Technological entrepreneurship develops in Egypt's start-up scene

Although challenges still exist with regard to Egypt’s internet experience, there is much optimism for the future. Nothing epitomises this more than the nascent start-up culture. Online commerce and advertising revenues are growing and more young Egyptians are being drawn to technological entrepreneurship.

Since the 2011 revolution, Egypt’s burgeoning start-up culture has received extensive coverage in the foreign press, although often times in a tone of surprise. But in many ways, the growth of ICT start-ups in the country should hardly be surprising. Egypt has always possessed a large informal economy and in the uncertainty of the post-revolutionary period it has grown even more. By 2014 the informal economy was worth as much as 70% of the formal economy, with a value as high as LE1.5trn ($204.5bn), according to the head of the Egyptian Centre for Economic Studies, Abdel Moneim El Saye.

In this environment of informality and loose oversight, entrepreneurial enterprise is often the only means of employment and wealth creation. In 2013, for example, small and medium-sized enterprises represented 70% of the national economy. These trends had traditionally been most prevalent at the lower end of the income spectrum and among blue-collar households, but that has begun to change. “Previously you were perceived as successful when you worked at a multinational corporation. Nowadays, entrepreneurship is the hottest topic in town. Everyone is trying to start their own business,” Gaml Sadek, co-founder of Bey2ollak, internationally known as “WhyTraffic”, a mobile application dedicated to user-generated traffic information, told OBG.

Success Stories

Incubated in the Technology Innovation and Entrepreneurship Centre, which is affiliated to the Information Technology Industry Development Agency, Bey2ollak is the most successful app in the market by user numbers. The company has 1.3m registered users and up to 350,000 monthly active users. Bey2ollak has benefitted from the advantages in the local market. For example, the target audience for the app is users between the ages of 17 and 34, according to Sadek. Given that more than 60% of the population is under the age of 30, such mobile apps have a massive potential target demographic. For Bey2ollak specifically, the fact that poor infrastructure, inadequate urban planning and insufficient public transport create traffic chaos in the Egypt’s capital city is also undoubtedly a boon.

Bey2ollak may have emerged as a somewhat unique Cairene solution to the problem of navigating the city’s congested roads but it is far from the only one. Many of Egypt’s early successes in the start-up world – from an app that shows the nearest hospital to Fawry, an online payment portal targeting the unbanked – are succeeding where there has been a failure by the state or the formal sector.

Foreign Appeal

Other start-ups have seen similar success outside of the country as well. For example, Clear Day, formerly Weather HD, a mobile app developed in Alexandria, had become the largest paid weather app in the world by 2013. Many other local players, including Bey2ollak, are looking to follow this lead and gain a regional and international foothold. “Egypt is a little bit of a misleading country to work in. You have 90m Egyptians, but lots of noise when it comes to purchasing power. In Saudi Arabia and Dubai, the population numbers are lower, but the noise ratio is also lower. You have American investors interested in Saudi and you have a Saudi user spend that is higher than the US,” said Sadek.

Next Steps

As such, it is hardly surprising that breaking into the markets of the Gulf remains a primary aspiration for many of Egypt’s start-ups. These markets may not have the weight of population, but they have strong purchasing power and a technology-literate customer base. Countries in the region have topped the ranks of highest Twitter use per capita globally, for example. Bey2ollak is among the companies planning to take its app to the Saudi market. It is targeting Riyadh and Jeddah.

The rationale for this move is not simply the wealthier user base in the kingdom. The company intends to break out of the advertising revenue model and to achieve this is looking at ways that it can sell the data that it collects through the app. With a move into Saudi Arabia, Bey2ollak has firmed up interest from mapping firms for its data.

Revenue Streams

In the Egyptian market, as elsewhere, advertising is still a main source of revenue for applications. Mobile app users, a young, upwardly mobile and well-off demographic, provide an attractive proposition for advertisers. In many ways, however, the market remains immature and limited.

“Advertisers are stuck in the website mentality. They just want a banner,” Sadek told OBG. Nonetheless, the company has managed to create more developed commercial tie-ups including targeted marketing and special promotions. Given its large user base, Bey2ollak has managed to command substantial fees in local terms. The company, for example, had a one-year sponsorship package a few years ago for LE1m ($136,000) per year.

However, there is undoubtedly frustration at the limitations of this model and the signal it sends about the infancy of the market. This basic revenue model remains a driving factor in the industry and makes it difficult for start-ups to grow. Venture capital (VC) firms are looking for existing revenue flows before injecting cash into many of these companies. “Most of the local VCs think locally. The risk factor is almost not there. For us, it is not just about the money, it is about the partner quality and added value,” Sadek told OBG. “We lack focused VCs with risk appetite.” The company has also struggled to attract commitment from international players. “We’ve met investors, but haven’t found the right match yet. Internationally, investors are reluctant to take the step because they’ve never invested in Egypt,” he added.

Investment

However, things are beginning to change. The funding environment, particularly at the seed and early stage, has been developing. Although this may be too late for Bey2ollak, there are now a number of VC and angel investor firms active in the market. For example, Cairo Angels, a forum bringing together investors and entrepreneurs, has done eight deals ranging in size from LE250,000 ($34,000) to LE1m ($136,000) between 2012 and 2014. The director of the Egyptian Private Equity Association, Dalia Tadros, predicts that 2015 will see $100m deals, according to Seed Stars World.

The environment is certainly changing for local start-ups. Another funder, Sawari Ventures, is supporting the sector through its accelerator programme, Flat6Labs. This initiative offers seed funding and training to new start-ups with an emphasis on Arabic content, software as a service, converged services, mobile applications and e-commerce. Seed funding ranges from $250,000 to $1m.

Public Sector Support

It is not only the private sector that is venturing into this arena. As excitement for start-ups grows, the government is lending encouragement. In December 2014, it announced the launch of a start-up incubator in conjunction with the private sector. Ayady for Investment and Development will have LE10bn ($1.4bn) of capital and will be 20% state-owned. Stakeholders in the incubator include the Federation of Egyptian Chambers of Commerce, Faisal Islamic Bank, Misr El Kheir Foundation and the Federation of Egyptian Industries.

Such a move suggests that the start-up environment is going mainstream and gaining significant momentum. Although challenges remain, in terms of both the potential local user base and the infrastructural environment, the early success stories in the market are bringing a greater conviction, greater attention and more financing to this growing industry.