Egypt’s tech sector battles to deepen growth
SOURCE: African Business
Egypt is fast becoming a tech powerhouse but its startups are facing challenges in the areas of funding and the retention of talent. Tom Collins examines the issues.
Since Egypt emerged from its second revolution in 2013 its tech sector has grown rapidly. According to a recent report by the GSMA Accelerator programme and Briter Bridges, the country now has 56 active tech hubs – organisations offering facilities and support for tech and digital entrepreneurs – surpassing the number in Kenya and putting it in third place on the continent after Nigeria and South Africa.
Boasting a host of incubators and accelerators, decent access to venture capital funds, a vibrant ecosystem and good quality higher education facilities, Egypt could become a tech powerhouse. Yet as the sector expands, it faces various challenges relating to the breadth and depth of growth.
Swvl, an Egyptian ride-hailing firm, raised $42m in June through a Series B-2 round led by a host of venture capital firms including Sweden’s Vostok, Dubai-based BECO Capital, China’s MSA and Endeavor Catalyst, based in New York. The 26-year-old founder and CEO, Mostafa Kandil, said the funds will be used for expansion into two or three African markets by the end of the year including Kenya and Nigeria.
This was the largest-ever funding round for an Egyptian startup. In 2018, Vezeeta, a healthcare startup active in the Middle East and North Africa, raised Egypt’s second largest amount: $12m in a Series C round from Saudi Arabia’s STV Capital. Yet aside from these two rounds, the ticket sizes are relatively small. Wuzzuf, a talent and management platform, raised the third largest amount at $6m in a Series B round last year.
Out of the 73 startups which have raised $1m or more on the continent this year, only six are from Egypt, Swvl included. Khaled Ismail, managing partner for HIMangel, a Cairo-based seed fund for early stage investments, believes there are a number of gaps in Egypt’s funding pipeline. While there are a number of domestic venture capital funds like Algebra Ventures and Egypt Ventures – as well as international funds like RAED Ventures and Arzan Venture Capital – not one institution, local or foreign, caters for the more mature startups looking to raise Series C funding.
“Egyptian companies cannot get the next five to ten million dollar cheque,” he says. “We need somebody who can build a fund which is Series C and above. A growth fund. Nobody has done that.”
Swvl and Veezeta raised money outside Egypt, drawing from diverse pools of international capital. Those rounds will transform both companies into bigger players who can compete across Africa and beyond. Most Egyptian startups don’t have access to that kind of capital.
There is also a missing rung on the funding ladder during the early seed stages. Egypt is home to numerous incubators and accelerators like Flat6Labs and AUC Venture Lab. These institutions, along with friends and family, represent the very first stage of funding. They provide startups with five-digit injections of cash which help launch the companies.
Thanks to a number of organisations operating in this space, Egypt graduates around 200 startups every year. Yet after the initial birth of the company, Ismail believes there is a lack of early-stage funding that caters for figures of between $100,000 and $500,000. HIMangel has invested in 22 startups with ticket sizes averaging $170,000. This second stage in the pipeline comes just before Series A, which raises figures of between $2m and $15m – a sum that would swamp most early-stage startups.
To bridge the gap, HIMangel has entered into a syndicate with angel groups Alex Angels, Cairo Angel and AUC Angels. By combining funds, the group hopes to provide solutions for companies in the earlier growth stages. Ismail himself sees $12bn to $15bn worth of opportunity in the waste management sector and $10bn worth of opportunity in the health sector, two avenues of interest which have come to define HIMangel.
Along with funding issues, Egyptian tech also faces problems in attracting and retaining talent.
In 2016, the country took a $12bn IMF loan in exchange for pushing through a tough reform programme that included floating the currency and cutting subsidies. Though the programme is widely credited with stimulating economic growth and attracting large amounts of investment, the devaluation of the currency has created problems for domestic employers.
The Egyptian pound has fallen from 8.8 per dollar to around 16 per dollar. The cost of paying an internationally attractive salary has therefore almost doubled for domestic companies, leaving many unable to compete with foreign companies and countries able to pay higher salaries.
“Most of the startups today are suffering from the superinflation of salaries for developers in Egyptian pounds,” Ismail says.
Egypt currently loses most of its talented graduates to Germany following changes to German immigration laws which make it easier for foreigners to settle and work there, he adds.
Egypt’s large pool of talented developers has made it a target for international companies seeking talent. Foreign companies that work in Egypt but pay in dollars also take much of the country’s top talent.
Yet apart from the devaluation causing talent headaches for employers, the positive macroeconomic environment ushered in by the reforms has paved the way for promising growth in the technology sector as a whole. Ismail says that while the reforms brought “mixed blessings”, Egyptian tech companies will begin to feature more prominently in the sub-Saharan region as the sector’s growth pushes startups to search for new markets.
Swvl is the prime example of this move southwards and it may be just the beginning. Halan, an Egyptian ride-sharing app for motorbikes, has just announced it will begin operations in Ethiopia to build on its presence in Sudan.
Contrary to those who believe that Egypt’s Gulf neighbours are natural markets for expansion thanks to the geographical and cultural proximity, Ismail argues that Africa makes more economic sense.
“The Gulf is very different in terms of market size, segmentation and needs,” he says. “I see more similarities than differences with places like Nigeria and Ethiopia.”