Investing in Tech Startups: The Road Ahead

1

In recent years, there has been a significant point of inflection in the Egyptian entrepreneurial ecosystem specifically in terms of increased venture capital investment, especially in the deep technology-related, early seed-stage start-ups. Nevertheless, the entrepreneurial deep technology space in Egypt is still operating at the nascent level and requires a lot more maturity. Start-up valuation, establishing proper criteria for start-up selection, and recognizing the prospects of start-up exits are all critical matters considered by investors and venture capitalists.

These are some of the key issues addressed in the first roundtable of the 2022 AUC Business Forum held on March 14, 2022, entitled “Investing in Tech Startups: The Road Ahead”. This roundtable was moderated by Ayman Ismail, Adul Latif Jameel endowed chair of entrepreneurship, founding director of AUC Venture Lab, and associate professor at AUC School of Business. The roundtable featured a diverse panel of experts in the start-up funding and investment field.

The reasoning behind the increased valuation of start-ups

As Ismail explained, many traditional business owners are dumbfounded when start-up companies with little-to-no profits and negative cash flows get valuated at much higher levels than their well-established, profitable businesses.

Chairman and Co-Founder of Sawari Ventures and Founder of Flat6Labs Ahmed Alfi illustrated his thoughts on this matter: “Investing in a well-established industrial company will never give you this level of return on investment as early stage startups. This is why valuations of start-ups are usually higher.” He added: “When one invests small amounts of capital in an early stage of a business venture, it will eventually grow to 200 or more times one’s initial capital investment. When investing at later stages of a start-up venture, one should expect to make around five to ten times one’s initial investment.”

Alfi further elaborated: “Another reason for the growth in valuations is that the talent pool that is participating as management in startups and high growth companies is tremendously stronger than it previously was.”

Basil Moftah, a general partner at Global Ventures, also shared his thoughts on this matter. “The question of valuation relates to how much return an investor expects and we [referring to venture capitalists] target incredibly high returns. Egypt is not digitized enough, therefore, a lot of opportunities in the fintech area exist,” highlighted Moftah, adding: “Digitizing processes in Egypt serves as a business opportunity with huge potential of growth and substantial returns.”

Investment analysis and criteria for the selection process of investors

Investing large sums of money into new businesses is accompanied by considerable risk. Therefore, for investors, it is important to conduct a thorough selection process when comparing investment options.

“In the selection process, we look at early product-market fit and there needs to be a good indication of that. As investors, we like companies that are solving an acute problem that is addressing the masses and a real need in the country,” explained Rafeh Saleh, founding partner at Cubit Ventures. “We need to see actual customer validation towards the business idea,” he continued.

Moftah also illustrated factors venture capitalists consider when investing in new business ventures. “It’s important to see what type of help the entrepreneur needs and whether we [referring to venture capital] have the bandwidth to take this project on and the skills and capabilities to aid the entrepreneurs in their journey. If we are not doing that, then we are setting false expectations for entrepreneurs.”

Moftah also highlighted another point, which entails the importance of considering the need for a level of profitability, not only the potential growth of start-up ventures, as some businesses continue growing without showing any signs of profitability and continue to have bad unit economics, which would be a loss for investors who injected capital into those businesses.

Amal Enan

Prospects of start-up venture exits

Many start-up founders’ main goal is to create and grow businesses to eventually cash this business venture out by selling its ownership, this is formally known as an exit. Shehab Marzban, CEO and founder of DFin Holding and Camel Ventures, discussed exit possibilities in the Egyptian entrepreneurial ecosystem. “I believe the majority of exits in the local market will come mainly from strategic acquisitions, mainly from conventional players in the Egyptian market,” said Marzban “However, very substantial exits will probably need to be more on a regional or global scale, as in these cases the local market might not be able to absorb the exits,” he added.

On a similar note, Chief Investment Officer at AUC and Founder and Managing Partner at Lotus Capital Amal Enan expressed her perspective on exit prospects. “It excites me to see the role that both local and international corporations in Egypt are starting to play in helping business ventures exit.” She reiterated: “I think corporates are increasingly starting to become good exit vehicles for businesses as they provide diverse exit avenues.”

Other topics discussed in the roundtable included the change in the deep tech space in Egypt, challenges of female entrepreneurship and sustainability-related entrepreneurial concerns. To summarize, start-ups are valued based on their reward-potentiality, several aspects must be considered by investors who choose new ventures to inject capital into and the prospect of start-up exits in Egypt has improved.

Click here to watch the full roundtable discussion.