Startups and entrepreneurship are distinctive features of the modern age. A considerable proportion of youth are characterized by free-thinking, being digital natives, taking off the beaten track, and starting their own businesses instead of working in the public or private sectors.
The economic climate that prevailed in the aftermath of the 25 January Revolution contributed to the development of entrepreneurship in Egypt. The economic downturn, declining investments, and fall of employment rates led the ambitious youth to start thinking of launching their own enterprises, harnessing technology in developing software and electronic applications to offer services that are in demand.
Recently, Swvl – a startup launched from Cairo and run by young Egyptian entrepreneurs – has been listed on NASDAQ at a value of $1.5 billion. This news has given entrepreneurs an impetus to move ahead and start their own businesses with the possibility of achieving similar successes but, alternatively, raised questions about the status of the startup ecosystem in Egypt and the challenges entrepreneurs face. This article analyzes the startup ecosystem in Egypt.
Swvl from Inception to NASDAQ
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 the company started providing its services in other ten countries including Saudi Arabia, Kenya, Pakistan, the United Arab Emirates, the United States, and Jordan. In 2019, the company’s headquarter was 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). 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 since it provides a legal umbrella that would enable it to be registered in the stock market, i.e. special purpose acquisition companies (SPACs). Traditionally, an 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, a special purpose acquisition company listed on NASDAQ. Thus, Swvl went public under the name Swvl Holdings Corp., to become the first $1 billion worth company in the Middle East to be listed on NASDAQ and the only company providing digital mass-transit services to be listed on a stock market.
Viability of Startups in Egypt
Startups are primarily focused on unique entrepreneurial ideas that put forward innovative solutions which can turn into effective goods and services that meet needs of the people. Egypt – a young nation by population – has a broad base of talented, ambitious, and innovative youth. To foster creativity and encourage innovation, the Egyptian government launched a number of initiatives to support youth. One of these initiatives is the CBE-backed “Rūwād Al-Nīl” [Nile Pioneers] launched in 2019 with the aim of supporting startups and small and medium enterprises (SMEs) operating in the manufacturing, agriculture, and digital transformation sectors.
Similarly, Egypt’s General Authority for Investment and Free Zones (GAFI) announced “Fekratak Sharīkatak” [Your Idea, Your Company] initiative that provides integrated support packages to small investors at all phases of their projects’ development to maximize their opportunities for global competition. The initiative provides a number of funding tools, business incubators, business accelerators, company registration services, and commercial, legal, and technical assistance services. The initiative targets Egyptian citizens, or Egyptian youth in particular, who have innovative ideas that can be turned into effective services and products. The initiative’s beneficiaries would receive seed funding, technical assistance, and a workspace for project management and would become shareholders. The initiative offer funding up to EGP 500,000 in return for 4-8 percent of shares. Other government entities that provide business incubators include the Micro Small and Medium Enterprises Development Agency (MSMEDA), the Technology Innovation and Entrepreneurship Center (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), UVA (UK) which provides e-hailing services, TruKKer (UAE) for Logistics and Transportation, Airbnb (US) operating in the real estate and tourism sectors, Amazon-affiliate Souq, and Noon (UAE). According to MAGNiTT’s latest report, in the Middle East, Egypt ranks second after the UAE in terms of the number of deals concluded in 2020. A report from AfricaArena indicated that Egypt ranks first in terms of the number of deals concluded in 2020, and the third in Africa and the Middle East in terms of the value of deals concluded at a value of $200-270 million.
Challenges Facing Startups in Egypt
While Egypt’s startup ecosystem provides startups with numerous elements of success, more is needed to make available all elements of an attractive startup ecosystem. As far as Egypt’s entrepreneurial ecosystem is concerned, Cairo ranks 51 in the Global Startup Ecosystem Index, while the United Arab Emirates managed to be ranked amongst the world’s top 20 startup ecosystems. Swvl’s experience makes it clear the startup ecosystem gap between countries in which startups are launched and countries in which they operate.
Through their development, 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 the project continues to grow and succeed, more funding becomes needed. Different mechanisms are used to support emerging companies throughout these stages, ranging from capacity building, providing education and training services, funding, market research, and technology infrastructure, streamlining the regulatory and legislative requirements for companies’ establishment at a reduced cost, confronting monopoly prevailing in some sectors, enacting laws, regulations and investment policies suited to the nature of emerging companies. While the Egyptian state has implemented many measures to improve the investment environment through introducing institutional and legislative reforms, some administrative, regulatory, and financing obstacles must be immediately 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.
Moreover, Egypt lacks a one single entity that acts as a focal point for providing startup services. Rather, a number of agencies take over 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 Central Bank of Egypt (CBE), the Egyptian Banking Institute (EBI), MSMEDA, TIEC of the Ministry of Communications and Information Technology (MCIT), and ITIDA. The more these agencies are, the more difficult the investment climate is for an entrepreneur. This requires that a single point of contact (SPOC) for startups be established for entrepreneurs to approach throughout the various stages of the company’s growth. This SPOC shall be responsible for developing a strategy for startups, contributing to ensuring clarity and ease of procedures, reducing costs, identifying strengths and challenges of the startup ecosystem, and addressing them.
Moreover, funding should be made available for startups in their various growth stages. Startups are unique in their nature and differ from large corporations listed on the stock exchange or SMEs listed on NILEX; so, there is a need to create a startup stock exchange that are commensurate with the special nature of the startups, their valuation methods, performance indicators, and growth drivers particularly given the large number of mergers and acquisitions of startups. Significant examples of these acquisitions include Uber’s acquisition of Kareem and Amazon’s acquisition of Souq.com. Further, 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 with the purpose of acquiring emerging companies putting them on fast-track to penetrate into the market and get affordable funding quickly.
Realizing the importance of developing the digital infrastructure being a fundamental element for attracting investments in general and startups in particular, the government put in considerable effort to make the digital transformation and develop flexible and secure digital infrastructure. However, there is still a need for further investments in the communications infrastructure to increase absorptive capacity, data transmission speed, and security.
In sum, Swvl’s case 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, i.e. four years in Swvl’s case. However, more efforts are needed to have 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 startups and entrepreneurship.