Bloomberg.

Domty shareholders will get a little more for selling to Expedition Investments: The Expedition Investments-led consortium bidding to acquire 34% of cheesemaker Domty has upped its offer by 10% on the heels of a fair value study that suggested the bid had undervalued the company. The consortium is now offering to purchase shares for EGP 5.50 apiece in the ongoing mandatory tender offer, up from EGP 5.00 before, the Financial Regulatory Authority said in a disclosure (pdf) on Thursday.

It’s an adjustment, but it’s still below the fair value assessment: The revised offer came a day after BDO valued the company’’s shares at EGP 6.90 each — 38% higher than the price offered to shareholders. A week ago, the company was half-way to its target, with shareholders having agreed to sell 40.5 mn shares.

What happens now? Shareholders have until Wednesday to sell their holdings to the consortium. It’s unclear whether the board will now publicly respond to the offer or make a recommendation to the shareholders.

REMEMBER- Domty’s majority shareholders are among the investors bidding for the shares: The Damati family — which founded Domty and already control 56% of the company — are part of the consortium and also own minority stakes in Expedition. Expedition, a special purpose vehicle domiciled in Mauritius, is controlled by investors in Egypt and the Gulf. Success in the MTO would hand the consortium control of 90% of the company’s shares.

Advisors: EFG Hermes is quarterbacking the transaction and Matouk Bassiouny & Hennawy is acting as counsel to Expedition.

Crédit Agricole Group acquired a 4.8% stake in Crédit Agricole Egypt on Thursday, it said in a disclosure (pdf) to the bourse. The French lender purchased 60 mn shares of its EGX-listed subsidiary, taking its holdings to around 65.3%, it said.

The details: Bloomberg Asharq reported last week Crédit Agricole Egypt’s shares were valued at EGP 6.23-EGP 7.00 apiece, bringing the total value of the transaction to EGP 374-420 mn. The bank did not reveal the price in the disclosure.

Market reax: Shares rose 4.0% to close at EGP 6.48 on Thursday.

Who owns the rest of Credit Agricole Egypt? Rolaco E.G.P Investments owned 6.59% before the transaction, while the remainder was held by unknown “others,” according to the bank’s website.

Advisors: Our friends at EFG Hermes acted as financial advisors and Zulficar & Partners provided legal counsel on the transaction.

Egypt’s largest private sector bank CIB has acquired a 15% stake in El Sewedy Engineering Industries (SEI) through a capital increase, it said in a statement Thursday. SEI will use the money to raise its stake in subsidiaries Arab Distribution & Marketing Corp and El Sewedy Illumination to 68.14% and 66.67% respectively, and “finance future expansion plans in regional and international markets,” the bank said. CIB did not disclose the value of the transaction or specify SEI’s current holdings.

Advisors: Ironwood Investments acted as financial advisor for SEI, while Talaat Law Firm was the company’s legal advisor. Ernst & Young and Intercap Capital were CIB’s financial advisors, while Matouk Bassiouny & Hennawy were counsel.

Revenues at the Suez Canal hit an all-time high of USD 744.8 mn in August, the Suez Canal Authority said on Thursday. This is 32% higher than August 2021.

Record tonnage + traffic: The large revenues came on the back of record tonnage and a record number of vessels transiting the canal. More than 2,120 ships transited the canal during the month, up 13% y-o-y. Tonnage increased 16% from August last year to 127.8 mn tons.

It’s been a good run for the strategic waterway: Suez Canal revenues hit a record high of USD 7 bn in FY 2021-2022 thanks to a global surge in oil prices and freight rates, as well as the crisis in Ukraine making the canal more attractive than other routes.

United Media Services appoints new CEO: Former Investment Minister Ashraf Salman (bio) has been named chairman of state-owned media giant United Media Services, succeeding Hassan Abdalla, who was recently appointed to lead the Central Bank of Egypt, according to Al Mal. Salman served as investment minister between 2014 and 2016 and is currently chairman and CEO of private equity firm AUR Capital.

New board at the French chamber of commerce: The French Chamber of Commerce and Industry in Egypt (CCIFE) elected a new board of directors, with Said Hanafi (LinkedIn), partner at MHR and Partners in association with White & Case LLP, as president, it said in a statement. TotalEnergies EP Managing Director Romain de La Martinière (LinkedIn) is co-president.

The big story on the airwaves last night: The apparent meltdown of high-profile B2B e-commerce player Capiter. We have chapter and verse on that in this morning’s news well and What We’re Tracking Today (above).

Queen Elizabeth II’s death and Charles III’s proclamation as king got plenty of attention on the talk shows, with several talk shows interviewing Labour Party member Kaied Omar Ghiyatha. The family reunion that followed the Queen’s death was the spotlight for El Hadidi, who described an image bringing together the two sons of King Charles III, Prince William and Prince Harry, and wives in a walkout among crowds as one that “brings joy” amid sadness (watch, runtime: 3:32) The story’s got a mention from Kelma Akhira (watch, runtime: 11:36), El Hekaya (watch, runtime: 1:01), Masaa DMC (watch, runtime: 12:34) and Ala Mas’ouleety (watch, runtime: 4:26 ).

Amer meets Kerry: Yahduth Fi Masr’s Sherif Amer sat down for a climate-focused interview with US climate envoy John Kerry (watch, runtime: 24:59), who visited Egypt last week to participate in the Egypt-International Cooperation Forum (Egypt-ICF). “If politicians stand up and experts are going to stand up, both of them are going to say: this is an existential issue, meaning life or death. We need to behave like it’s an existential issue,” he said on the climate change crisis.

A climate milestone: Egypt’s renewable energy production could surpass 10 GW next year, Electricity Minister Spokesman Ayman Hamza said on Al Hayah Al Youm (watch, runtime: 5:50).

The National Dialogue was everywhere after the board of trustees yesterday finished choosing the rapporteurs for the process. Masa’a DMC (watch, runtime: 12:23), Al Hayah Al Youm (watch, runtime: 11:58) and Ala Mas’ouleety (watch, runtime: 3:07) all have coverage.

Leading the coverage on Egypt in the foreign press this morning: Prosecutors have charged the editor of Mada Masr, Lina Attalah, and three of its journalists with publishing false information. The four journalists — who also face charges of slander and defamation — were released on bail on Thursday. The story is everywhere from AP and AFP to the New York Times, the BBC and Arab News. The Committee to Protect Journalists has taken note.

Also making headlines:

• Le rapatriement: Criminal proceedings brought against the former head of the Louvre for allegedly trafficking Egyptian artifacts and the recent repatriation of looted objects to Egypt from the New York Met are getting attention. (Axios)
• New cities + the state: New cities including the new administrative capital aren’t about solving Cairo’s overcrowding issue, according to this video from Vox. (Vox)
• Bookworm: An Egyptian book collector has turned his room into a library of around 15k books. (Reuters)
• A yarn stretching back to 1979: Yasmine and Farida Khamis of Oriental Weavers tell the story of the USD 240 mn carpet company’s success. (Forbes Middle East)

SODIC has relaunched its Sheikh Zayed residential project Karmell, which was put on hold last year after the Housing Ministry decided to rezone the New Zayed area, the developer said in a disclosure to the bourse (pdf) on Thursday.

Things are finally in place for the National Dialogue to begin after the board of trustees selected the remaining rapporteurs for the three main political, economic and social committees and the 19 subcommittees in a meeting yesterday, it said in a statement. It didn’t announce a date for the start of the dialogue.

Al Ahly named Swiss manager Marcel Koller as its new coach, taking over from Portugal’s Ricardo Soares, who was sacked last month after failing to improve performances following the departure of Pitso Mosimane. (Twitter)

Other things we’re keeping an eye on this morning:

• Representatives of renewable energy developers Scatec and Fortescue Future Industries (FFI) held talks with President Abdel Fattah El Sisi over the weekend. Scatec is working with Orascom Construction and Fertiglobe on Egypt’s first green hydrogen plant and FFI is conducting feasibility studies for a 9.2 GW green hydrogen facility. (Statement | Statement)
• Pesticide imports will be exempt from the requirement to use letters of credit after the Agriculture Ministry approved categorizing pesticides as production inputs rather than final products, exempting them from the central bank’s import restrictions. (Al Mal)
• FMCG player Dabur Egypt will double its production capacity with a new factory in Tenth of Ramadan City. The first phase is set to start operations in March 2023. (Zawya)
• The US Department of Defense plans to pay USD 83 mn to Egypt to reimburse it for border security operations along the Libyan border. (Bloomberg Asharq)
• Authorities released 33 pre-trial detainees on Friday in the latest in a string of releases ahead of the National Dialogue. (Statement)