Payments, Bureaucracy and Brain Drains: Cairo Stands at a Startup Crossroads

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When Willie Elamien first showed up in Cairo in 2014, the city’s startup scene was very different than it is now. There was hardly any government support. People rarely saw entrepreneurialism as a career. Those who did, ran companies that were barely off the ground–if at all.

Three years later Elamien is Cairo managing director of Flat6Labs, one of the Middle East’s leading startup accelerators and the only one in town that’s taking a profit. Just this week the firm, which also operates in Tunisia, Saudi Arabia, Abu Dhabi and Beirut, closed a $5.5 million funding round, with which it hopes to back over 100 local companies. Three years into his life as a Cairene, Sudan-born Elamien is seeing entrepreneurialism emerge as a viable life choice for young Egyptians.

“Whereas historically startups have been a graduation project, they’re looked at now as proper companies, and real alternatives to getting a job,” says Elamien, who joined Flat6Labs last year from Rocket Internet outfit Hello Food.

In the past, up to 70% of companies applying to be part of the Flat6Labs program would be in the idea stage. This year over half are already beyond a prototype. “It’s a big leap forward,” says Elamien. “We’re then more focused on traction, growth and sales.”

Cairo is enjoying a purple patch in all three. Just six years ago the Egyptian capital, home to just over 20m people, was the epicenter of the Arab Spring, as protests to oust former President Hosni Mubarak were met with state violence. Mubarak was thrown from power in February 2011. But a democratic vote ushered in the Muslim Brotherhood’s Mohamed Morsi, who lasted just a year as leader before falling to a coup d’etat orchestrated by military general Abdel Fattah el-Sisi in July 2013.

El-Sisi remains in power. His increasingly autocratic rule has earned the ire of rights groups worldwide. Undeterred, a startup revolution has taken place in his capital city. Cairo, a city steeped in history in whose back yard sit the Pyramids of Giza, represents a third of Egypt’s GDP despite being home to a little over a fifth of its 90m population. It is also the world’s fastest growing city, predicted to swell by half a million people this year alone. Little wonder it has become the home for almost all of the country’s biggest tech successes.

Flat6Labs are just one of a raft of accelerators and incubators that includes JuiceLabs, Injaz, Gesr and the government-backed Technology Innovation and Entrepreneurship Center (TIEC), which sits to the west of the capital, among the shiny new-builds of 22-year-old Sheikh Zayed City. Closer to Cairo’s ancient heart is GrEEK Campus, formerly a Greek wing of the American University in Cairo, which has earned the title ‘Tahrir Alley’ for its proximity to the square where 2011 protests market one of the major events of the Arab Spring.

GrEEK Campus was created in the wake of 2013’s military coup that overthrew Morsi, killing hundreds of protesters and crushing the chief Islamist zeal that accompanied the Arab Spring. GrEEK Campus founder Ahmed el-Alfi, a venture capitalist who has lived in California, is also founder of Flat6Labs.

Since then instability and violence have cut tourism by almost 50%, crippling what is a huge part of the economy. That has encouraged even more young Egyptians to try their hand at tech (20% of the country’s population is aged 15-24).

Among Egypt’s most exciting startups is 2013-founded Instabug, a tool that detects glitches in apps. Yaoota is a price comparison website, while Vezeeta is a doctor appointment booking and review platform. Other, smaller firms include recycler ZeroWaste, customer feedback brand Perligos and Ta2heal, a company aiming to help children with autism.

Last year Forbes Middle East showcased 20 ‘promising Egyptian startups’ that had raised a total of $24.2m. That puts it on a level with some of the region’s biggest players, including Saudi and the UAE. 500 Startups is the most active early-stage fund, alongside Cairo Angels. Angel investors still dominate the market, with 38 compared to 17 venture capitalists. Most are foreign.

“There is a need for financing in Egypt more generally,” says Menna Abdelrahman, general manager at Cairo Angels. “It’s not a lot, in terms of availability and financing here. But also the ease of starting from the bottom up might be an issue. We will get more funding when we see more successes. It’s a work in progress.”

On average it costs around $1,500 to register and establish a company in Cairo, and overheads are far smaller than in other Arab nations like Jordan or Lebanon. Labor is also cheap–but that is a double-edged issue. “The brain drain is bad. It’s a constant worry here, says Abdelrahman.

There are other issues too. Egypt is ranked 122nd of 190 nations at the World Bank’s Ease of Doing Business report. It only places 39th in terms of starting a business, suggesting that there are fewer roadblocks for startups than there are SMEs and major corporations. But autocratic governments rarely make for thriving startup ecosystems.

Government restrictions make it difficult to get money in and out of the country. Setting up shares is prohibitively complicated–far less so than in Dubai or Saudi’s illustrious free zones. And infrastructure is flagging: a 4G spectrum is coming soon, and average Internet speeds begin at just 1Mb/s downstream. Men aged between 18 and 30 must also complete 12-36 months of military service. “In the middle of working on a startup they have to go and do that,” says Abdelrahman. “It’s difficult.”

“Startups are sensitive,” says Mohamed Esmat, business development director at Telecosys, a Flat6Labs alumnus. “The unstable economic situation is already impacting them.” Working with Flat6Labs offers entrepreneurs a smooth entry into the market, he adds, “yet I know if you are going to do it on your own, it is going to be tough.”

For companies trying to create jobs, like Flat6Labs, government interference is scant, says Elamien: “The restrictions you hear about are more political than economic freedoms If you plan to bring in investment of any kind to hire more business and improve the prospects for those in the vicinity, the government will not stand in your way. If on the other hand you’re working in female empowerment, or civil society, you may have problems.”

That hasn’t stopped a number of striking tech solutions appearing to combat social ills such as sexual assault, bomb attacks and forced disappearances. But any startups addressing a civil society problem can expect state harassment.

For any other tech firms, however, there are significant opportunities. Egypt is by far the most populous country in the Middle East. Its 90.6m population far outweighs that of Saudi Arabia (31.5m) and Yemen (27m). Its 31.4m Internet users are also far above any other in the region, with 17.7m of them online shoppers.

The Egyptian payments market increased in size from $4.18bn in 2014 to $5.06bn in 2015. It is forecast to grow to $14.04bn by 2020, representing the third-biggest market in the Middle East behind the UAE and Saudi Arabia. Its e-commerce potential is around $500m, and Internet penetration is now at approximately 40%.

Those figures have enticed big online players like Amazon and Booking.com, while local firms like ride-hailer Careen have enjoyed success through knowledge of Egypt’s unique cultural and language landscape.

Egypt’s finance and payments market is underdeveloped by European or American standards: just 10% of Egyptians are banked, and very few people regularly use credit cards. That may sound like a heavy disadvantage. But it is opening up a whole new fintech market, in which Flat6Labs is playing a key role.

1864 is ‘Egypt’s first homegrown fintech startup’, founded last year as a partnership between Flat6Labs and Barclays. It offers mentorship and acceleration to local startup hopefuls, and in its first season graduated companies like discounter Saveit, fraud prevention firm Card Switch and Carsurance, which is Egypt’s first-ever car insurance brand.

“The ones that are doing well are not focusing on B2C but B2B, because purchasing power’s very low. So if you want to grow a sustainable business you need to focus on B2B so you can either sell to foreign people, or businesses,” says Elamien. “People don’t have banks. So even if you’re able to create a consumer-facing payments system, you won’t get much custom because people don’t have cards activated to pay for stuff online.”

That could all change if, as has been reported, the government introduces a new law permitting payments by mobile phone credit. Mobile penetration in Egypt is one of Africa’s largest at around 112%. “So if you’re able to use mobile phone credit as currency, you can create something as good as Mpesa in Kenya,” Elamien adds.

Above all, Egypt’s startup scene needs more successes to show its young entrepreneurs that there’s a big future in tech. It’s a huge market. Traction, and exits, could send its acceleration into overdrive. “The interest gets people going, and makes things change a lot,” says Abdelrahman. “We are not just some corner of the world.”