Egyptian start-ups brace for funding crunch

Investors increasingly look for profitable and sustainable businesses when deciding where to put their money

Venture funding and deals hit a record high in Egypt last year, with $491 million invested across 147 transactions. Reuters

The global economic slowdown could soon put the brakes on Egypt’s booming start-up scene, with ominous signs, such as workforce cuts at Nasdaq-listed Swvl and healthcare platform Vezeeta, serving as a warning to companies and investors.

“Most of the start-ups are feeling the macroeconomic crunch right now, on multiple fronts”, GrubTech chief executive Mohamed Al Fayed tells The National.

“Valuations are a lot slimmer than they were, let’s say, six months ago. And obviously the investor sentiment is more discerning on what they invest into, and what the growth and profitability metrics look like."

Venture funding and deals hit a record high in Egypt last year, with $491 million invested across 147 transactions, according to start-up data platform Magnitt. The country ranked third in funding, after the UAE and Saudi Arabia, and second in the number of deals.

In the first half of this year, Egyptian start-ups raised about $314m, data compiled by Dubai-based venture capital firm Wamda indicated.

That is a small amount, considering the latest government estimate that Egyptian start-ups will reel in a combined $850m and others forecasting that total funding will cross the $1 billion mark in 2022.

The International Monetary Fund this week said the global economy is facing an “increasingly gloomy and uncertain outlook” and lowered its growth forecast to 3.2 per cent, citing the Russia-Ukraine war, inflationary pressures and a slowdown in China.

Start-ups are already feeling the heat. Global venture capital funding plummeted 20 per cent, 16.6 per cent and 20 per cent year-on-year in March, April and May respectively, a CrunchBase report says.

Swvl cuts sent shock waves

Cairo-born mass transport app Swvl’s announcement in May that it would cut a third of its workforce sent shock waves through the Mena start-up ecosystem.

Swvl had begun trading on the Nasdaq in March, after a Spac (special purpose acquisition company) merger with Queen’s Gambit in a $1.5bn deal.

The layoffs came as a surprise to many, as Swvl had been on a buying spree since last year, acquiring Spain’s Shotl, Argentina’s Viapool, Germany’s door2door, Turkey's Volt Lines and the UK's Zeelo.

Swvl management said it made the decision to cut headcount by 32 per cent as part of a plan to turn cash flow positive in 2023.

“We needed to make sure we get to profitability soon with the cash flow we have and not rely on external access to capital in this environment”, Swvl chief financial officer Youssef Salem tells The National.

The company expects its losses to widen to $90m this year from $50m in 2021 before turning profitable next year.

Responding to criticism about aggressive expansion, Mr Salem says Swvl is focusing on growing the profitable business-to-business revenue stream.

“These acquisitions are all in significantly higher income countries and hence significantly better profitability than the existing prospects”, he says.

“All the cutbacks have happened in the B-to-C [business-to-consumer] business, which is the business that has a much longer runway to profitability and hence the business that had to be scaled back.”

Meanwhile, Swvl’s share price has lost more than 80 per cent of its value since its debut at $10.

Mr Salem says institutional shareholders, which make up 84 per cent of the total, have all voluntarily extended a lock-up for six months "because they believe in the long-term strategy” of the company.

“On the other hand, we do have 16 per cent free float, which is more sensitive and more vulnerable to market conditions”, he says.

Feeling the pressure

Start-ups that are closer to the end of their fund-raising cycle, are feeling the pressure more than others.

Subscription-based doctor booking and consultation platform Vezeeta, which last raised $40m in series D funding in 2020, reportedly laid off 10 per cent of its 500-person staff in June. Vezeeta did not respond to a request for comment from The National.

“Most of the companies we’re hearing about are literally the top of their class, the highest achievers in the space, the companies that raised the most amount of money," says Ayman Ismail, founding director of the American University of Cairo Venture Lab and AUC Angels. "Because of that, those are probably the companies that are going to have the most pressure.

“Because they raised a lot, they’ve created a very aggressive spending pattern to grow very quickly and if you want to basically extend your runway, then you have to shrink from that aggressive pattern and that shows primarily in staff reductions that have to happen very quickly."

On the global stage, Pakistan’s most-funded start-up Airlift shut down this month, citing the “devastating impact” of the global economic downturn. The e-commerce fast-delivery service had raised $85m in a series B funding round last summer at a valuation of $275m.

Tougher second half

Due to the long lead time in the funding cycle, a slowdown will likely become more apparent in the second half of the year.

For example, business-to-business e-commerce platform Cartona closed a $12m round this month, but had started fund-raising in January.

“Of course, the market was not as bad as it is now,” Mahmoud Talaat, Cartona’s chief executive and co-founder, tells The National.

The only way to reach the projected $1bn in total funding this year would be if a substantial number of late-stage companies are able to raise additional large rounds, Mr Ismail says.

“You’re not going to hit the $1bn without several $20m, $30m, $50m investments. This is what’s going to get you there,” he says.

Holding out hope

Some start-up founders are still optimistic about growth and upbeat on funding prospects.

The UAE’s GrubTech, a platform that digitises the back-end operations of restaurants and cloud kitchens, expanded to Egypt last month and plans to invest $5m in the country.

“We foresee Egypt being a cornerstone in our growth strategy over the next 24 months, for sure,” Mr Al Fayed says.

The company plans to raise its next round of funding in the last quarter of this year and close in 2023. The goal is $20m, more than the total raised over the previous three rounds, Mr Al Fayed tells The National.

While the business has not yet reached profitability, it continues to grow 20 per cent month-on-month. More than $18m of food annually is processed through the GrubTech platform, which is used by thousands of restaurants.

Ultimately, the current economic environment will naturally weed out the weak and push start-ups to adapt, says Mr Ismail of AUC.

“Valuations are going to go down” he says. "Some companies are going to have down rounds — and this is happening today — but this is not going to be a bust.

“2023 is going to be a good year in investments, because you’re going to be investing in companies that have proved their resilience in a tough time.”