Enterprise talks to Basil Moftah, general partner at Global Ventures: Dubai-based VC fund Global Ventures invests in technology startups across emerging markets. Being more of a B2B than a B2C investor, the fund is most excited about foodtech, fintech, B2B commerce, healthtech and B2B edtech, among others. Its portfolio in Egypt includes stakes in Elmenus, Minly, Yodawy and Thndr, among others. The sector-agnostic fund’s most recent local investment saw B2B e-commerce platform Cartona getting a USD 4.5 mn pre-series A round.

We sat down with Moftah to talk about the fund’s local plans, Egypt’s “fintech moment,” the rise of SPACs, startup growth metrics and exit strategies.

Edited excerpts from our conversation:

Egypt will end up being one of Global Ventures’ most substantial capital allocations this coming year. The firm is planning to invest USD 15 mn in Egypt from now until the end of 2021, and USD 20-30 mn in 2022, with a focus on B2B startups. And its physical presence here will also grow: Global Ventures’ Egypt office will be its largest outside of the UAE by year-end, growing to 10-12 people by the end of 2021 after having been in Egypt for the past three years.

So far, it has made eight investments totaling USD 17 mn in Egyptian startups, such as Yodawy, Thndr, Minly and Elmenus. Collectively, it has led rounds of over USD 35 mn in Egypt, of which the biggest was Paymob’s USD 18 mn round.

Egypt is clearly having its fintech moment. “As of July 2021, we found 109 fintech startups in Egypt alone. So in total, there must be a couple of hundred fintech startups in Egypt at this point,” Moftah says. There is also a rising openness from banks, companies and regulators to rely on fintech for payments, salaries or salary loans, he adds.

(Some context from Enterprise: In 2020, over USD 15 mn of VC funding in Egypt went to fintech startups, according to Magnitt’s 2020 Egypt Venture Investment Report. As per our internal trackers, fintech startups have attracted investment of some USD 164.5 mn year-to-date. This includes MNT-Halan’s blockbuster investment round of USD 120 mn, Paymob’s USD 18.5 mn and Dopay’s USD 18 mn rounds.)

The fintech boom has legs, but investors need to tread cautiously when screening potential portfolio companies, Moftah suggests. The fear stems from two main issues: First, success attracts a lot of people who may not know what it entails to build a fintech startup, so the investor needs to be extra cautious to spot the entrepreneurs with real ideas and stamina, Moftah says. Second, dealing with people’s money needs to be coupled with security and privacy standards. There is worry about how these startups manage security, privacy and the money itself. “You have to be cautious as an investor because you have a shared duty to have the company do its best to be well managed, and not be subject to fraud,” he adds.

Investing is a bit like getting married: “You can date a lot and meet lots of different companies, but when you invest, you have to think about the things that matter in the long-term,” Moftah says. These include the personality of the people involved in the business, such as founders and other investors. In the long-term, founders get influenced by other people on the cap table, so it is crucial to see “who they bring to the party.” Other than that, the idea itself and its potential, the market size, the developed product and signs of real traction are high up on the priority list.

No copycat gene? It’s too simplistic to say that local startups are copies of successful ventures abroad, he says. Implementing ideas from abroad in the local market requires a totally different technology, product and service, Moftah says. For example, Thndr is sometimes called the Robin Hood of Egypt. Robin Hood is for people to quick-trade or day-trade; Thndr is for people to save money and be part of economic growth.

It is about taking an idea and making it better and more relevant to a wider audience. “The premise to say that they’re copycats does not do justice to how much work and effort an entrepreneur goes through to thoughtfully implement it locally,” he explains. “What is WEchat if it’s not a copy of WhatsApp for China? But it is bigger and more important today and allows much more commerce to happen than on WhatsApp.”

Valuations are important — but not at the top of the list of Global Ventures’ selection criteria. “In spite of what people believe, valuation is the fourth or fifth priority for us. All valuations are high by definition, but what matters is whether I believe that this company can grow 10x once I put my money into it,” he adds. That doesn’t mean that valuation does not matter, but rather that there is a premium for quality entrepreneurs and long-term sustainable execution.

Post-investment, top line growth is the main metric for company growth. Global Ventures looks at double-digit, month-on-month growth, which at a minimum means the startup overall doubling every 8-12 months.

But being EBITDA-negative at the beginning is ok. “All startups are EBITDA-negative and they should stay that way for a while, because at this point, we are less interested in [a positive bottom line] than we are in increasing market share,” Moftah tells us. Other key metrics include the number of users consuming the product, how much they spend on average, and whether they are increasing or decreasing. Soft metrics like how many likes the social media page generates could be lead indicators, but they are irrelevant.

While investment rounds have become larger in Egypt and MENA, they are still marginally smaller than the global average. We previously reported that the average transaction increased about 2x in 2020 to USD 2.38 mn per transaction, compared to USD 1.12 mn in 2019, excluding clear outliers. And rounds are growing: in 2021, we’ve heard about Trella’s USD 42 mn, and MNT-Halan’s USD 120 mn round. As companies mature, they need more capital to execute, but as a percentage of GDP, the amount of money going into MENA VC tech companies is still fractionally smaller than anywhere in the world, the GP says. “The US invests 0.7% of its GDP in VC funding. In MENA, the number stands at 0.5%. This shows the [potential], the gap and the lack of funding,” he adds. Egypt’s share of investment growth is the highest in the region. In terms of ranking, the UAE tops the region, with Egypt and Saudi Arabia neck-and-neck for second place.

Larger investment rounds are not a sign of more competition, but rather a growing interest of different types of investors in the sector. For instance, private equity is definitely trying to get in on tech, as the industry is growing to a size which has ideal entry points for them, Moftah says.

The Middle East and Egypt are far behind in IPO statistics, with strategic exits trumping IPO scenarios. Globally, very few startups actually tap the stock market, as the majority (of those who survive) will see investors exit through a trade-sale. Excluding startups that fail, less than 3% of companies go on to IPO worldwide, and about 60-70% go through strategic trade sales, such as a pharmaceutical company buying a healthtech outfit, Moftah explains. The remaining are picked up by private equity players who consolidate a few startups together to create a bigger company.

Global Ventures does not actively plan IPO exits, but rather opts for strategic exits. “Fawry and SWVL have done it, but it’s still a drop in the bucket compared to global standards. We plan for strategic exits where we try to look for competitors or companies trying to get into the sectors to buy the startup. We don’t actively plan for IPOs because they are a very unlikely event,” he says. In the end, the market — not the investors — dictates a startup’s exit strategy. The final decision is up to the portfolio company and its management to decide to either sell or tap public markets.

Governance is the main challenge Egyptian startups face, just like in other emerging markets. Global Ventures spends a lot of time with companies on setting up their governance structure. “The understanding of it is not there. It is as much about control as it is about transparency, duties and responsibilities,” Moftah tells us.