Robin Butler’s notes from Egypt

Sturgeon Investment Director, Robin Butler, shares his thoughts following his recent fact-finding trip to Egypt.

Until recently, my knowledge of the startup ecosystem in Egypt relied on the very high level and superficial stories that make it into TechCrunch or Magnitt. This trip to Cairo was a chance to spend good old-fashioned face-to-face time with founders, investors, and other ecosystem players to build a more in-depth picture of the local market. I wanted to understand the pain points for local startups, whether they can raise capital and at what stage, what support they need from investors outside of money, which markets they target for expansion, and whether the government is supportive. From investors, I wanted to learn how the market has evolved in the last 5 years, which stage they focus on, the verticals they see the greatest opportunity in, and what they perceive as the challenges for startups. Four days, 30 meetings (including 27 startups, 10 VCs and two accelerators), 18 Uber rides, and one visit to the pyramids later and I feel like I have just begun to scratch the surface of an incredibly vibrant startup ecosystem that is beginning to take off. Below are some thoughts, comments, and anecdotes.

egypt - frontier markets investment trip

Key Takeaways:

  • Fintech and logistics are the hot sectors seeing a lot of investor interest and raising capital in these verticals is not an issue; opportunities are also in health tech, Edtech and Agritech where capital is less available.
  • Local funds are mostly sector agnostic and primarily focus on Pre-Seed and Seed stage investments; for Series A onwards, companies must attract regional (a lot of interest from Saudi) or international investors; still a gap in the market around Series A/B.
  • Increased international investor interest has driven valuations and round sizes up, especially in the Fintech and logistics space, encouraged perhaps by the example of Swvl.
  • From international investors, founders want mentorship on how to scale their business, support in expanding regionally, and access to capital for later rounds.
  • Africa and the Middle East are target markets for expansion, depending on the business model and language, with those I met evenly split between going after larger but more complex markets in Africa or higher purchasing power but also competition in the GCC.
  • Egypt is a hub for tech talent in the region, but hiring is a problem for all startups as they compete with remote opportunities and local multinationals; there needs to be a good story and empowered work environment to attract the best.
  • The quality of founders is improving rapidly (6 Egypt startups in YC last year), with more second-time founders and those with experience in other startups leaving to set up on their own; the “Careem Cartel” a prominent example of this.
  • The majority of founders, though, are still male and from relatively privileged backgrounds which gives them the network to raise initial capital and early traction.
  • Government is starting to support the startup ecosystem and launching a VC fund of funds but regulations are still outdated (all startups incorporate abroad); Central Bank and financial regulator are most supportive, which is helping drive the boom in Fintech startups.

Firstly, the quality of founders across the board was very impressive. It is difficult, as an outside investor with limited local context, to make an accurate judgement on their capabilities after a one-hour presentation/discussion but they were, for the most part, able to clearly articulate the problem they are addressing and how they are solving it. Feedback from VCs was that the quality has improved dramatically in the last five years; whereas most startups used to be fresh university graduates with just an idea, today the average founder is older with more experience either in their target industry or working for another startup. The “Careem Cartel” of ex-Careem employees who have gone on to found startups is a particularly successful example of this. The diversity of founders is limited though, with the majority being male and from higher economic backgrounds. This does not detract from their achievements, but does suggest there is even greater, untapped capacity and opportunity in the market.

The capital available to back these founders has increased as well. Whereas 2-3 years ago there were only a few local VCs active in the market, today the number of local VCs has gone up and more regional and international investors have entered the market. Saudi investors in particular have been active backing Egyptian startups at all stages. Most local investors are sector agnostic, but Fintech and logistics have attracted the lion’s share of investment, at the expense of other promising areas such as Edtech, Health tech and Agritech. The larger pool of capital chasing a limited number of opportunities has pushed up valuations, especially in “hot” verticals, to the chagrin of local VCs, pushing them to invest earlier and international VCs to fill later rounds.

With a population of 102m people, 61% of which are under the age of 30, smartphone penetration at 53%, and GDP of $363bn, Egypt is a significant market in its own right with the capacity to support meaningful startups in multiple verticals. Almost all founders I spoke to, though, were eyeing international expansion, encouraged by their investors. There is a divide between those that think the GCC, with its high purchasing power but also greater competition, is the place to go, versus those who see the opportunity in large but complex African countries. Startups for which the Arabic language is a key differentiator tend to focus on the GCC for obvious reasons, whereas those with a more mass-market approach seem to look to Africa.

Support in entering new markets is one of the key things that founders want from an international investor. They are also looking for mentorship in scaling a company from Series A onwards, with very few having direct experience of doing this in Egypt or elsewhere. A universal problem is the availability of tech talent, especially at the mid- and senior-level – a common problem in every country that Sturgeon invests. While Egypt is a hub for tech talent in the region, built on strong engineering universities, this strength has attracted the world’s top tech companies, offering remote working packages that startups simply can’t compete with. This leaves an abundance of junior talent which is high on enthusiasm and ambition but limited in experience, forcing some later stage companies to look to Eastern Europe or India to build their tech team.

Every VC I spoke to emphasised how quickly the market has changed in the last 2-3 years. For the older hands who have been active since the 2011 revolution and before, the size of the opportunity has always been obvious but it has only really been since Covid that international investors have caught on to this in a meaningful way. More interest has its downsides; in particular, significantly higher valuations; anecdotally seed round valuations have gone from $5m to $10m or higher, with the recent $11m seed round for instant grocery delivery app Rabbit taking this even further. The best companies are now able to raise $30-40m Series A/B rounds, such as B2B marketplace Maxab and grocery delivery platform Breadfast this year, but there is still a funding gap in the market around Series A.

Feedback about the role of the government in the startup ecosystem is mixed. The Central Bank and financial regulator were mostly praised for their work in supporting Fintech startups, a key reason for the recent boom in this area, driven by the government’s push to improve financial inclusion. More broadly, the current regulations are not startup friendly – as in all frontier markets, it is simple to start a business but much harder to close it down – and all startups incorporate abroad once they raise a meaningful round. The government controls around 70% of GDP in the country, and is competing in some areas with private startups with an unfair advantage. They are, however, setting up one if not two VC funds of funds in partnership with local financial institutions which, if executed correctly, should support the development of the ecosystem.

As I repeated 30+ times during the week, Sturgeon’s investment thesis centres on frontier and emerging markets with large young populations, high smartphone/internet penetration but still at the early stage of their digital transformation. Egypt, along with Pakistan and Bangladesh, are perhaps the archetypal examples of this thesis and my trip to Cairo only confirmed this. There will be significant tech enterprise value created in the Egyptian market over the next 5-10 years, with successful companies that solve an acute pain point for businesses or consumers being able to capture the large local market and use that as a springboard for Arabic and African countries. Swvl is an early example of this opportunity and demonstration of the quality of founders and the businesses that they build in a challenging market. It is undoubtedly an exciting time to be a founder and investor in Egypt, and I look forward to keeping track of the startups I met and returning in 2022 to learn more.

Egypt startups visited

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