Egyptian start-up and small business environment improving

Entrepreneurship is often – and rightly – lauded as a key component of dynamic economies. Innovation, enabled by ready access to capital and a permissive regulatory environment, can help drive corporate growth, exports, private sector activity and jobs – all of which are needed in Egypt. Small and medium-sized enterprises (SMEs) comprise a large portion of Egypt’s economic activity, contributing roughly 65-75% to employment and 80% to GDP by some estimates. Meanwhile, large government projects like the Suez Canal Corridor will create jobs for Egyptians. Still, establishing an environment in which locals are able to create their own job opportunities has become a strategic priority for the government, and the topic of entrepreneurship is a regular feature in conferences on Egypt’s economic future.

Challenges

While self-starters are not in short supply in Egypt – the large informal sector, which by some estimates accounts for roughly 30-40% of the economy, is testament to that – establishing a new business and growing it to its full potential can be a challenging undertaking in the current environment.

Egypt’s legal framework, which includes patchy contract enforcement, represents a significant barrier to market entry and discourages informal enterprises from formalising. According to the World Bank’s “Doing Business” 2016 report, Egypt was ranked 155th out of 188 economies, with resolving a dispute taking more than 1000 days. Access to capital is another hurdle. Banks have historically been reluctant to extend credit to start-ups and SMEs, preferring the high-yield, big-ticket deals on offer in the corporate segment (see Banking chapter), while non-banking financing mechanisms, such as venture capital, private equity and crowd funding, have only recently begun to emerge in the Egyptian market.

However, recent years have seen a combination of government effort and private sector interest start to bear fruit in the form of an increasingly deep entrepreneurial ecosystem. In the “Doing Business” 2016 report Egypt was ranked among the best-performing countries in the MENA region in terms of starting businesses, with eight days to register a company, compared to 40 days 10 years ago.

Government First

As with most emerging economies, governmental bodies played the leading role in the early stages of this process. The Social Fund for Development (SFD), formed in 1991, has been particularly active, following a wide remit that incorporates community-level initiatives, mobilising national and international resources, and working with governmental bodies, non-governmental organisations and private sector groups to provide employment opportunities. Legislation passed in 2004 gave it an explicit mandate to support SMEs in terms of access to finance, licensing and similar matters, and established it as the principal coordinating agency for the sector. In 2015 the fund announced that it had allocated $15m from a $300m World-Bank-led loan to finance entrepreneurship projects.

Support has come from other donors as well. The European Bank for Reconstruction and Development launched its “Supporting Women in Business” programme in partnership with the SFD in 2013, and by early 2015 had implemented 47 advisory service projects. The German Federal Foreign Office is funding a mentoring programme being undertaken in Egypt by Enpact, a non-governmental organisation founded in 2013 that is attempting to foster entrepreneurial relationships in and between Egypt, Australia, Germany, Jordan, Morocco, Switzerland and Tunisia. The same year saw the creation of the Egyptian-American Enterprise Fund, a $60m facility backed by the US Treasury Department which invests in start-ups and SMEs, with any profits being evenly split between the US and Egypt upon the fund’s dissolution.

Increasing Awareness

While the sums involved in each of these separate efforts are relatively modest, together they have done much to raise the profile of entrepreneurship among the population. Adding to the momentum is the prominence of the topic within the educational system, which until recently has had scant regard for providing course curriculum on the risk-taking and innovative thinking required for business development. The American University in Cairo (AUC) was one of the first to recognise entrepreneurship, introducing the Entrepreneurship and Innovation Programme (EIP) in 2010. Likewise, one of the aims of the Business Administration Programme run by The British University in Egypt is to give students an understanding of entrepreneurship and its sustainability in varied political climates.

Private Sector

Educational institutions continue to play a leading role in the entrepreneurship universe, and in the form of projects such as the AUC Venture Lab – a start-up accelerator and incubator launched 2013 – have moved beyond the theoretical to the practical. The AUC also helped to create Flat6 Labs, in partnership with Sawari Ventures, which now operates out of Cairo, Jeddah and Abu Dhabi, offering selected start-ups $10,000-15,000 in seed funding in exchange for minor equity in the company. As well as the financial boost, young companies accepted into the programme are also granted four months of mentorship in areas such as logistics and attracting the interest of investors, training by industry experts, legal support, office space, networking opportunities and benefits arising from sponsors such as Microsoft, PayPal and Amazon Web Services.

This injection of private sector capital and know-how into the arena is perhaps the most exciting development in recent years, and the increasing number of incubators and angel investors setting up shop in Egypt is testament to the nation’s entrepreneurial potential. Other start-up and venture capital players include Ideavelopers, which has a regional scope through its Technology Development Fund; the Cairo Angel Network, an integrated platform for professional angel investors; the incubators and services offered by Smart Village, a business park on the western fringes of Cairo; and Innoventures, which provides funding and incubation services to seed stage start-ups, with a focus on ICT, electronics, media, market intelligence and inclusive businesses.

New Models

As momentum builds in the start-up arena, the range of funding mechanisms continues to diversify. A recent, and promising, trend is the emergence of crowdfunding platforms that provide a direct channel between individual investors and promising enterprises. In some cases these platforms have sought to reach out beyond the traditional investment community, such as the attempt by Tennra to make investing fun through “gamification”. Launched in 2015, the initiative combines a Kick-starter-like model with gaming, where donors “play and pledge” money to specific projects, sharing their scores on social media. Players receive perks from Tennra in the form of coffee vouchers and discount cards, while entrepreneurs are charged 7% of the total funds raised via the platform.

More traditional crowdfunding models are deployed in the Egyptian market by Zoomal, which bills itself as the first crowdfunding platform in the Arab world and is backed by four of the region’s largest venture capital organisations (Middle East Venture Partners, Wamda, N2V and Sawari Ventures); Shekra, which has chosen to crowdfund through a closed network of investors to ensure their “seriousness and reliability”; and Bassita, which deploys a “click-funding” model that focuses on social and environmental causes. The variety of private sector approaches to entrepreneurship is an encouraging feature of the new interest in Egypt’s start-ups and small businesses. The government, as well as international agencies and public-private partnerships, will continue to play an important role in the promotion of this segment of the economy and entrepreneurial activity overall, but the profit motive attracting domestic and regional investment is the crucial element in the continued development of this sector.