“At the end of the day, it’s the government’s role to create the optimal entrepreneurial ecosystem that wins,” says Nihal El Chami, program coordinator at Falak Startups.
It might be tempting to say that all it takes to create a successful startup is talent, an idea, and money. Good entrepreneurs know it involves much more than that: a suitable market, for instance, and a sustainable competitive advantage. They understand the finer details and fuse them to create a more insightful image of the macro environment.
Within that macro environment is the real dominant player: Government. While venture capital firms support entrepreneurs on the ground, governments determine the infrastructure and regulations that make those interactions possible. Clearly, it’s in the best interest of the state to develop effective, accessible innovation ecosystems. Misguided policies and inadequate incentives can significantly hurt startups that want to survive and thrive.
Bolstering policies
There are many ways a government can reduce burdens facing startups, from market regulations, licensing and permits to tax policies. Over the past few years, Egypt’s entrepreneurship ecosystem has shown improvement, with the launch of several venture capital funds and a positive flow of investments in technology startups.
With the establishment of the Micro, Small and Medium Enterprises Development Agency (MSMEDA) in 2017, new laws and decrees involving investment, and industrial licensing were amended and enacted to facilitate a smooth business environment for young entrepreneurs.
The investment law, for example, allows new incentives by easing cross-border trade and profit repatriation, guaranteeing protection from arbitrary and capricious decisions, and providing new tools designed to make it easier to establish, start and operate a business, according to Minister of Investment Sahar Nasr in a press statement.
Another hindrance used to be the bankruptcy law, since many new ventures fail. The old law did not differentiate between those who honestly face difficulties and those who commit fraud. Both were guilty and faced possible jail terms. On February 2018, law no.11/2018 was issued to regulate restructuring, preventive reconciliation and bankruptcy. The law took effect on March 2018. The legislation introduced an “out-of-court restructuring system” that helps troubled companies reorganize, according to the Riad law firm.
Moreover, the ongoing Global Entrepreneurship Monitor (GEM) research project, an annual assessment of the national level ofentrepreneurial activity in multiple, diverse countries examined two areas of government policies: Support and relevance, and taxes and bureaucracy. The results are ranked from 1 “highly insufficient” to 9 “highly sufficient.”
Egypt’s score in support and relevance was 4.2 (ranking 26th of 54 countries surveyed), compared to a global average of 4.3 and an efficiency-driven economies average of 4.2, the report wrote. “This figure represents a noticeable improvement, compared to a range of 3.1-3.6 over the period between 2010-2017,” it noted.
Regarding taxing and bureaucracy, Egypt scored 3, (ranking 42nd), compared to a global average of 3.9 and an efficiency-driven economies average of 3.9. “This remains a challenging area that requires a complete overhaul,” the report added.
By scrutinizing the breakdown assessment of government policies, three areas have improved notably, according to the GEM report. These areas are overall public policies, such as procurement, consistently favoring new companies, and support for new and growing companies at the national and local levels.
On the other hand, Egypt has seen a decline in bureaucratic and taxation support for entrepreneurs, the report noted. The ease of coping with bureaucracy and licensing score slipped from 3.3 in 2012 to 2.6 in 2017.
Taxes were an increasing burden for small businesses, dropping from 4.4 in 2012 to 3.6 in 2017. “The issue does not only revolve around the high levels of taxation, especially the value-added tax (VAT). It also pertains to the way taxes are calculated and collected, which often lacks predictability, consistency, and transparency in rules and applications,” the report said.
Scale-up programs
The past two years also witnessed the growth of government-led entrepreneurship support programs, as well as startup incubators and accelerators, such as Egypt Ventures, Fekretak Sherketak, and Falak Startups accelerator.
In 2017, the Ministry of Investment and International Cooperation signed an agreement with the Saudi Development Fund to establish Egyptian Entrepreneurship Investment Co. (EEIC), also known as Egypt Ventures. It acts as a source of startup capital that invests in early-stage funds, incubators, and venture capital funds. It also invests directly in early growth companies. The value of the fund is EGP 451 million ($36.6 million).
Meanwhile, Fekretak Sherketak was the first initiative taken by the accelerator program Sherketak, which was financed by Egypt Ventures. Sherketak (which translates to “Your Company”) is a four-month accelerator program that offers funding of up to EGP 500,000 for teams to build their startups in return for a 4-8 percent equity stake. Sherketak provides a wide range of services, including business, legal and technical support. It helps companies register, research their market and build business plans.
After the acceleration period ends, Sherketakassists shareholders in finding investors to take it to the next growth stage. Moreover, it introduces teams to experienced mentors and business leaders who provide tips and networking possibilities. Sherketak, an accelerator that is not tailored to any specific sector, runs two cycles per year with the EFG Hermes program for FinTech, as well as the United Nations Development Programme for Social Impact.
Falak, which began in 2017 as a Ministry of Investment initiative, was designed to support and empower the next generation of Egyptian entrepreneurs. Its program offers funding, mentorship, training and a wide variety of perks and benefits to provide entrepreneurs the necessary tools, resources, and contacts to develop and expand. The ministry saw that startup accelerator Flat6labs was monopolizing the market, with no competition and unfair offerings, according to Nihal Al Chami, a program coordinator at Falak Startups.
“Falak was established to give the startup industry a much needed shot in the arm. We started with a fair offer, which consequently led competitors to shift their models,” Al Chami says. The accelerator awards as much as EGP 1 million in exchange for 5 to 10 percent equity.
The accelerator says it has invested a total of EGP 18.3 million in 51 companies spread across 27 governorates and 21 industries. It also has partnered with 12 accelerators in the region and launched a “soft landing program” for African investors interested in operating in Egypt.
Government support programs for entrepreneurship are especially crucial in underserved and marginalized communities. According to the GEM report, Egypt’s score in government entrepreneurship programs is 3.3 (ranked 46th of 54 countries surveyed).
“Government programs in Egypt score low in terms of availability, reach and effectiveness,” the report said. “Competency of government employees, number of government programs and how successful they are in supporting new and growing firms all hover at very low levels.”
A noteworthy exception is business incubators and science parks, where government programs score 5, a significant increase from 4.5 in 2015 and 3 in 2012. The report attributes the increase to improved support for early-stage startups, especially in information and communications technology, and science and technology.
