Sunday, 16 October 2022

How can Egypt’s StartupLand pitch itself to global investors amidst the VC slowdown?

How can Egypt’s StartupLand pitch itself to global investors amidst the VC slowdown? The global economic slowdown has caught up with Egypt, with VC funding across the board tightening amid fears of recession. Recently, local stakeholders have become a bit more worried about what comes next and how to position Egypt as an attractive startup market.

We sat down with Basil Moftah, general partner at fintech fund Nclude, to break down what investors and startups can learn from the downturn and what Egypt’s pitch to international VCs should be going forward. Since Egypt’s StartupLand is still considered nascent and hasn’t witnessed real downturns before, startups and investors alike are learning how to handle current market conditions. But on the upside, there still is untapped global VC funding that hasn’t been deployed yet, of which local startups can later make use.

Edited excerpts from our conversation-

Egypt has a very nascent startup scene that is still learning. VC investment finds its roots globally in the 1970s-1980s. Therefore, other markets outside of Egypt are more mature since they went through multiple cycles. This relative immaturity of the Egyptian market means that everyone is learning what works for this market, especially since the startup scene started taking off around 2011.

One problem is that the market is lacking in investor numbers… There are very few active VC investors in Egypt, compared to the US. Back in 2020, the US recorded over 1.9k VC firms managing over 3.6k venture funds worth USD 548 bn in assets, according to the National Venture Capital Association. Today, the number of VC firms in Egypt stands at 51, according to Magnitt. “To have a market, you need a significant number of competing players with different theses and philosophies about how they invest,” Moftah says.

…And depth: This is the first time the Egyptian market has faced a downturn, so stakeholders are still learning on how to handle it, Moftah tells us. “Everyone is on a steep learning curve of triaging and understanding their portfolio,” he adds. The VC model is based on making a number of small wagers across a large portfolio, expecting only a handful to be successful.

The big question investors are trying to answer now: Which companies to keep backing and which ones to let go of? A typical VC fund portfolio deploys an average of 15-20 investments per fund. Deciding which of them to let go of can be very complicated because the capital intensity of different business models varies, Moftah explains. Capital intensity refers to how much money it would take a company to achieve profitability. Hence, VCs have to decide whether to back businesses that require less capital but grow slowly, or businesses that require more capital but grow faster. That’s an issue that local investors didn’t have to handle until recently.

The result: “This means for Egypt that you have a compounded effect of less money available,” Moftah tells us. Now, startups either have to achieve profitability much more quickly, meaning they have to be a lot smaller than what was the original plan for them, or they have to shut down.

For startups to properly handle this downturn, governance is key. Since the market started during a big upturn, there's been a lack of governance by boards and management teams amid chasing growth instead of profitability, Moftah says. Involving the startup’s board may have seemed like a headache, but keeping members up to date helps create alignment when difficult decisions arise.

…And having a plan B that doesn’t rely on more VC investments is important. Founders need to have a plan for when they’re unable to raise funds, Moftah says. This includes looking at what profitable products and services you have that would allow you to sustain the business for a longer period of time.

Long-term financial planning is also a must. Fundraising has always been a time-consuming process. “The typical investment round used to take 3-6 months to be completed — today, we’re looking at 6-12 months,” Moftah notes. Hence, startups should start the process as early as possible.

And if your startup is past its pre-series A investment round, regional and international investors are critical. “The biggest ticket size from a local investor that I have heard of is USD 5 mn,” he states. There are a couple of outliers, but generally, local VCs can't put in much more than that. “If you're looking to raise USD 10 mn or more, you’ll have to turn to regional and international investors,” Moftah adds.

But bear in mind: Building relationships and trust with those investors takes more time today than in the past, based on the trifecta mentioned above, Moftah says.

Although global economic turbulence has cast a shadow on investing in Egyptian startups, there is a silver lining. Most international VC funds are USD-based. The devaluation of the EGP means that in some ways, the cost of operating from a USD perspective is getting less expensive in Egypt, he explains.

But it isn’t all that rosy. At the same time, startup revenues are worth less because of the USD-EGP exchange rate.

So what should your startup pitch to international investors be? Startups that are expanding abroad pose a very attractive investment option. “When you expand, the majority of your costs will be based in Egypt, yet you'll be generating revenues from multiple markets,” Moftah says.

Egypt’s pitch in general is still attractive given it is one of the largest emerging markets with a young, tech-savvy population. But founders need to be prepared to prove to international investors how they will continue to grow at a fast pace through diversifying products and markets, and properly managing the cost base, he adds.

Globally, the VC squeeze will persist for at least 12 months, but that doesn’t mean that there isn’t any money in the bank. “There's a lot of dry powder around the world that hasn’t been invested yet,” Moftah says. There’s committed capital that VCs had previously raised, but not deployed yet, ranging between USD 200-600 bn globally, he suspects. Some of that will be deployed in Egypt.

And it won’t just rain — it’ll probably pour. “Dry powder usually comes a little bit like an avalanche,” Moftah tells us. Once investors see favorable economic conditions, the money will be rapidly deployed. They will have to move quickly to invest within the fund’s 3-5-year investment period. When this will happen is heavily debated at this point. Moftah suspects it could take at least 12 months.

But most of it will go to existing portfolio companies. Investors are going to dedicate a big portion of their funds to a few of their promising portfolio companies, Moftah explains. New investments will be met with much more scrutiny.

As a startup, use the downturn to learn how to tactically deploy your resources. “When you have less money, you make better decisions,” he tells us. Downturns are healthy because they force startups to focus on what matters as opposed to trying to be everything for everybody at the same time, he concludes.

Your top stories on future trends for the week:

  • Telda bags USD 20 mn round: Digital banking app Telda raised USD 20 mn in a seed round led by long-time investor Global Founders Capital (GFC) to help it tap new markets and expand its product offering.
  • MEA fintech startup platform FlapKap raised USD 3.6 mn in a seed round from follow-on investor A15 as well as Bolt by QED, Nclude, and Outliers.
  • Mastercard invests in fintech fund Nclude: Mastercard closed an undisclosed strategic investment in Nclude to invest in “promising early-and-growth-stage fintech and fintech enabled companies” and support digitization and financial inclusion in Egypt.
  • Digital healthcare platform Vezeeta raised an undisclosed amount from existing investors Abu Dhabi-based Gulf Capital and Swedish VNV Global.
  • Pharma startup i’Supply raised USD 1.5 mn in a pre-seed round led by Disruptech Ventures.
  • Capiter meltdown could end up in court: The two co-founders of B2B e-commerce startup Capiter have filed a lawsuit with the public prosecutor’s office against the company’s board of directors over their recent firing.
  • Egypt-born B2B beauty startup Glamera secured a USD 1.3 mn seed funding round led by Riyadh Angel Investors, with participation from Techstars Accelerator, Ithraa Capital, 100 Ventures, Silicon Valley Venture, Lucrative Ventures, and angel investors.

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