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Egypt has always been a leading incubator for startups in the region, whether we look at the size of its ecosystem, the amount of venture capital deals it attracts, or the total amount of funding that startups in its ecosystem attract compared to other countries in the region.
Egypt also operates in two distinct regions: it is a major player in the pan-African ecosystem and also a leading player in the MENA region.
In Africa, the four largest markets for tech ecosystems have consistently been Nigeria, South Africa, and Egypt, followed by Kenya. In the MENA region, Israel tops the list, followed by the United Arab Emirates, Saudi Arabia, and Egypt. Of course, if you include Turkey, Egypt comes in fifth.
No matter what metric you use, be it funding raised by startups or the number of scaleups in each ecosystem (defined as startups that have raised over $1 million), the results are largely the same: overall, the takeaway is that Egypt is a major player across the region.
Egypt is also benefiting from global macroeconomic conditions that appear to have pumped liquidity into emerging markets at an unprecedented rate. Lucidity Insights spoke with Karim Aziz, who leads the International Financial Centres Corporation’s (IFC) investments in digital payments startups around the world and has invested in startups on IFC’s behalf for the past 20 years.
“Venture capital (VC) has made incredible progress globally over the past five years,” Aziz said. “There has been huge liquidity, most of it from the US, but also from many developed markets such as the European Union and Asia. That has catalyzed venture funding in emerging markets, particularly benefiting highly populated markets such as Egypt, Nigeria and Pakistan.”
Related: 10 charts to understand Egypt’s startup ecosystem
Source: Lucidity Insights
With VC winter set to hit full swing around the world in 2023, it’s clear that capital flowing into Egypt during the global investor bull market was a catalytic force, but maturation is still needed across the ecosystem. Egypt was closing around 45 deals per quarter in 2022, but that number dropped dramatically to around 15 per quarter in 2023. In Egypt, as in markets around the world, especially those with currency risk like Nigeria and Pakistan, as capital dries up, undisciplined investors and their startups have found themselves in a bind, forcing them to take a hard look at themselves.
“When it was easier to raise capital, many startups would pour money into marketing to acquire users after raising funds. Sure, it increased revenue, but it was an unsustainable model, and these companies are struggling badly now,” said Tarek Assaad, founding partner at Algebra Ventures. “In contrast, more disciplined startups that invested in technology tended to grow slower, but they retained customers and strengthened their balance sheets.”
Source: Lucidity Insights
The path to fixing undisciplined balance sheets and spending leaves you with two options for survival: cut costs or grow revenue. Because cutting costs is painful, most companies prioritize growing revenue wherever possible. In reality, you may need to do both simultaneously.
There are several ways Egyptian startups can grow their revenue and cash flow.
1. Funding While established industry incumbents can raise some capital to consolidate their market leadership positions, startups are less likely to raise capital. With the global cost of capital rising along with rising interest rates, raising capital in these conditions is difficult, if not impossible. It is even more difficult for startups that do not have a sound track record of disciplined cash management. Any startup that has committed to raising capital to grow their company and assumed they would be able to raise capital again once the funds run out will be faced with a harsh reality.
Source: Lucidity Insights
2. Price Increase It is a difficult task for a startup to increase the price of a product that is already in the market, especially if they have loyal customers who have been paying a certain amount up until now. They may be able to charge a different, higher price to new customers, but in a market like Egypt where inflation is running rampant and the public is tightening their purse strings, increasing prices risks losing customers and revenue, making this a less likely game-changing tactic.
Source: Lucidity Insights
3. Expanding our customer base So we ask ourselves: how do we grow our customer base without overpaying for customer acquisition? This is the question many startups are asking themselves to not only survive in these times, but to figure out how to thrive again in these times. Egyptian startups have started looking into expanding their services to customers abroad, as attracting customers has been tough in Egypt as consumers don’t have as much disposable income as they did in previous years.
Ultimately, for startups that can’t expand geographically and only operate in Egypt, the only prescription for now is survival mode: cut costs, provide great service, survive, and wait for the macroeconomic tides to turn. Bassem Raafat, principal at A15, echoed this, saying, “Hyper-local, operationally intensive, and highly regulated companies that can’t easily expand geographically will find it harder to raise capital in the current environment.”
For startups that have the option to expand their services to other markets, the question remains: simply, “Where should we expand?” This is where the debate begins: are Egyptian startups better suited to serve other African markets or other parts of the Middle East? The answer is not that simple.
Source: Lucidity Insights
Egypt: A springboard to Africa or the Middle East?
Historically, when Egyptian startups considered geographic expansion beyond their borders, they tended to look to the Middle East rather than Africa, primarily due to the perceived ease of doing business there: Egyptian entrepreneurs often see other parts of the Middle East as easier markets to penetrate due to cultural similarities and the commonality of the Arabic language.
Additionally, there is a perception that Dubai and Riyadh have a “pot of gold” at the end of the rainbow — both easier access to capital for fundraising and access to an affluent GCC consumer base that tends to pay higher prices for the same products. This means that Egyptian startups could potentially sell roughly the same products they sell in Egypt at significantly higher multiples in Saudi Arabia or the UAE. But according to many investors, this is only half the story.
The logic used to be that if Egyptian startups could produce technologically advanced solutions in Egypt at a fraction of the cost of GCC startups, Egyptian startups would win in these markets. And that was true for a while. But today, many of the startups based in Dubai and Riyadh have their own development teams operating in lower-cost markets like Egypt, Lebanon, Southeast Asia, and even some other African and European markets. From that perspective, Egyptian startups might do better by taking their tech solutions to African countries that not only need them but also have less competition.
Source: Lucidity Insights
Speaking to many investors, they say Egyptian startups need to consider other parts of Africa for a variety of reasons, and dig a little deeper beyond the short-term incentives currently offered in the Gulf market. “Egypt needs to become a hub and entry point for the rest of Africa,” IFC’s Aziz points out. “Unfortunately, Egyptians are inward-looking, not outward-looking. Frankly, a lot of them think, ‘Why should I go to other parts of Africa? I’m happy here.’ This mindset needs to change.” Aziz reiterates that this change in mindset needs to come from both local startup founders and local investors. “Egyptian venture capitalists need to build relationships in other African markets where Egyptian founders want to expand,” he adds.
Algebra Ventures’ Assad agreed that Egyptian startups that develop strong products in Egypt are more likely to succeed in Africa. “The problems Egyptian tech companies are currently trying to solve include access to credit, access to data and information, and financial inclusion in a market where less than 5% of Egyptians have a credit card. These are the same fundamental issues facing other African markets. The GCC offers great opportunities but is not necessarily the right development for every startup. If you’re looking to grow your startup you need to find markets that have the same problems, but I see similarities between Egypt and other African markets.”
Assad also says that there are more exits where Egyptian startups are acquired by other African startups. “Algebra Ventures has had two exits, one where an Egyptian portfolio company was acquired by a Nigerian company, and the other by a South African startup,” he says. That said, there is no standard template. The decision of which market to enter depends entirely on the startup, the problem they are trying to solve, and the sector they are in. “Some fintechs often don’t take off particularly well,” Aziz points out. “For example, in lending, you need to be very localized, but with the plethora of local market regulations, licensing issues, and ever-changing market trends in each market, it’s rarely a plug-and-play scenario. When you need to customize your services to a very specific customer profile, you can’t scale easily.”
Beyond the access to capital and language of operation offered in the GCC market, there are many other factors to consider. Basic things like the fact that the GCC is a primarily iOS market, while Egypt and the rest of Africa are Android markets, also influence players. Additionally, while there may be better access to capital in the GCC, the costs of expanding and operating in the GCC are significantly higher than those in Africa. The competitive environment and a startup’s unique selling point will also change depending on the location you choose to expand to.
One thing investors are beginning to agree on is that Africa can no longer be ignored. Africa is becoming increasingly attractive not only as a competitor for Egyptian startups, but also as a market where Egyptian startups may have a competitive advantage. Egyptian entrepreneurs are often thought of as tenacious and hardworking, but how many can claim to have a pan-African vision?
Sawari Ventures is one such player. Ahmed El Alfi, founding partner of Sawari Ventures, told us that he believes Africa has great potential for innovation and impact, but startups seem to struggle to scale across the continent, despite similar demographics and addressable challenges. “We believe this is due not only to a funding gap, but also to the lack of enough regional pan-African investors with the network, capital and capacity to fill existing gaps and back startups with regional ambitions,” El Alfi says. He also notes that while more and more pan-African funds have been launched in recent years, none are operating out of Egypt, one of the top three startup ecosystems on the continent. He goes on to say that they are raising capital for just such a fund in 2024. “We look forward to stepping into this gap,” he says. Inevitably, other funds will follow suit.
For further insights into Egypt’s entrepreneurial ecosystem, check out our report, “ Investing in Egypt’s Startup Ecosystem .”here.
This article was originally published by Lucidity Insights, Entrepreneur Middle East’s partner in producing a special report on the tech and entrepreneurial ecosystem in the Middle East and Africa.
Related: Egypt’s most active investors: Global, regional and local players fuelling the country’s startup ecosystem
