In recent years, Egypt’s startup ecosystem has been on the upswing, becoming one of the Arab world’s largest startup hubs. Over the last decade, over 280 startups have been founded.

In Startup Genome’s 2024 Global Startup Ecosystem Report, Cairo improved its ranking from 51-60 last year to 41-50 in the Emerging ecosystem category. Additionally, it secured the top spot in the Bang for Buck category among MENA ecosystems.

However, this overall positive picture does not negate the growing struggle for startups in Egypt, which continues to be weighed down by national debt and currency devaluations. The country’s economic crisis has deepened, burdened by a national debt and a persistent inflation rate of 32.5%.

Consequently, the Egyptian startup ecosystem saw a sharp downturn in the first half of 2024, with just $83 million raised by 33 startups. This represents an 80% decline year-over-year.

IMPACT ON STARTUPS

“Startups are not immune to macroeconomic impacts on specific countries,” says Philip Bahoshy, CEO and Founder of MAGNiTT. This is most evident in key areas like restricted access to funding and currency devaluation impacting revenue and costs, which also translates into different aspects like supply chain disruptions and hiring freezes, among others.”

Talking about how Egypt’s economic climate is impacting startups’ operations, Amr Kawashti, Co-Founder and Managing Partner of In Your Shoe, says the recent period has been “a rollercoaster.”

“Inflation and market uncertainty have been very challenging. The supply chain issues have been a real headache—we’ve had to scramble to find new suppliers and rework our logistics, which has cut our margins.”

Kawashti notes that currency devaluations have directly impacted the startup’s pricing strategy. While it tried to absorb as much of the increased costs as possible, it affected its bottom line.

“To cope with this, we’ve had to get creative with our pricing strategy. We’ve had to raise our prices a bit to offset the increased costs, but we’ve tried to do it in a way that doesn’t alienate our customers,” adds Kawashti. “We’ve also been looking at ways to streamline our operations and find efficiencies, like automating some of our processes.”

“It’s not easy to do, but sometimes you just have to bite the bullet to keep the business afloat.” 

FUNDING OPPORTUNITIES

The economic crisis has resulted in a decline in investor appetite in Egypt. Bahoshy notes a 55% year-on-year decrease in unique investors in 2023. However, in 2024, the number of investors in the Egyptian VC space remained nearly flat compared to the first half of 2023, mirroring trends across the MENA region. 

In 2023, investors dealing with Egypt’s macroeconomic challenges focused on deals of less than $1 million, with 43% of Egypt’s total deals in H1 2024 falling within this range. By H1 2024, there was a shift towards larger round sizes of $1 million-$5 million, in line with MENA trends.

Zeina Mandour, Venture Investments Manager at DAR Ventures, says VC funding in the region has been slowing down since 2023, and the Egyptian market is one of the most affected. She adds that this is a healthy correction for the market and attributes the slowdown in Egypt mainly due to the uncertainty surrounding the currency situation.

“This has made a lot of investors adopt a “wait-and-see” approach, as they’re concerned about their money potentially being stuck in the market or facing declining valuations, especially if the performance of companies takes a 50% hit with the devaluation.”

However, investors do not entirely avoid investments. Mandour says that many funds are mandated to invest in Egypt, which means significant capital is waiting to be deployed. However, investors are currently taking the time to reassess their investment strategies to align with the new market dynamics.

Highlighting fundraising trends in light of recent economic circumstances, Mandour says, “We’ve seen the valuation averages decreasing, including the number of transactions and average ticket size. They’re restricted by deployment periods, no matter what.”

Over the past two years, many funds reached full deployment and shifted their focus to raising capital for new funds, while others held back on investments for internal reasons. This created the appearance of a significant decline in activity.

Malek Sultan, Co-Founder and Partner at DisrupTech Ventures, cites other factors for the decline in funding. “On a global scale, the investment landscape is witnessing a massive shift from the “grow at all cost” mentality to a more sustainable path to profitability. This is primarily due to investor cash not being abundant post the covid-boom because of rising interest rates.”

Sultan emphasizes another crucial aspect — emerging markets like Egypt are maturing by observing emerging unicorns, exits, and IPOs. This evolution indicates that investor interest is now sharply focused on asset-light models executed by capable founding teams dedicated to sustainable growth.

Fintech continues to maintain its prominent position as the most funded sector. According to the latest MAGNiTT report, Egypt led Africa in deal count with 28 out of 119 total deals in the first half of 2024 and ranked third after KSA and UAE in total regional funding, amounting to $768 million.

SILVER LININGS

Sultan highlights the resilience of Egypt’s local ecosystem, with current challenges prompting well-prepared startups to explore regional market expansions as a buffer against economic shocks. This shift has created lucrative opportunities for cross-border business in markets with large customer bases and significant spending power.

He notes the increasing number of SaaS companies emerging due to supply chain disruptions. Leveraging Egypt’s talented workforce and strategic location, these startups are establishing back offices in the country while expanding into regional markets.

“This setup has enabled these companies to have an EGP cost structure and a USD revenue stream, strengthening their growth trajectories and helping them hedge multiple hurdles.”

Looking at his organization’s portfolio, Sultan highlights three notable case studies from WideBot, Khazna, and Sprint’s regional expansions during the past two years. The key lessons from these successful ventures, he says, include entering markets at a more mature stage to conserve resources while maintaining their back offices in Egypt. 

These companies also emphasize offering unique products that address essential market needs rather than wants, leveraging proprietary technology and extensive expertise. 

Lastly, they focus on addressing timely challenges through innovative solutions driven by a commitment to strategic cost reduction and maximizing revenue in hard currencies.

Mandour predicts an increase in innovative solutions tailored for the B2B sector and sectors such as real estate, industrial applications, smart cities, and sustainability—areas currently in high demand in the market.

“Because this is a new era, funding entities will be more stringent in evaluating criteria for achieving sustainable growth and profitability early. This is to ensure the viability of their operating business models from the early stages,” she adds.

Kawashti says despite all the current challenges, he sees potential startup opportunities. “With the economic uncertainty, we might have some interesting acquisition opportunities or even some strategic partnerships. And who knows, maybe this will be the push we need to innovate and find new ways to serve our customers.”

GOVERNMENT SUPPORT

Bahoshy highlights that the Egyptian government has proactively supported the VC ecosystem in recent years through various initiatives. 

In 2023, notable efforts included the introduction of initiatives such as the five-year tax exemption for startups and the silver license for startups, which aimed to simplify market entry by reducing required documents by 62% to foster investment. Additionally, establishing a permanent unit for startup policies has played a crucial role in nurturing and expanding the ecosystem.

“Moving forward, initiatives by both the government and financial institutions, similar to the previously adopted ones, can further encourage investors and better support the startup ecosystem.” 

According to Kawashti, the government could take additional measures to support startups, including providing more access to resources, whether it’s through capital, knowledge, workshops, or tax incentives. “They should also look at ways to reduce the bureaucratic hurdles that startups have to deal with. Cutting through those would make it easier for us.”