Prospects for Egyptian startups

Asmaa Rifaat , Saturday 18 Sep 2021

The government has launched a number of initiatives to support startups with the goal of making Egypt a regional hub for entrepreneurship

Startups and entrepreneurship are distinctive features of the modern age. A considerable proportion of young people in Egypt today are also characterised as free-thinking digital natives, eager to venture off the beaten track and start their own businesses instead of working in the public or private sectors.

Recently, Swvl – a startup launched from Cairo and run by young Egyptian entrepreneurs – has been listed on the New York Nasdaq Exchange at a value of $1.5 billion. This news has given other entrepreneurs an impetus to move ahead and start their own businesses with the possibility of achieving similar successes. It has also raised questions about the startup ecosystem in Egypt and the challenges entrepreneurs face.

Swvl was established in Egypt in 2017 as a technology startup by three young Egyptian entrepreneurs to provide mass transit services in Egypt. As the idea found success, the company’s development strategy was updated, and it started providing its services in ten other countries including Saudi Arabia, Kenya, Pakistan, the UAE, the US and Jordan.

In 2019, the company’s headquarters were relocated to Dubai while its activity in Egypt continued. Funded by venture capital, Swvl has progressed since its inception through all rounds of funding from the seed round (company founders) to Series A (angel investors) and Series B (global venture capital funds) funding. As the expansion and growth of the company continued, it headed towards going public and getting listed on a regional or international stock exchange.

The US stock market was the best place for Swvl to list since it provides a legal umbrella enabling it to be registered on the stock market in the shape of a special purpose acquisition company (SPAC). Traditionally, a SPAC is a company with no commercial operations that is formed with the aim of raising capital through an initial public offering (IPO) for the purpose of acquiring an existing company.

Thus, Swvl announced a merger deal with a special purpose acquisition company, Queen’s Gambit Growth Capital, which was listed on Nasdaq. Swvl went public under the name of the Swvl Holdings Corporation and became the first company in the Middle East worth $1 billion to be listed on the Nasdaq and the only company providing digital mass-transit services to be listed on a stock market.   

To foster creativity and encourage innovation, the Egyptian government has launched a number of initiatives to support startups. One of these is the Central Bank of Egypt (CBE)-backed “Ruwad Al-Nil” (Nile Pioneers) launched in 2019 with the aim of supporting startups and small and medium-sized enterprises (SMEs) operating in the manufacturing, agriculture and digital-transformation sectors.

Similarly, Egypt’s General Authority for Investment and Free Zones (GAFI) has announced its “Fekratak Sharikatak” (Your Idea, Your Company) initiative that provides integrated support packages to small investors at all phases of a project’s development to maximise opportunities for global competition.

The initiative offers funding of up to LE500,000 in return for four to eight per cent of shares. Other government entities that provide business incubators include the Micro Small and Medium Enterprises Development Agency (MSMEDA), the Technology Innovation and Entrepreneurship Centre (TIEC), and the Information Technology Industry Development Agency (ITIDA).

Egypt’s geographical location is a significant factor contributing to attracting regional and global startups to operate in the Egyptian market. Examples of global companies running in Egypt include Uber (US), Careem (UAE) and UVA (UK), which provide e-hailing services, TruKKer (UAE) for logistics and transportation, Airbnb (US) operating in the real-estate and tourism sectors and Amazon-affiliate Souq, and Noon (UAE).

CHALLENGES

While Egypt’s startup ecosystem provides startups with numerous elements for success, more is needed to make available all the elements of an attractive startup ecosystem.

Startups go through a number of stages, starting from idea formulation, planning and market research, capacity building, raising funding, idea execution and product marketing. As a project continues to grow, more funding becomes needed.

While Egypt has implemented measures to improve the investment environment through introducing institutional and legislative reforms, some administrative, regulatory and financing obstacles must be addressed to make Egypt’s investment environment more appealing. With the freedom of movement of capital between countries in search of the best investment environment and the highest profits, foreign investment flows in Egypt increased from $5.4 billion in 2016-2017 to $8.4 billion in 2019-2020.

Egypt lacks a single entity that can act as a focal point for startup services. Rather, a number of agencies take this responsibility, each of which plays a specific role. These agencies include the GAFI, the Financial Regulatory Authority (FRA), the Industrial Development Authority (IDA), the CBE, the Egyptian Banking Institute (EBI), MSMEDA, TIEC of the Ministry of Communications and Information technology (MCIT) and ITIDA. The greater the number of agencies, the more difficult the investment climate is for an entrepreneur, however.

Moreover, funding should be made available for startups in their various growth stages. Startups differ from large corporations listed on the stock exchange, so there is a need to create a startup stock exchange commensurate with the special nature of startups and their valuation methods, performance indicators and growth drivers, particularly given the large number of mergers and acquisitions in the sector.

Significant examples of such acquisitions include Uber’s acquisition of Careem and Amazon’s acquisition of Souq.com. Furthermore, new financing strategies need to be introduced to make funding available for startups as they grow, on the model of SPACs which are primarily shell corporations established to acquire emerging companies and put them on the fast-track to penetrate the market and get affordable funding quickly.

In sum, the experience of Swvl shows that Egypt is a major market in the region that can enable technology startups to launch operations, grow, expand regionally and go global within a short period of time, four years in Swvl’s case. However, more efforts are needed to build an integrated, flexible ecosystem with advanced digital infrastructure, effective startup legislation, and efficient funding mechanisms paving the way for Egypt to achieve its goal of becoming a regional hub for startup entrepreneurship.

*The writer is an economic researcher at the Egyptian Centre for Strategic Studies (ECSS).

*A version of this article appears in print in the 16 September, 2021 edition of Al-Ahram Weekly

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