On speaking terms: Egypt’s investors, entrepreneurs forging a bond [Know Your VC]

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The investor-entrepreneur relationship in Egypt has been something of a rollercoaster, but both say they’re finally starting to iron out the bumps after a long learning process.

A15 investment director Tamer Azer believes the relationship between investors and entrepreneurs in Egypt has suffered in the past few years.

He said mistakes - mainly unkept promises - had been made by both investors and entrepreneurs but were a part of “the learning process”. Some stakeholders didn’t understand, or were unwilling to accept, the fact that such learning processes took time, and this had caused tensions.

Expectation management

One of the situations where such tension typically showed has been in deals.

Azer  said that on the entrepreneur side the issue had been people going in with unrealistically high valuations, asking for too much money for too little equity. Investors on the other hand wanted too much equity for their money.

“We take too much equity in startups because we’re Arab, we’re traders, we have to own,” he said. “Venture capital doesn’t work that way. There has to be enough equity left for other investors to want to invest; if I take 51 percent on my first try, the next investor is not going to want to come in. Additionally, the entrepreneur is not going to have enough incentive to continue to fundraise.”

Furthermore, there is a shortage of cohesive market data on which both entrepreneurs and investors can based their estimations. This can lead to wide variations in what an entrepreneur - who has put her heart and soul into the business - thinks compared to an investor who knows they can get a cheaper deal with an Egyptian company than, for example, one in the UAE.

Neveen El Tahri, chairwoman of investment fund 138 Pyramids, said in her experience Egyptian entrepreneurs were “usually in a hurry, propose big valuations, and want to make quick exits”. Furthermore, lower-than-expected valuations from investors were sometimes taken as a underestimation of the time and effort entrepreneurs put into their business.

In fact, investors focus on a completely different set of factors on which they estimate their valuation.

“For venture capital investors [in Egypt] to make money given this high risk factor, many of them adopt the ‘portfolio approach’,” said Ayman Ismail, entrepreneurship chair at the American University in Cairo, whereby they invest in  a number of startups expecting the majority to fail and a minority to succeed.

“It’s important to recognise that a tension in the relationship between investors and entrepreneurs is normal.”

Images via Reem Fatthlebab.

The new norms

Ismail said in a developed entrepreneurship ecosystem, where thousands of transactions had been made, established ‘norms’ defined all aspects of the investment cycle right through to the valuation according to the type of firm and the sector.

But in developing ecosystems investors and entrepreneurs have to invent their own whenever a new investment in made. For example, in developed countries there are a huge number of term sheet templates that work with the local regulations. In Egypt, investors and entrepreneurs have to design their own from scratch.

Today the relationship between entrepreneurs and investors is becoming more mature.

Ismail said that as the sector grew and professionalized, it was attracting more people into angel and venture investing. “The process of maturing and having more understanding has started because of stronger track records, giving way to the establishment of business norms,” he said.

Feature image via YPO.

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