Egyptian startups: the need to localize

My journey as a mentor for Egyptian and Arab startup companies began some four years ago when an American Silicon Valley CEO friend of mine called me to say he had had a visit from Flat6Labs and was impressed with the spirit the young Egyptian entrepreneurs showed. He suggested that, as an Egyptian-American entrepreneur, I might be better able to help. Falt6Labs is a Cairo-based regional program that offers initial seed-investment, mentoring and support for bright and passionate entrepreneurs with cutting-edge ideas. An intro to Flat6 was made and I became one of the volunteer mentors for their startups. For each of the companies, mentoring was through face-to-face meetings during my visits to Cairo, in addition to monthly Skype calls and other ad-hoc communications.

The companies I mentored were in diverse fields: cinema production, publishing, marketing, mobile advertising and privacy technology, and also applied technologies. Mentoring gave me the opportunity to know a side of Egypt that I had not seen when I left in 1980. I formed lasting friendships with my mentees. Just as January 25, 2011 was a new awakening for many beautiful things in Egypt, this other aspect of Egypt was similar: a new awakening of latent talents with young entrepreneurs full of creativity, drive, perseverance and commitment to succeed.

In the fall of 2014, I attended an event in Cairo focused on startups, where a speaker from Cairo Angels talked about their role in supporting the ecosystem. Ecosystem is a term used for the overall environment for startups. An ecosystem mirrors the availability of entrepreneurs willing to leave corporate careers and pursue their own projects, investors who would support such entrepreneurs, employees wanting to work in startup environments, customers willing to try new products and services from new companies and the rules and laws regulating the set-up and investment of companies.

I approached the Cairo Angels speaker and later became a member. I don’t really like the word “angel” for early-stage investor, because it has connotations of selfless help, which of course is not the case. This is very much an investment for profit, not a charity, nor is it a social deed. Cairo Angels invests anywhere between LE500,000 and LE1.5 million per startup, with each investor investing between LE50,000 and LE200,000 on an individual standalone basis. It is a network, or a club, not a fund or a company.

Following the latest RiseUp Egypt Summit held earlier in December 2015, and after nearly a year with Cairo Angels, I am full of excitement and optimism for the development of the environment for startups in Egypt and the Middle East in general. I have a couple of remarks on the Egyptian startup scene, however, which I would like to highlight here.

Proficiency in foreign languages is for sure one of the assets of many Egyptian entrepreneurs. Language can, however, be a barrier in accessing and raising awareness of the Egyptian startup scene. It is true that the English language dominates the culture of startups; words like “startup”, “angel”, “VC”, “exit”, etc. are commonly used among startup communities wherever they are in the world. I’m also clearly aware of the impracticality of offering instantaneous interpretation for an event on the scale of RiseUp, but it is odd to be in a room full of Egyptians, Jordanians, Lebanese and Saudis, and find they are all speaking in English. The total lack of Arabic in a summit held in Cairo strikes me as rather odd. Perhaps the organizers would consider holding some of the sessions in colloquial Arabic in future years?

I attended a session at Cairo Angels at which the entrepreneur building anArabic language self-publishing platform (Kotobna) presented his company in Arabic. One day later, I heard the same guy give the same exact presentation in English at RiseUp. His English was excellent, but when speaking naturally in colloquial Egyptian Arabic, he came across far more passionate and engaging.

Egypt 2015 is not Silicon Valley 2015, and Silicon Valley 2015 is not the same as it was 30 or 40 years ago. The challenges and the pace are very different and the regulatory framework is very different. While American startups have established their own Silicon Valley jargon for various rounds of investments (seed, angel, series A, B and C, etc.), it is rather odd to find the Cairo startup scene repeating these labels while being clueless of their context.

Additionally, the number of venture-capital firms (or VC’s) operating in the region remains limited. VC’s are firms that are willing to invest in high-risk business for higher return. The political and operational instability makes it critical, however, for companies in Egypt to strive towards cash-flow-positive status (generating more cash than you are spending) rather rapidly. After all, Egyptian CEO’s face prison terms if they fail to satisfy certain financial obligations, since bankruptcy legislation is lacking. Bankruptcy laws offer the needed mechanism for regulating what is essentially a high-risk business.

It is no secret that most startups do indeed fail. If failure means that entrepreneurs end up in prison with their careers destroyed, then no one will dare shun a stable corporate career to start a new business. With the number of backlogged cases in the millions and rising, courts take long years to rule on cases. While a California startup may never think in terms of dividends as a goal, only aiming to get acquired for large sums of money, Egyptian startups may have to think about sustainable profitability as an end-goal in itself. The startup scenes in countries like France, Germany, Austria and Switzerland are also different from that of the USA; we have to find our own way that addresses Egypt’s own circumstances.

Moving on to the issue of valuation, or estimating the financial worth or value of a startup project, I find that many Egyptian entrepreneurs are either completely unaware of the topic or have been seriously misled with unrealistically high expectations. Discount Cash Flow (DCF) is a financial formula used to calculate the present worth or value of future cash returns. Some entrepreneurs talk about DCF, but this is not enough.

Inflated expectations of rapid success are way too common, while competitive reactions are also often totally ignored in future projections. Perhaps most surprising is the interest rate, or Discount Rate, which many entrepreneurs preparing DCF models use. The higher the Discount Rate, the lower the valuation; the discount rate encompasses the levels of risk associated with the currency and economy at large. Many in Egypt assume a 10% Discount Rate, whereas the currency devaluation alone represents a risk of around 25 percent. And then there are other economic factors, such as currency controls and tax-law uncertainties. I thus do not necessarily advocate DCF as the only, or even the preferred, way for valuing startups.

In the early stages of the formation of the Egyptian startup ecosystem, a few deals were done with excessive valuation. This has created a “Spoiler Effect”, whereby an overpriced deal spoils the ecosystem and causes stagnation. Entrepreneurs continued to measure their self-worth against overpriced and failed deals, and investors were too wary to engage. Not until a total reset is done on valuation expectations will the ecosystem truly function and flourish. Valuations are notoriously difficult: investors are looking to make money, not feed the egos of entrepreneurs who focus on getting as good a deal as someone else. It is all about creating a win-win culture. 

It is natural for the Egyptian or Middle Eastern ecosystem to be heavily influenced by the pioneers of startups in California, for much of the culture originated there. Egypt does change and will change, but it is not California, it will never be and it need not be. The pioneers of startup in Egypt did an amazing job and risked large amounts of money and committed great resources to this beautiful vision.

Seeing young people with the empowerment that is only possible in this environment is heartwarming and exciting. Ultimately, in order for startups to thrive in Egypt, it will need to forge its own style, its very own Egyptian ecosystem.

(This article first appeared at Mada Masr )