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Sunday, 7 August 2022

Startups globally are being urged to cut spending — What are Egyptian startups doing?

Startups in Egypt were urged to cut spending — are they listening? With global funding drying up in the wake of global macro shocks and a higher interest rate environment, VCs everywhere have been urging their startups to shed their spending budgets. VCs here were no exception, advising startups to cut spending and extend runways for no less than 18 months. This week, we look at how startups are implementing this advice in Egypt’s StartupLand.

How are they doing it? From what we’re seeing, startups have been reevaluating their marketing activities, revisiting growth trajectories and reassessing their product subsidization plans. We have also heard of layoffs happening at Vezeeta and Swvl.

One thing is certain, startups are cutting spending: A number of local startups are curbing spending dramatically to survive in the current economic climate, co-founder and CEO of NowPay Mostafa Ashour says. “We are currently curbing spending and reducing burn rates in anticipation of uncertain years ahead,” co-founder & CCO of Zammit Abdelkader Ahmed Abdelkader tells us.

Case in point: Hussein Abo Bakr, co-founder and CEO of Mozare3, explains that his company has revised and lowered its revenue projections to maintain liquidity. They have also changed their growth plans: prior to the funding slowdown, Mozare3 planned on almost tripling their work force from 90 employees to 250 by the end of 2023. Given the funding decline, however, Mozare3 has dialed down that number to 180 staff members by 4Q2023.

Different sectors burn capital for distinct reasons. Tech startups obviously have to spend capital and invest in their product, our sources agree. Startups, whether they be B2B or B2C businesses, need to focus on cutting unsustainable practices; this is depending on the varying business models and the products of different given startups, but areas such as marketing, sales, and unnecessary hires need to be limited to some extent, most of our sources concur.

So how is spending being cut? There are a few precise activities that startups are turning towards, but the bottom-line is: “We incentivized our sales team to push for more growth, and reviewed our budget for the capital we have remaining to cover us double the period we estimated,” Abdelkader tells us. And there are some concrete steps being taken.

#1- Re-evaluation of marketing activities. Startups are focusing on the marketing channels that reap the most benefits, Abdelkader says, adding that for his startup, he has reduced second priority expenses and is solely utilizing marketing techniques that have proved successful in the past, and is halting expensive experiments that may or may not pay off.

Optimizing marketing spend seems to be the new norm. “We have halted marketing activities such as billboard and TV campaigns, prioritizing instead more efficient avenues: we focus on our performance marketing budget,” CEO and co-founder of MoneyFellows Ahmed Wadi tells us. Digital marketing is now getting more budget than other marketing methods, he adds.

#2- Revisiting growth trajectories. Local startups are altering their growth goals to adapt to the funding decline. “NowPay, for instance, still has the same vision for growth that we had before the global startup frenzy began to wane,” Ashour says. “We’re not limiting spending, but we are adjusting to the funding slow down and do not aim to expand at the same pace we had in mind prior to the economic downturn,” he adds. Other local startups are altering their plans as well. “As a result of the change in the investment market worldwide, we’ve decided to change our strategy so we can reach the break-even point as fast as we can to hedge against any pressure or uncertainties of external parties,” co-founder of MoneyFellows Ahmed Wadi tells us.

Partnerships may be a good strategy to attain growth goals without burning capital: “We intend to utilize funds from Mozare3’s next financing round to create 6-8 new partnerships in different parts of the value chain,” Abo Bakr tells us. The startup is planning on partnering with more companies and tech platforms in the coming period to expand its regional capacity. Instead of burning cash to expand, joint ventures will enable us to leverage our partners’ capabilities and infrastructure so we can both mutually expand, Abo Bakr explains.

#3- Evaluating customer acquisition vs retention. Instead of focusing on product subsidization and cavalier cash burning on promo codes, offers, and the like, startups are focusing on having the right product market fit that will help them retain customers in a sustainable manner, Abdelkader says, adding that retaining customers is 10 times less expensive than acquiring new customers. “We are currently prioritizing retention over acquisition for Zammit,” he tells us.

Some startups are equally invested in simplifying their product offering. “We have introduced a huge pivot to our product to increase our total addressable market,” Abdelkader says.

Or looking at alternative financing instruments: “We used to source a chunk of our working capital from our equity and books,” Abo Bakr says. “Now, however, we’re knocking on the doors of banks to integrate their debt products instead of utilizing our own funds for working capital financing,” he explains.

Startups are also leveraging the talent that has been laid off by their peers. Startups can now hire talents that were laid off for less capital than they would have before the funding decline, given how uncompetitive the employment arena scene currently is, CEO and co-founder of DXwand Ahmed Mahmoud tells us. Early stage startups can acquire great talents that were laid off by growth stage startups as well, which would have been more expensive and difficult prior to the funding crunch, Aly El Shalakany, chairman of Cairo Angels, tells us.

The funding decline may serve as a blessing in disguise for certain startups: Your competitors may not be able to secure funding in the coming days and won't be able to go toe to toe with you, CEO and co-founder of Sokna Ahmed Gaballah says. The businesses that do survive the coming period will find that many of their competitors will have perished, he added.

What’s next? Founders need to preserve cash and keep their eyes on the ball, most of our sources tell us. They have to be a bit more disciplined when it comes to spending capital and must prioritize extending runways, El Shalakany advises. Founders also must constantly observe the macro economic climate to adjust for the growth and survival of their businesses accordingly, Ashour says.

Your top stories on future trends for the week:

  • Homzmart closes one of Egypt’s largest funding rounds of the year: Furniture and home goods marketplace Homzmart has closed a USD 23 mn pre-series B round, with participation from Saudi VC STV as well as existing investors including Impact46, Outlier Venture Capital, Rise Capital and Nuwa Capital.
  • Swvl’s acquisition of Zeelo is off: Cairo-born mass transport app Swvl will not be acquiring UK smart bus startup Zeelo, after the two companies called off the transaction due to turmoil in financial markets.
  • Another Emirati fintech is looking at Egypt: Emirati buy-now-pay-later fintech Tabby plans to enter Egypt, after raising USD 150 mn in debt financing in what it says is the largest credit facility raised by a fintech in the Gulf region.

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