Sunday, 17 April 2022

What’s Next in fintech, part II: Fundraising

What’s in store for fintech in Egypt Part 2 — a growth story: In part 1 of our virtual roundtable discussion on the future of fintech in Egypt, key industry players discussed the untapped potential of fintech and which industries are most primed for change. They got to pick the mind of the regulator, as they were joined by assistant sub-governor of the central bank Dr. Rasha Negm. She revealed much of what’s in store in the legislative pipeline, including a new all encompassing fintech law that would regulate crowdfunding and peer-to-peer lending.

Missed Part 1? You can listen to it on our website (listen, runtime: 44:59) or on: Apple Podcasts | Omny | Anghami | Google Podcasts | Spotify.

This week, our private sector guests stuck around for an in-depth conversation on where the sector goes from here in terms of funding and consolidation — at home and abroad. The general consensus appears to be that while valuations in Egypt are still primed to go up, growth is expected to slow down in light of the current macro climate and historic pitfalls like the brain drain. The solution: More integration with Africa.

But first, a refresher on our guests:

  • Karim Nour, the co-founder of Kashat — the first nano-finance company in MENA providing financial services to the un- and under-banked.
  • Omar Saleh, the CEO and co-founder of Khazna, which now offers general purpose credit; buy now, pay later (BNPL); and bill payment services.
  • Aly El Shalakany, a corporate lawyer and longtime angel investor turned venture capitalist who is now the CEO of the Cairo Angels Syndicate Fund and an investor in Kashat.
  • Ashley Lewis is a partner focused on Africa with Accion Venture Lab and has been investing in financial services and social ventures across sub-Saharan Africa and Southeast Asia for over a decade. Lewis was one of the first investors at Khazna.

Listen to part 2 of our discussion on: our website (listen, runtime: 33:45) | Apple Podcasts | Omny | Anghami | Google Podcasts | Spotify. Or you can read edited excerpts of our conversation below:

Could Egyptian startups raise over USD 1 bn this year? Our guests seem to think so: “Egyptian startups will attract north of USD 1 bn this year and it could be a multiple of that over the next few years,” Saleh predicts. There are a few headwinds that could act as obstacles along the way, but we can definitely get there, El Shalakany agreed, adding that he’s “bullish” on the prospect. While Lewis sees the Planet Startup hitting the USD 1 bn mark this year, she posits that even if we fall short of the figure this year, Egypt is still moving in the right direction and has the right players at the table.

For Egypt, the adoption of fintech is a ‘supply problem, not a demand problem’ and there’s plenty of room for growth, Nour added.

This comes as Africa’s potential is on the rise: Historically, Africa hasn’t gotten its fair share in investments, but this is changing as the continent emerges as the new frontier, El Shalakany said. The region has also proved its resilience, both El Shalakany and Nour agree. “I think that there is a recognition for the people that are serving these underserved places that there's a lot of low-hanging fruit there,” Nour believes.

And investors are ready: LPs poured into the African market in 2020 and are now wrapping either first or second closes which means they now have “a lot of dry powder” to invest in the region, Lewis notes. There are also markets that have a lot of depth of capital coming in and both of these together “make a scenario where we can get the capital into the region,” she added.

But high valuations could tip the scales not in our favor: Valuations across Egyptian startups have seen a rapid ascent in 2021 but the trend may not continue at the same clip this year given the macro challenges that Egypt faces, Lewis noted. Despite this, international investors will still have a seat at the table and high quality teams are still going to get access to funding, she believes. This year may also see more local VC players competing to put down more capital and support companies through the funding cycles, she added.

And that old brain drain problem? It’s still an issue: In Egypt, brain drain is often cited as one of the biggest challenges facing varying industries, from medicine to engineering. “Our main asset is people,” notes Saleh, and it’s important to convince highly-skilled employees to remain in the country. If you’re competing on pay alone, you’ll never come out on top, especially as major companies such as Facebook and Google hire more remote positions post-covid, he added. Talent was also a concern when the Cairo Angels Syndicate Fund reached its first close late last year, El Shalakany noted. Questions arose, such as “Is there really enough talent for the space we're looking at? Can we compete?” but in the end, the fund banked on the country’s resilience, he explained.

Offer more than money: Companies should leverage their story and underline the impact they’re creating on people’s lives to be able to attract the needed talent, Saleh believes.

Consolidation across Africa is also part of the outlook for fintech in the coming period: More consolidation is on the horizon, predicts Lewis. “You have, kind of, centers of power across the Africa region and I think people are just trying to bolster their war chest as much as possible,” she elaborated. As of today, Africa is lagging behind when it comes to intra-trade and intra-investment, said El Shalakany. The coming period will change that as companies across the continent realize the potential of consolidation to expand into new markets, whether it’s Egypt, Nigeria, Kenya, or South Africa, he added. The potential trend is already being experienced as Cairo Angels Syndicate Fund is now working with at least three of their portfolio companies to assess consolidation possibilities, El Shalakany told us.

And this could be mirrored on the funding side as well, believes Lewis. In four or five years, PE and VC players are going to want to scale their investment platforms to be able to bring more resources to the table and this could happen through consolidation, she explained.

Choosing to get into business with someone is a long-term commitment, one that El Shalakany likens to a marriage. It’s important to choose the right investors, Nour and Saleh stress. ‘In the good times and the bad,’ is a vow that should also be present in a startup-VC relationship, our guests agree. “We’re never going to be the biggest check in the room, so as a VC you need to differentiate yourself. Our thing was always ‘we’re here’,” El Shalakany said. It’s a people’s business and being accessible goes a long way, he added.

So what should you look for in a partner? People who think long-term but still know when they need to be decisive, believes Nour. Meanwhile, Saleh sees it as defining what each party will bring to the table and which VC has the experience and vision to push you to the next phase, he told us.

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