Why Capiter’s fall from grace is a wake-up call to Egyptian start-ups

The B2B e-commerce company’s co-founders were removed by the board after they failed to ‘fulfill their fiduciary duties’

Capiter's co-founders chief operating officer Ahmed Nouh (left) and chief executive Mahmoud Nouh. Photo: Capiter Twitter

E-commerce platform Capiter's fall from grace has shaken up Egyptian start-ups, serving as a warning they need to better prepare for a downturn and manage the “growth at all costs” mindset, industry insiders said.

"The reality of the situation is that there are other start-ups that are not in a perfect position right now. And they're having to make difficult decisions," Aly El Shalakany, chief executive of Cairo Angels Syndicate Fund, told The National.

The board of the well-funded platform, which raised $33 million from investors just a year ago, removed co-founders Mahmoud and Ahmed Nouh last week after they failed to turn up at due diligence meetings for a potential merger.

“This action follows the co-founders’ inability to fulfill their fiduciary duties over the past week,” the board said in a statement on Friday.

The board has since appointed Majid El Ghazouli, Capiter's chief financial officer, to act as interim chief executive “until the Nouh brothers return and allay the concerns of employees, suppliers, creditors and stakeholders”.

Meanwhile, social media has exploded with allegations of financial impropriety and rumours that the founders allegedly escaped with the $33m.

“The board and shareholders are not at liberty to comment on the news or allegations circulating the social media for the time being,” Abu Dhabi-based investor Shorooq told The National.

"The board and shareholders are also working closely with relevant stakeholders, legal and HR teams, as well as the legal authorities, for an external finding on this matter."

Former chief executive Mahmoud Nouh defended himself and chief operating officer Ahmed on popular Egyptian TV show El Hekaya on Saturday.

He said they received no official notice from the board about being removed from their positions. He also said he and his brother had attended board meetings virtually from Dubai, where the company has an office.

Mr Nouh acknowledged that Capiter has faced financial struggles over the past five months, “like many other companies”, blaming the situation on the Russia-Ukraine crisis.

The $33m was raised by the start-up over a period of 18 months and was spent on expansion, he said, denying allegations they fled with the cash and stating that “money was very limited”.

Capiter failed to pay salaries on time earlier this month, sparking the initial controversy. Mr Nouh said about 60 per cent to 70 per cent of salaries were paid and the rest were supposed to be paid on September 5.

He apologised to the 30 per cent of Capiter’s 2,000 employees who were affected, saying that they “are trying to reach a solution with the board members”.

“Everybody is doing their best to rescue the company,” he added.

Interim chief executive Mr El Ghazouli told Egyptian TV show Al Hadath Al Youm on Sunday that Capiter was dealing with financial troubles, but that the board of directors had not formally decided to liquidate the company.

He said they were exploring acquisition offers. In response to allegations of financial impropriety against the company’s founders, he added: “The law will take its own course.”

What is Capiter?

Founded in July 2020, Capiter is a marketplace that connects retailers and wholesalers in the food and beverage, fast-moving consumer goods and electronics industries.

Small and medium enterprises can order products, arrange delivery and access embedded finance, such as buy-now-pay-later, through the app.

Before starting Capiter, Mahmoud Nouh was a co-founder and chief operating officer at mass transport app Swvl between 2016 and 2020.

The company has raised around $66m in total, according to CrunchBase. Its investors include Accion Venture Lab, Derayah Ventures, Foundation Ventures, MSA Capital, Savola, Shorooq Partners and Quona Capital.

When the start-up closed its $33m funding round in September 2021, it claimed to have 50,000 merchants and 1,000 sellers with more than 6,000 stock-keeping units on its platform.

The macroeconomic picture

Capiter’s turn for the worse is not unexpected in the current economic environment, as global venture capital funding has plummeted and public markets have dipped.

Venture capital funding dropped by about 15 per cent to 20 per cent in the first five months of this year, a CrunchBase report says, and US stocks recorded their worst first half in more than 50 years.

Start-ups in the Middle East and North Africa raised $2.2 billion between January and August, a 29 per cent increase from the $1.7bn recorded during the same period last year, according to Wamda Capital. Egyptian start-ups raised close to $370m during that period.

However, “the lingering uncertainty in market conditions has largely dented the ability of growth stage companies to raise new rounds of equity” in the Mena region, the Dubai-based venture capital firm said last month.

“The macroeconomic picture in Egypt and many other emerging and frontier markets is very difficult right now,” Mr El Shalakany said.

“Start-ups don’t operate in a vacuum. They need to sell products."

The challenge for start-ups is to manage cash flow and avoid mass layoffs. Other Egyptian start-ups, including Nasdaq-listed Swvl, which let go a third of its workforce in May, have been criticised for aggressive expansion at all costs.

“A lot of these startups have come out of a period, where they were basically told ‘grow at all costs’. The general sentiment was that financial discipline and the route to profitability is a secondary or tertiary consideration,” Mr El Shalakany said.

But the mood has changed, he said, with founders being told to extend their runway and look at raising funds every 18 to 24 months, rather than every six to 12 months.

Asset managers are being more selective with their investments, giving an implicit message that “tech valuations were unsustainable and unrealistic”.

Layoffs elsewhere

The situation at Capiter has shone a spotlight on other struggling Egyptian start-ups that have let go of employees, some who say they were not given any advance warning and not paid their full salaries.

ExpandCart, an e-commerce platform that helps businesses and individuals create their own online stores to display products and accept orders, reportedly cut 90 per cent of its staff over the summer.

Two former ExpandCart employees told The National that at least 200 to 250 people were let go due to the start-up’s financial troubles.

Aladdin Badran, who was hired at ExpandCart as an enterprise solutions consultant in February and made redundant in July, blamed the lack of a “proper crisis management plan” for the worst-case scenario.

ExpandCart did not respond to a request for comment from The National.

Food delivery app elmenus cut a more modest 15 per cent of staff in June, mainly in customer support and operations, chief executive Amir Allam told The National.

“That put us back on track and we adjusted our projections accordingly at the time,” he said.

The sentiment in tech start-ups has shifted to target profitability, rather than "growth at all costs", he added.

Commenting on Capiter, he said, “This is going to keep happening. This is a normal part of start-ups. I don’t think we should make failures seem like doomsday. We should all learn from each other and grow and improve.”

Capiter a lesson for others

Capiter may still survive and "is not yet dead in the water", Mr El Shalakany said.

"There is still an opportunity to turn it around, like many other start-ups have done — Uber being one of them, for example."

Barring fraud or criminal activity, the founders should not be vilified and the focus for other start-ups and boards should be on ensuring governance so that there is “no single point of failure”, Mr El Shalakany said.

Ayman Ismail, founding director of the American University of Cairo Venture Lab and AUC Angels, echoed that view.

“Building scalable start-ups is a risky business and many of them fail, including well-funded ones,” Mr Ismail said. "We need to learn how to wind them down in an orderly way that protects all stakeholders: founders, employees, suppliers and investors."