VC funding for startups dipped over the summer from the steady stream that has been typical of Planet Startup in recent years. The four-month period between June and August 2022 saw 12 rounds raise at least a combined USD 68.7 mn, according to our internal tracker — that’s down 30% in value terms from the 11 arounds that raised more than USD 98.4 mn in the same period of 2021.
The dip in value raised came after a torrid winter: March 2022 alone saw Egyptian startups land funding worth at least USD 87.2 mn in 15 transactions.
The community started the year expecting to see Egyptian startups raise USD 1 bn in funding this year — the first time we would cross that barrier. But companies here have raised just USD 346 mn in funding since 1 January, according to our tracker, suggesting they are unlikely to hit that lofty goal.
(Editor’s note: In seeking coverage of their rounds, many startups will say only that they raised a “six figure USD” round — or other, similarly vague approximation. We include the lowest figure possible in the funding total, so the risk to the totals in our internal tracker is to the upside. That upside risk is sharpened by announcements that specify a fundraising figure that includes both equity and debt components without breaking it down into each.)
This is a global slowdown in which Egypt is now being caught up: Risk assets across the board have been hit this year by tightening financial conditions and fears of recession. With borrowing costs on the rise and a downturn in the financial markets, VC-backed companies in the US and other developed markets have begun tightening their belts and are cutting back on staff. Meanwhile, Limited partners in VCs are no longer writing tickets for new funds, while funds are scaling back the size and frequency with which they make new investments.
And Egypt isn’t immune: In recent years Egyptian startups have attracted mns of USD of VC funding from the US and other parts of the world — funding that is now starting to dry up. And funding dries up here quicker than in other parts of the world: Unlike most developed markets, investing in Egypt brings with it a greater degree of currency risk, and with current uncertainty hanging over the EGP, VCs are less likely to invest until there is clarity on where the EGP will settle. Signs of trouble here on Planet Startup have been growing for months, with rising inflation, currency pressure, import restrictions and other supply chain issues giving some international VCs pause for thought before stepping up involvement in Egypt.
Fundraising has been substantially slower than what had hoped, Sequence Ventures Chairman Karim Helal told Enterprise. Sequence Ventures aims to reach its first close of EGP 150 mn before year-end, after which it will start deploying in a number of companies. The VC has already deployed undisclosed amounts in deep tech companies AIM Technologies and Rology.
Valuations have been unrealistic: “We have looked at a number of potential investments but decided not to go through with them, despite liking the model and the business, because they gave ridiculously unrealistic valuations,” Helal says. “People thought VCs were under pressure to deploy. So I think the bar was a bit low … Silly valuations were being accepted on face value and suspect models were being approved.” Companies should not be clinging to unrealistically high valuations — a trend that hurts both companies and investors, Algebra Ventures Managing Partner Tarek Assaad said.
In a time of stress, VCs have been more focused on shoring up existing companies than they have on making fresh investments: This year’s lull was coupled with many investors — mainly international VCs — focusing on their existing portfolio companies rather than deploying funds in new transactions. In 2021 and into 2022, many global VCs were flush with liquidity and things were really looking up in foreign markets. But when that changed, they went back to focusing on their local markets, Assaad said.
Down-rounds are now the norm, Avanz Capital Management Co-Founder and Chief Portfolio Risk Officer Hany Assaad told us. A down round is when a company sells shares at a lower price than its previous funding round. The fall in valuation could occur for a plethora of reasons — failing to hit targets, falling investor confidence and new competitors. We dive deeper into down rounds in our local startup scene here.
The downturn isn’t going anywhere fast (though that’s not the consensus view): Helal anticipates the investment drought will stretch through the end of the year and that we should expect things to go from “slow to slower” as investors become more stringent in terms of what companies they will put money into. Hany is a little more optimistic about what’s to come. “I think there will be more activity in the second half of the year,” he told us. There will still be investments to be made, but expect ticket sizes to fall.
A reality check: What’s going on now “will help companies and investors come back to planet earth in terms of valuations and dissecting the business model,” Helal said. “We are going to see fewer but definitely better and more credible candidates for investments.”
Survival of the fittest: “I think the prospect is very promising but it will be more selective … Giving us much stronger companies with a much higher probability of success,” Helal said.
Some VCs remain unmoved: Algebra Ventures is proceeding with its objective to invest in companies with significant value, creating valuable solutions. “Our approach has always been looking at fundamentals, maybe more so these days than before,” Assaad said.
So, what’s an Egyptian startup to do? If a startup’s continuity depends on the second and third round of funding then that’s cause for worry, because if either of those rounds don't come through they will have no cash flow and will start laying off people, Helal added. “Make sure you grow based on the amount of cash you have on hand. Don't plan based on future funding rounds,” Hany said, adding that downturns have to be planned in the financing.
But the ones that weather the storm will be strongest: Some companies will struggle but the ones who make it will become in a much stronger position, Assaad said.
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