“Angel investing — I think we should always touch on this point — is not charity. It is professional investing where you make a return; crucially, you also have a wider lasting impact,” said Aly El Shalakany, chairman of Cairo Angels, during a December AmCham event.
It is likely the riskiest type of investment, seeing that it almost always assesses the potential of a startup rather than actual achievements, hence the name “angel.” When an investor provides angel funding, no debt is created. Instead, the investor receives an equity or ownership stake in the firm. The more capital or technical assistance provided, the bigger the share might be.
While angel investing in Egypt is relatively new and differs from the United States, it has come to the fore as one of the more attractive investment instruments, especially in disruptive areas like fintech or artificial intelligence. Accordingly, understanding how the U.S. became such a powerhouse in angel investing could help local angels avoid the pitfalls and create lucrative opportunities.
“I honestly strongly believe that angel investing is a key significant element of the investment landscape that will gradually become a competitive advantage [in Egypt at the] country and macro levels as well,” said Nader Iskandar, founder and CEO of EME International, during an AmCham December webinar.
Once the domain of high-net-worth investors, angel financing in the United States has become more accessible thanks to the passage of the Jumpstart Our Business Startups Act of 2012, a law enacted to spur small business funding. The act removed some regulatory restrictions surrounding the practice of angel investing.
According to a report by Marianne Hudson for Genglobal.org, “in the U.S., angels invest about $25 billion in 70,000 companies every year.”
In 2017, the Angel Capital Association (ACA), a professional development organization for early-stage investors, commissioned the American Angel study. “One of the main takeaways from the study is that 63 percent of U.S. angels are based outside of Silicon Valley, New York and Boston, meaning that entrepreneurs may have more success in raising capital close to home rather than traveling to those world-famous investing hubs,” wrote ACA Executive Director Emeritus Marianne Hudson, ACA’s executive director at the time.
Another key takeaway, Hudson noted, is “more than half of angels (54.8 percent) have experience as entrepreneurs and often advise the startups they invest in, informally or as board members. Angel investors with entrepreneurial experience write bigger checks, with an average of $39,000 vs. $28,000 for angels without entrepreneurial experience. They also have more companies in their angel portfolios and see better returns.”
The exit strategy is a key consideration for any angel. American angels in the ACA study said an average of 11 percent of their portfolios yielded a positive return. “That number is consistent with other studies that have shown 5 to 10 percent of angel investments yield a positive return for angels,” wrote researcher Laura Huang. “A deeper dive shows that where startups have been sold or gone public, 39 percent yielded positive returns for the investor.” Similar figures for Egypt’s angel investor scene are not readily available.
The pandemic has had many entrepreneurs look to their angel investors like never before. “Angels are telling founders to scrutinize sales forecasts, hiring plans, costs and every other assumption about their business,” wrote Jia Wertz, an entrepreneur and filmmaker, for Forbes in March. “Some angels will be slightly more hesitant about dumping millions into companies, at least for the time being … Seasoned investors actively working with investment groups … are not oblivious to concerns around the pandemic. Nevertheless, they may look for opportunities to enhance their portfolios as more novice investors are sitting on the sidelines.”
Angels in Egypt
In 2019, Egypt was the fastest growing startup ecosystem in the MENA region, according to startup platform MAGNiTT’s 2018 Mena Venture Investment Report.
At a May 2020 roundtable hosted by Malaikah (Egyptian Business Angels Network-EGYBAN), as reported by Egypt Today, Loay El Shawarby, principal at El Shawarby Attorneys at Law, noted that angel investors in Egypt remain in the businesses for two to three years, pointing out that Egypt’s angel investment market is highly illiquid. He added that angel investors in Egypt tend to enter at least 15 companies, with each deal worth EGP 1.5 million.
Another participant, Sherif Abdel Latif, chairman and CEO of Financial Advice Corporate Transactions, explained that while “startups in Egypt can generate an initial public offering (IPO) in just two to three years and not necessarily seven to eight years [on average] like in the United States,” businesses in Egypt usually raise capital by 3-4 percent compared to 7-8 percent in the United States.
During the Malaikah roundtable, Sawari Ventures Managing Director Tamer Azer said that 60 percent of U.S. startups fail and 20 percent show mediocre performance, while 20 percent succeed. Of those that succeed, 32 percent seek IPOs while the rest are sold, usually in the range of $10 million to $32 million.
As reported by the Kauffman Foundation, a 2018 study by William Kerr and Josh Lerner of Harvard and Antoinette Schoar of MIT found that angel investment significantly increases a startup’s success rate. “Startups receiving angel investment were 20-25 percent more likely to survive after four years and 16-19 percent more likely to have grown to 75 employees,” said Wertz of Forbes.
Impact investing refers to the goal of generating beneficial social or environmental effects in addition to financial gains.
El Shalakany of Cairo Angels holds this philosophy as one of his convictions: “ESG (environmental, social and governance) funding and impact investing are very trendy words these days, but I think if you are investing in this space, especially in emerging and frontier markets, then by definition you are an impact investor. I am an impact investor in Africa in that capacity.”
Ismail said that while one of the primary motivations is monetary gain, the ESG impact factor is equally important. “The developmental aspect of it [was my other motivation], to help the youth, and as much as I can women in particular, and especially projects that have bigger impacts on the country and society in important sectors like agriculture, health and so on. The combination of all of that is what led me to become an angel investor,” he said.
Iskandar of EME International is buoyant on the prospects for Egypt’s angel investing scene in 2021. “I think it is very exciting … there were over 43 exits in the region last year, which is huge for our region. This is very encouraging and motivating to existing entrepreneurs, people considering starting their own companies or people considering investing through syndicates or funds or directly.”
“We thought that investors might be reluctant to get in on new deals [because of the pandemic]; however, we closed one of the largest deals in our history,” Zeina Mandour, general manager of Cairo Angels, which participated in sustainable clothing brand Opio’s $300,000 seed round, said to Wamda in January.
“There’s a lot more cash in the market that is circulating [and] chasing talent, which was not the case before. So, it’s become a lot more important to deploy cash quickly to good startups, because they require immediate funding,” Nader Aboshadi, a member of the Cairo Angels board of directors, told Wamda. “If you’re too slow in allocating funding, you lose out on the good opportunities.”
Looking ahead to the future in this rapidly evolving field, Iskandar noted, “This ecosystem is huge and we all need to support one another at different stages, not just at conception. Different parties need to cooperate to help these companies to grow and make a positive impact on society.”
The story of three angels
By Adam Skaria
Defying culture and society’s perception has long been the bane for local entrepreneurs and investors. Working as an angel investor in Egypt is a case in point. The investor must commit funds and time to an idea that has barely manifested . Meanwhile, entrepreneurs must share their most intimate business details with strangers, and be open to criticism.
However, in the past few years an increasing number of investors and enternerpers are starting to accept the idea.
Aly El Shalakany, chairman of Cairo Angels, during a December AmCham event, moved to Egypt to establish a law practice that would offer him enough time to pursue additional interests. “I like building things and connecting people, there’s an entrepreneurial streak in me, but I never had the time to do that,” he said.
Soon after, El Shalakany started mentoring at Endeavor Egypt, and fell in love with the idea of helping startups and entrepreneurs realize their true potential. The next step was to invest in startups as an angel investor. “I was intrigued. I didn’t know anything about it, it was the first time I ever heard the term,” he explained. By 2012, El Shalakany co-founded Cairo Angels. Today, his company has invested $2.8 million in 28 startups in six cities nationwide.
Cairo Angels has equity stakes in an array of tech, events, delivery, gaming, entertainment, reading and job search apps, including up-and-coming and established names like Instabug, Elves, Eventtus, Bosta, HireHunt, Play3arabi, Nature’s Market and Books.com.eg.
Khaled Ismail, founder and chairman at his eponymous KI Angels, and Nader Iskandar, founder and CEO at EME International, also saw Egypt’s potential as an angel investment hotspot.
“When I decided to become an angel investor, it was [after I] established seven companies in Egypt, with all of the failures and successes involved,” Ismail said during the webinar. He had “very good exits selling two companies to Intel and Cavium.” The next challenge was “to switch to the other side of the table to be an investor rather than inventor,” noted Ismail. “This was based on what I learned over 20 years in seven startups, which was from one side.” Since inception in XX, KI Angels has invested an average of $200,000 in more than 12 companies.
Iskandar has a similar background and motives, but his forte is in the software development space. That opened the door for him to add angel investment to the company’s portfolio. “One of the companies we started about 15 years ago in the enterprise mobile space actually opened the door for me because we ended up doing software development for startups and mid-size companies.” Iskandar’s EME International has seen almost all major local banks employ its mobile wallet solutions through Fawry, which now boasts over 3 million users and 500,000 transactions per day. “It progressed gradually, and eventually [EME] began to co-invest with [other local angel investors] in different opportunities.” Suddenly, the world of angel investing opened up, and startups were more open than ever to angel investors, not just financially but on a technical and strategic level, as well, noted Iskandar.