Egypt is emerging as an entrepreneurship hub in the MENA region, largely due to growing government support and a large tech-savvy population. In the past five years, Egypt has raised $1.5 billion in investments, demonstrating the growing confidence in its entrepreneurial ecosystem.
Recently, Egypt announced a five-year tax exemption for startups as part of the country’s wider strategy of boosting the country’s startup ecosystem. The exemption was announced during President Abdul Fattah El Sisi’s visit to Borg El Arab Technological University in Alexandria.
Earlier, Entlaq’s CEO, Mohamed Ehab, said Egypt’s entrepreneurial ecosystem is experiencing a growth of 50%, and soon, the county will be able to establish startups with foreign investments totaling $8 billion by 2030.
He also highlighted the importance of partnerships between the government, the private sector, and startups in driving entrepreneurial growth.
The exemption is part of Egypt’s wider strategy to boost the country’s ecosystem and retain talent. In May, the country passed 22 new decisions to boost investment. These decisions made it easier for companies to establish and operate in Egypt, especially a ten-day approval process when establishing a company.
Omar Saleh, Co-Founder & CEO of Khazna, says the government has launched dedicated specialized regulations, including the SME law passed in 2020, which has provided significant support to startups through multiple entities.
He refers to CBE’s program to facilitate financial access to SMEs and the establishment of specialized direct investment funds, which helped attract foreign direct investment.
“The latest CBE report says fintech attracted almost $800 million in 2022, more than ten times the amount in 2020. We hope to see banks and financial institutions more progressive and active in evaluating and financing early-stage ventures,” Saleh says.
However, economic instability heavily weighs down on entrepreneurs. Egypt’s inflation rate is predicted to rise amid the country’s huge debt.
Egypt owes $2.49 billion in short-term debt in June and $15.24 billion in the second half of 2023, including $3.86 billion in short-term debt and $11.38 billion in longer-term debt.
The IMF has increased its forecasts for Egypt’s inflation in 2023 and 2024 to 24.4% and 32%, respectively. This is up from its April projections of 21.6% and 18%.
Ali Youssef, co-founder and COO of Cairo-based startup Grinta, a digital pharmacy platform, says Egypt’s economic landscape has made things more challenging for startups.
“Economic uncertainty stemming from global recessions and financial crises has made consumers cautious, while stringent and complex regulations have increased compliance costs and red tape,” Youssef adds.
“Market saturation and the rapid pace of technological disruption have made it increasingly difficult for startups to find footing and compete effectively. Access to capital can also be more limited during economic downturns or shifts in investment trends.”
Youssef, however, believes that despite these obstacles, innovative solutions and proactive government policies can still create opportunities for new businesses to succeed and contribute to the country’s economic growth.
Aly El Shalakany, Managing Partner of Acasia Ventures, also speaks of how the macroeconomic situation in Egypt is challenging startups.
He explained that the recent devaluations of the Egyptian pound have reduced startup revenues, while high inflation and US dollar-denominated expenses have increased costs. “All of this has led to a more challenging fundraising environment for Egyptian startups,” he adds.
Will the government’s initiatives be enough for startups to succeed?
ARE THE INITIATIVES EFFECTIVE?
Co-Founder and CEO of Rabbit, Ahmad Yousry, believes the recent tax exemption decision is “a commendable step in the right direction” in nurturing the startup ecosystem; however, economic incentives would be more impactful if they’re better tailored to the needs of early-stage startups.
Yousry says startups take an average of 3-4 years to reach profitability, “meaning this incentive would only be applicable and relevant for a year or so.”
El Shalakany shares the same sentiment, saying that while these policies are welcomed and encouraged, he’s unsure of their effectiveness “considering that startups don’t usually generate profits in the first five years of their life cycle.”
While initiatives like the tax exemption can financially relieve startups and encourage entrepreneurship, Youssef says they can be tricky as their effectiveness depends on various factors.
“A balanced approach is necessary to ensure they benefit startups while contributing to public service tax revenue.”
“To assess the impact, it’s essential to consider the specific details and implementation of Egypt’s initiative and track its effects on job creation, innovation, and the economy over time,” he adds.
On the other hand, Saleh praises Egypt’s initiatives to support startups. He says these initiatives are great tools to help startups use their resources effectively to create value and drive innovation.
THE RULES ARE HARD TO PLAY BY
Economic instability is not the only hurdle that startups face in Egypt; Youssef lists other challenges that new businesses have been facing in recent years, including access to capital and funding, regulatory barriers such as navigating complex business registration, licensing, and compliance processes, inadequate digital and physical infrastructure, and cultural barriers.
“Addressing these multifaceted challenges is crucial to fostering a conducive environment for the growth of new businesses in our country,” he says.
Questioning Egypt’s rigid regulations, El Shakalany asks, “Why does a startup need an auditor? Why should a startup have to register employees at the social insurance and comply with outdated employment laws that don’t encourage a dynamic labor market? Where are the tax incentives for early-stage investors to invest?”
In August of this year, Egypt’s FRA introduced new startup evaluation rules, covering pre-profitability to post-exit stages.
The requirements include a valuation for startups to be assessed for weaknesses, strengths, governance, creditworthiness, tangible and intangible assets, and future profitability.
HOW CAN THE GOVERNMENT HELP?
El Shalakany suggests that the government should minimize regulation as far as possible until a startup graduates into a larger company.
Youssef says there are other ways Egypt can empower and nurture new businesses.
“A multifaceted approach is crucial. This approach includes simplifying regulatory processes to ease the burden of compliance, ensuring startups have access to diverse sources of funding, establishing incubators and accelerators for mentorship and resource support, and providing tax incentives to encourage research and development.”
He also highlights the importance of investing in education and training programs, enhancing digital infrastructure, and fostering international partnerships for market access.
Yousry suggests international investor roadshows to promote Egypt’s thriving tech ecosystem and a more comprehensive strategy to promote the ecosystem’s “brand” and international competitiveness.
“In addition to roadshows and economic incentives, incubation, mentoring, and functional expertise support programs have also been instrumental in growing tech startup ecosystems, especially from the APAC region,” he says.
HOW CAN STARTUPS ENSURE SUCCESS
Youssef advises aspiring entrepreneurs in Egypt to carefully plan and properly understand the local landscape through comprehensive market research to identify opportunities and potential challenges within Egypt’s unique socio-economic context.
“Craft a well-structured business plan that outlines your strategy, target audience, and financial projections. Ensuring legal and regulatory compliance is paramount, so take the time to understand the specific requirements for your industry,” Youssef adds.
Yousry says seeking feedback is essential to success; entrepreneurs should “focus on the business fundamentals and invest in a robust tech infrastructure.”
Finally, El Shalakany allays entrepreneurs’ common fears: “Entrepreneurs should not be afraid if they don’t succeed at first. It’s normal to try something and for it not to work out. Resilience is one of the key characteristics investors like to see in a founder.”
El Shalakany adds: “Despite the macroeconomic challenges, the entrepreneurial spirit is alive and strong in Egypt. The quality of people building businesses today has never been better.”
“It’s not easy to build a business because of the overall economic environment, but successful entrepreneurs always find a way to survive and thrive during the good times.”
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