The reasons behind Egypt's startup boom

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Barely a week goes by without a startup in Egypt announcing an investment round. The country has over the past few years ramped up its entrepreneurial activity, becoming the fastest growing ecosystem in the Middle East and North Africa (Mena) region according to a report by Magnitt.

Helped by the falling inflation rate and an economy that is on its way to recovery, more people are gaining the confidence to launch their own business.  

“We have seen a lot of change in the startup ecosystem in Egypt in the last couple of years. We see it in the number of our applications; it is doubling. Also, in the quality of the entrepreneurs who are applying to join the programme," says Marie-Therese Fam, managing partner at accelerator Flat6Labs Egypt.

With a population of more than 100 million, Egypt’s market has the potential to be one of the most lucrative and it is attracting the attention of not just startups from the wider region, but also investors.

"Over the past three years we have been seeing more access to finance and more interest from global investors to invest in the ecosystem, adding to that the governmental initiatives supporting starts and SMEs,” says Mohamed Hamza, associate director at AUC Venture Lab. “We have been seeing an increased awareness about entrepreneurship through the work of various stakeholders, appearing on TV and having dedicated programmes directing attention towards the topic as well as the introduction of entrepreneurship education as a requirement in a number of public universities.”

The number of venture capital (VC) firms, accelerators and incubators in Egypt have been increasing, indicating a growing interest in entrepreneurship in Egypt. In fact, according to one report by the Global Entrepreneurship Monitor (GEM), launched by The American Univeristy in Cairo School of Business in 2018, 82 per cent of Egyptians perceive successful entrepreneurs as having high social status and almost 76 per cent of Egyptians, mostly youth, perceive entrepreneurship as a good career choice, compared to a global average of 61.6 per cent. Moreover, 55.5 per cent of non-entrepreneurs surveyed expressed their interest in starting their own business, a percentage that is double the global average.

"There is a shift in the mindset. Young people are more eager now to start their own projects. Also, there are so many entities that provide help and support to startups. The more young people know about these entities and the fact that there is so much support, the more they are encouraged to start their own projects,” says Fam.

But perhaps one of the biggest drivers for the rise in entrepreneurship is the lack of “interesting jobs for young people”, according to Fam. While the overall unemployment rate stands at around 8 per cent according to CAMPAS, Egypt’s statistics agency, the youth unemployment rate as of 2018 was more than 32 per cent according to the World Bank.

The GEM report reveals that opportunity-driven entrepreneurship has been decreasing at the expense of necessity- driven entrepreneurship that is driven by the lack of other work alternatives, increasing from 31.1 per cent in 2016 to 42.7 per cent in 2017, compared to a global average of 22.2 per cent.

Solving global problems in Cairo

The historic capital, Cairo, is a city with a dense population of 30 million, crumbling infrastructure and an unwavering sense of hope. The metropolis has proven to be fertile ground for solving problems that many cities in emerging markets around the world are experiencing.

One particular sector that Cairo has excelled in, is solving the transportation problem for overcrowded cities with poor public transportation systems. It has been startups that have provided the solutions and one such example is Swvl, an application for booking buses that recently closed a $42 million investment round, marking the biggest VC investment deal in the country and the highest in Mena in the second quarter of this year.

"Startups can offer many innovative solutions for the big issues. We cannot say they are solving the whole thing at one time, but at least they are offering a know-how and a new way of dealing with things just like what happened with the transportation market starting with Uber then the rise of Careem then Swvl which is much more Egyptian and much more related to our situation and streets," says Ahmed Adel, business mentor at Fekretak Sherketak. 

Swvl’s understanding of the Egyptian market enabled it to become the market leader and highlighted the opportunities in the buses sector with both Uber and Careem launching their own service.  

“We can even see that the public transportation sector started to use mobile applications such as Mwasalat Misr which I think will be a good experiment that will be generalised soon,” says Adel.

Challenges

Yet despite the innovation and enthusiasm, there remains plenty of challenges that hinder the growth of startups in the country. Many end up failing, the country had the highest rate of business discontinuation among the 49 countries studied in the GEM report with a rate of 10.2 per cent in 2017, a significant increase from 2.7 per cent in 2010.

The report attributes the high discontinuation rate to the challenging business environment reflected mainly in the lack of profitability for businesses and the difficulties in accessing capital.

"Investors need to understand that the nature of investing in startups is different,” says Mohamed Khedr, managing partner at Endure Capital and founder of Fatakat, an online network aimed at Arab women. “Investors are used to dividends and thus find it difficult to supply startups with money for seven or 10 years and wait for its exit until they can have their money.”

According to Khedr, many investors “do not understand that they can have a maximum of 30 per cent stake because the founders still have upcoming investment rounds and stake to share and do not want to end up with 3 or 4 per cent share”. While others tend to be overbearing and tend to get too involved in the day to day running of the startup, which ultimately might contribute to the failure of the company.

The regulatory environment is also a hindrance, particularly with regards to investing in startups.

“There needs to be new laws that are introduced specifically for startups such as shareholders' agreement as well as regulations that ease taxation and financial restrictions and facilitate procedures of registering startups,” says Khedr.

Lack of experience is one other main reason why startups fail. Generally, Egyptian entrepreneurs have low fear of failure compared to the global average in GEM, but despite the positive attitudes, most entrepreneurs report that it is a tough and stressful job with extended working hours, high risk and high level of uncertainty. About nine out of 10 startups in Mena fail but few are aware of the failure rate since much of the media focuses on the success stories, investment rounds and acquisitions.

"One of the biggest reasons why startups fail is experience. You can learn how to be an entrepreneur but not open your own business,” says Adel who founded a startup when he was still a university student and had to shut it down a year later. “You can be an intraprenuer. You can join a startup to learn more. I am not encouraging students to open their startups without experience. If you have a good idea that you think will change the market, just get some experience in your team.”

Yet, there are lessons to be learned in failure. Many entrepreneurs in Egypt who have failed learn from their mistakes and strive to start new businesses. One example is the team behind Wasla Browser, their third venture after their initial startups failed. While university graduates continue to found their own businesses in the hope of becoming their own boss and creating employment opportunities for themselves, it is the ones who are on their second or third ventures that are likely to see success and it is these founders who are contributing to the most value to Egypt’s startup ecosystem.

"The youngest people think that they will be their own decision makers, and no one will tell them what to do and so on which is actually not true. An entrepreneur is bossed by the market itself, the customers and investors," says Adel.  

 

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