For the second installment of our #urbaneconomies series, we look at the role of funding and policy in growing tech and non-tech entrepreneurship in Cairo, using Daniel Isenberg’s Domains of the Entrepreneurship Ecosystem as a guide.
Although the Egyptian government has long been an enthusiastic promoter of small and medium enterprises (SMEs), up until recently, financing institutions did not have a unified definition of what makes an SME. According to Haytham Waguih, Head of Private Equity (PE) at the Arab African International Bank (AAIB) and board member at the Egyptian Private Equity Association (EPEA), the absence of a single unified definition for SME has meant that investment funds and banks across Egypt often use very different parameters. Last December, the Central Bank of Egypt (CBE) released a circular re-defining small, medium and micro-enterprises – a move that Waguih lauds as key to establishing a solid foundation for funding entrepreneurs moving forward.
In January of this year, the CBE launched a program to finance 350,000 SMEs for EGP 200 billion (US $22.5 billion) over the next four years, with a declining interest rate of 5% annually, and introduced a policy that will oblige banks to commit 20% of their total loan portfolio to SMEs. But in spite of these recent policies, the government still lacks a systematic and methodical approach to address entrepreneurship, which, according to Waguih, is one of the keys to fostering a climate for the growth of the sector. “There is urgency and pragmatism in terms of developing a methodology and mechanism on the ground that are still lacking,” he notes.
According to Ayman Ismail, Assistant Professor and Abdul Latif Jameel Endowed Chair of Entrepreneurship and Director of the American University in Cairo’s Venture Lab, reform of the macroeconomic environment is key to attracting more entrepreneurs and businesses to Egypt – although he prefers a more minimalist role when it comes to government. “There are two types of interventions by the government: one is doing things themselves and the other is creating the environment to help people start doing things. I believe that the government should be a catalyst for more private accelerators and incubators by supporting them and creating a conducive environment for startups,” he says. “The biggest thing the government can do for entrepreneurs is to clear the bureaucratic hurdles. This helps all companies, but more so the younger ones that are more vulnerable.”
Entrepreneurship As Cure-All
One of the biggest challenges that those who work in the entrepreneurship support system grapple with is disentangling entrepreneurship from youth unemployment. While it is understandable that the government should want to find an easy fix for youth unemployment, which the UNDP estimates to be at 34% (the national average is 13.2%), years of positioning entrepreneurship as the solution has done more harm than good.
“The message that was sent in the first round of awareness about entrepreneurship in Egypt was that: unemployment is very high and you will not find work, so you should start your own business,” says Dalia Tadros, Executive Director of the Egyptian Private Equity Association (EPEA). Tadros explains that in the late 1990s and throughout the 2000s, the policy of entrepreneurship-as-cure-all was not uncommon, which entrenched the wrong definitions in a lot of people’s minds. This was particularly true among university students, where it became common to find “transient” entrepreneurs – including men waiting to find out if they have been drafted into the military and fresh graduates waiting to see if they would get accepted to the multinational positions that they applied to.
Ayman Ismail explains that the phenomenon of positioning entrepreneurship as the solution to unemployment is not exclusive to Egypt. He explains how countries like Spain and Greece have leveraged on entrepreneurship in an effort to combat their own youth unemployment rates, which soar as high as 40%. “In Egypt, youth unemployment ranges from 25-40%, depending on how you define it and when you measure it, so a lot of people think entrepreneurship is a way for youth to create their own jobs, when the rest of the economy is not producing enough jobs for them. But that is not a fair argument, because if the business environment is open and growing, business will come, small and big,” he says.
Last year, the WEF questioned whether entrepreneurship can potentially solve the youth unemployment crisis globally. According to the WEF’s Job Creation and Youth Entrepreneurship 2015 Survey, 47% of entrepreneurs (and 77% of world-leading entrepreneurs) plan to increase the size of their workforce, compared to 29% of large corporations, making entrepreneurship especially attractive for governments looking to alleviate unemployment.
But in spite of the enthusiasm for SMEs and entrepreneurship on the government level, reality leaves a lot to be desired for entrepreneurs in Egypt. A confusing regulatory framework and taxation system coupled with the absence of venture-friendly legislation and clear taxation regulations (not to mention the absence of bankruptcy laws) means that many entrepreneurs struggle to assess the risks associated with venturing off the beaten path.
According to Tadros, one of the biggest challenges that entrepreneurs have to deal with is the lack of clarity of tax regulations. “Every entrepreneur in any country will complain about taxes, but the reality is, you get services from the government, so you pay taxes. But are the laws clear? For me, that’s the deal breaker,” she says.
Waguih agrees, noting that many entrepreneurs avoid being transparent to evade taxes – a problem that should be addressed by making tax laws friendlier to entrepreneurs. He explains that, while legislation represents one side of the problem, entrepreneurs’ willingness to manipulate the books in order to avoid paying taxes is another side of the problem – noting that this lack of transparency makes more conventional financial institutions wary of investing.
With 40 banks operating 3,690 branches, Egypt’s banking sector is considered one of the largest and most diverse sectors in the Middle East. In spite of that, informal “angel” funds for those who operate in the informal sector are still largely reliant on pooling resources from family and friends, and limited banking penetration means that loans from merchants and more traditional self-help financial groups like gam’iyyat remain deeply entrenched. The World Bank’s 2014 Global Findex Database estimates that only 14% of the Egyptian adult population has a bank account, and it is estimated that, although less than 2% of adults have credit cards, 22% borrow money regularly from family and friends.
When it comes to the bankable population, the investment climate for entrepreneurship can hardly be isolated from the overall investment climate in Egypt, which is generally unfavorable, with Egypt ranking 131 of 189 countries in the World Bank Group’s Doing Business Ranking in 2016. In fact, the overall enabling environment in Egypt leaves much to be desired if you’re in business, and Egypt ranked 137 out of 140 countries surveyed for the WEF’s Global Competitiveness Index when it came to macroeconomic environment.
And with only a handful of venture capital firms (VCs) in Cairo – most of which were established in the past five to ten years – it is no wonder that entrepreneurs of all stripes are often at a loss when it comes to raising funds. According to Waguih, since so many VC fund managers are educated or have worked abroad, they often bring a more globally-oriented investment mentality to the table; and since the global investment climate is largely geared towards tech, that is where the majority of local VCs put their money. He explains that, although PE funds like AAIB’s are not necessarily averse to investing in ICT enterprises (which they currently lack the infrastructure to do), most of their current investments are in food and beverage and financial services sectors.
Mohamed El Sawy, Owner of The Courtyard and CEO of Misr Contracting Company, notes that a general culture of risk-aversion is one of the major challenges to the development of the ecosystem around entrepreneurship. “It’s very difficult for any startup to convince any businessman that they have a winning idea, because we have no data and we have no research – we have nothing to base it on,” he says. “In order for anyone to invest in a business here in Egypt, we require them to prove that their business works, as opposed to VCs abroad, which just want a proof of concept.”
Financial consultant and serial entrepreneur Neveen El-Tahri has established upwards of five companies in the financial services sector over the past 20 years. Two years ago, El-Tahri established Delta Inspire and 138 Pyramids – an investment management firm and VC fund, respectively. 138 Pyramids, which manages a fund of EGP 70 million, has already invested in five companies, covering industries like fashion and apparel to education and tech. She explains that, while the fund is open to tech applicants, they are more interested in brick and mortar companies, partially because they are keen to invest in companies that create jobs, but also because other VCs target tech. “We’re playing a more developmental role – which is not to say that we are not money oriented, but we focus on companies that can create jobs,” she explains.
According to El-Tahri, the current economic climate naturally makes investors risk-averse. “If you have a risk-free tool to put your money in the bank and get 11-12% [return on government bonds], why would you throw my money into something that you’re not sure will bring you a return?” she asks. She explains that, for investors to make that leap of faith, they have to be fully convinced that putting money in a VC will reap a bigger return, and they have to want to be part of the VC ecosystem.
Chief Investment Officer (CIO) at Flat6Labs and Investment Manager at Sawari Ventures Dina ElShenoufy explains that, although Flat6Labs began purely as an ICT incubator, it has expanded into more tech-enabled, innovation-driven industries over the past five years. According to her, the financial support infrastructure for tech and non-tech SMEs becomes apparent once companies are past the first round of funding. “Non-tech entrepreneurs don’t have the VCs to support them when they’re past the first round of seed funding,” she says. And while non-tech startups can raise money from angel investors, they rarely fit the bill of VCs looking to invest in tech – yet they are too small for PEs. “It’s much easier to sell a successful company to a VC than to sell a non-tech company to a VC,” she adds.
And while tech entrepreneurs can often access funding through a variety of channels – including angel investors, seed funding and VCs in early stages – they have fewer resources once they graduate and must rely on more traditional tools like debt and credit. Conversely, while non-tech SMEs may find it more difficult to raise money at the early stages, the familiarity of their business to risk-averse bankers and investors means that they have more potential funding sources at later stages.
Entrepreneur, investor and co-founder of RiseUp Egypt Con O’Donnell explains that, in addition to a low risk appetite, having only a handful of local investors has meant that investors are spoiled for choice – although that may be changing. “The good news is that you’re no longer limited to Egypt. You can get money from Silicon Valley investors, and they give you lots of resources, so you’re no longer tied to what’s available here, but most people don’t realize that yet,” says O’Donnell. He notes that the opening up of the market “…will force local VCs to roll up their sleeves and get dirty with the startups and pull in their contacts, which they haven’t traditionally done.”
But it’s not just Silicon Valley investors that tech entrepreneurs can look to; investors from the region are keeping an eye on Egypt as well. Last year, online recruitment platform Wuzzuf raised US $1.7 million from Sweden-based Vostok New Ventures and UK-based Piton Capital, while price comparison site Yaoota raised US $2.7 million from the UAE’s KBBO, which, according to Tadros, is part of a growing trend of high net worth families in the Gulf looking to diversify their portfolios with smaller investments.
On the other hand, Wael Amin, founder of ITWORX and partner at VC firm Sawiri Ventures, laments the lack of funds as investors’ biggest challenge. “If we double the amount of capital that we have in the current ecosystem 2-3-4 times, it is still not enough for the amount of opportunity in this city. Because there is such a big gap, we don’t even consider other VCs competitors at this point – we just need everyone to work together. And because money is so scarce, the bar that you need to reach to become investable is very high, and entrepreneurs react to that, so they become less ambitious. So it’s not just a matter of having a lot of ideas and little money, but if you had more money, you would have more ideas,” he explains.
In the next installment of the #urbaneconomies series, we look at how culture and support structures impact tech and non-tech entrepreneurs.
The #urbaneconomies Cairo series is commissioned by district coworking space.
District pioneered the MENA coworking concept in 2011, building a vibrant community to support change-making entrepreneurs. By combining the right people with substantial knowledge and creating inspirational spaces, District continues to build coworking communities across MENA.