Will The Global Tech Bubble Come To Egypt?

August 22, 2022


The 2020 pandemic left little doubt among businesses and individuals that the future of work, social interaction, services, payments and shopping will be digital. “We will look back at 2020 as the moment that changed everything,” said the U.N. Conference on Trade and Development (UNCTAD) in a March 2021 article. “Nowhere else has unprecedented and unforeseen growth occurred as in the digital and e-commerce sectors.”

However, 2022 hasn’t been a good year for tech startups and high-fliers. More than 414 tech companies, including Meta, Netflix and Twitter, laid off 58,885 employees since the start of 2022 at press time, according to Layoffs.fyi, an aggregator platform. TrueUp, another aggregator, estimated layoffs at 26,000, up from 20,000 in April. “Either way, the data is grim,” said Natasha Mascarenhas, a senior reporter for Techcrunch, a specialized news portal, in July.

Tech companies in the MENA region are particularly vulnerable. The region “is a highly fragmented market of about 20 nations with many languages and multiple currencies — accounting for 400 million people,” Tarek Sakr, former CEO of 4Sale, Kuwait’s largest classified ads company, wrote in a March op-ed on Wamda, an economic news platform. “The risk to the booming technology sector, especially in the Middle East, is [also] a … consequence of [increased valuation and growth-focused business models].”

Ride-hailing app Careem and parent company Uber Technologies are trimming costs and discontinuing services. The other ride-hailer, SWVL, is cutting costs and raising prices to turn a profit in 2023 instead of 2024. Meanwhile, e-payment platform Fawry reported a drop in net earnings in the first quarter of 2022.

The news from those companies reflects a worrying global trend. “With consumer price inflation for the first time in years causing politicians and central bankers to reverse their monetary and fiscal policy stances, all ingredients for a comprehensive meltdown are present,” said Sakr.

Fragile by design

The rapid pace at which countries digitize their economies has opened the door for tech startups and companies to expand operations. Fueled by business-friendly government and central bank policies, these companies are more likely to take risks with business models. “Many startup founders from the current generation [were brought up in a] world of declining interest rates and cheap capital,” Eric Rosenbaum, a senior editor at CNBC, reported in May.

That was magnified in 2020 when governments slashed interest rates to their lowest level in decades and distributed “pandemic stimulus packages” to maintain GDP growth, noted Sakr.

Now, central banks and governments are reversing those policies to fight rapid inflation, leaving tech entrepreneurs and business leaders in an unfamiliar environment.

“Founders have been in a world … that has only ever seen hiccups,” said Rosenbaum. He pointed to the “six-month break in bullishness after WeWork’s IPO collapsed and the brief COVID-19 crash before a [venture capital] market [returned] better than ever before.”

As a result, the CNBC reporter said, the founders “underappreciate the reversal in conditions and reduced money in the system as a decade of quantitative easing turns to quantitative tightening.”

The reversal could last for years. Those tech startups and high-fliers face a global economy that will miss its growth target of 4.1% in 2022 by a wide margin, according to the World Bank. The current projection is 2.9%, compared to 5.8% growth last year.

Adding to their challenges, tech companies are not selling physical products for profit, don’t benefit from brand loyalty nor geographic barriers that may hinder the competition. They compete in a digital landscape where any company in the world offering services at the lowest prices, if not for free, wins almost every time.

The upside for tech startups is they require “less capital for growth and the ability to operate with no hard assets,” said Rosenbaum.

That low upfront investment has attracted a massive amount of capital to tech startups and high-fliers over the years, as investors saw limitless growth potential in an increasingly digital environment.

“The 2000s and 2010s were marked by a growth-over-profits mentality on Wall Street and an aggressive proliferation of retail investing,” explained Will Daniel, a reporter for Fortune. “In both periods of economic expansion, the best-performing stocks belonged to growth-focused companies.” It was the same story in 2020 when lockdowns forced everyone to seek digital alternatives to face-to-face interaction.


Speed bumps

By 2022, despite the government’s strategy to digitize the economy, several pioneering local tech companies had reported troubling news. Despite growing revenue, they posted a drop in net profits, eaten away by the high cost of doing business.

It started when the ride-hailing companies started cutting back in MENA even before the pandemic. In January 2020, not long after Uber fully acquired Careem, Mudassir Sheikha, Careem’s CEO and co-founder, said at a press conference his company would shed 5% of its staff and reassign 10%. “We cannot just keep raising money and keep hiring people … We have to operate in a slightly more efficient way.”

Careem also pulled out of Oman and Turkey at the start of 2020, two months before the World Health Organization declared COVID-19 a pandemic. It also halted Careem Bus service in May 2020 after launching it in December 2018. “We assessed our strategic bets … in the short to mid-term and our financial ability to pursue them all simultaneously. The outcome was a decision to suspend Careem Bus,” said Sheikha in a note. In May 2020, the ride-hailing company announced plans to shed 31% of its employees throughout the MENA region.

Also in May of that year, Uber Technologies laid off “hundreds of office-based staff,” reported Al Ahram. That aligns with the company’s global strategy of trimming its workforce by 17% in 46 countries.

SWVL, Egypt’s first bus-hailing service, founded in 2017, is also facing challenges, despite being valued at $1.5 billion at the end of March after it went public. Since then, its stock price declined from $10 to $1.73, at press time. In June, SWVL announced it was laying off 32% of its employees in an attempt to turn a profit next year.

Mostafa Kandil, SWVL’s CEO and co-founder, said those layoffs would be in fully automated departments such as engineering, production and support functions. The news came nearly a year after the company went public on NASDAQ. As of July 1, SWVL’s market cap had almost halved to $805 million.

Mohamed Hedayat, co-founder and managing director of the furniture e-commerce startup Kemitt, told Al Ahram Online in July 2021 that these types of challenges are not uncommon for most tech startups and high-fliers. “We can sugarcoat it by phrases like ‘disrupting industries’ or ‘making life easier’ or ‘changing the world,’ but at the end of the day, it is all about numbers and profit.”

Fawry, Egypt’s pioneering e-payment platform, reported a 44.2% drop in net profits during the first quarter of 2022 compared to a year earlier. That despite its revenue increasing by nearly 40% during the same period, according to a bourse filing. Last year, the company reported a 34.3% increase in net profits and 39.6% in revenue.

Osman Farouk, an analytics lead at Telus, a Canadian telecom company, told Al Ahram Online in June that such media reports could indicate a downward trend in the region. “The tech … bubble is bursting,” he asserted. “Raising money has been the prime focus for ventures, but they lack the understanding that being cash-flow positive and profitable eventually is the key to success.”

Growth vs. profit

International experts see echoes of the dot-com stock crash of 2000 in the tech sector’s disconnect between growing revenues and shrinking profits today. The realization came into sharp focus when S&P 500 ICT stocks dropped 20% this year, the worst decline since 2002. “There’s a very strong similarity between the dot-com crash and the bear market that we’re experiencing today,” George Ball, chairman of Sanders Morris Harris, a U.S.-based investment firm, told Fortune in May.

Some believe the tech bubble will likely burst soon because the sector has been growing at an unsustainably fast pace. “The entry point for the discussion is as much about the massive influx of liquidity that private companies experienced in recent times as the sudden decline in liquidity taking place now,” said CNBC’s Rosenbaum.

In the United States, 150 unicorns (startups valued at $1 billion or more) were created in 2020, according to Rosenbaum. In 2021, the same number was created every quarter. “And companies were being funded as unicorns earlier than ever,” he said.

In May, Kyle Stanford, a senior venture capital analyst at PitchBook, told CNBC: “We stopped calling [2021] a record year for venture capital … because it didn’t even do justice to what was going on.”

To attract those massive investments, tech startups and high-fliers almost solely focused on marketing their growth potential as disruptors. Most had no feasible short-term profit-making plans, but that didn’t stop investors from piling in. “So much of the growth over the past five years has been: We will give you more money than you want or need, but you better grow fast as you can … and if you do that, we will give you even more money,” explained Stanford. That led companies to prioritize market share over profits.

Some of those tech firms — and even investors — used debt to maximize other potential returns when a company reached sufficient scale, noted Ball. However, when that “extreme growth cannot be maintained, the [debt] is exposed,” he told Fortune.

Sakr of Kuwaiti 4Sale noted, “Under such circumstances, the first businesses to go bust are cash-burning, non-profitable tech companies.”

The problem with relegating profit-making to the background is that “valuation has always been part art and part science,” Brian Lee, senior vice president of CB Insight’s intelligence unit, told CNBC in May. “When you’re in markets where there is lots of optimism and exuberance, more emphasis is placed on what the future looks like rather than what is happening now.”

Sakr believes that deemphasizing profitability is a recipe for disaster. “When profitability is replaced by valuation as the litmus test of successful businesses, entrepreneurs have an incentive to embrace ultimately unsustainable but fast-growing business models,” he said. “We have reached a point where artificially high valuations in equity markets have become detrimental for sustainable economic activity.”

Holding it together?

Some investors see the downturn as temporary, even if companies don’t realize profits yet. “This is not a Dot-com Bubble 2.0,” said Daniel Ives, managing director covering the tech sector at Wedbush Securities, in a note published by Fortune in May. He believes that this downturn is because investors are selling to reap the rewards of their acquisition. That affects startups in very different ways, according to how much funding and resources they accumulated before their stock prices declined.

In the long term, tech company stocks will rise once more “supported by demographics and accelerated by client behavioral changes,” UBS CEO Ralph Hamers told CNBC at the World Economic Forum. He noted that those tech startups and high-fliers have “real business models” that solve society’s incumbent problems. “It is not like 20 years ago in [the dot-com bubble]. We had some models there, just models on paper and not real.”

David Rubenstein, Carlyle Group’s co-founder and non-executive co-chairman, explained that tech companies caught in the tech bubble from 1999 until 2001 reported no revenue and consequently had no chance of realizing a profit. Now, companies like Netflix, with its 250 million subscribers, have guaranteed income. “A lot of these companies whose values have gone down recently are still great companies,” he said at the World Economic Forum.

One reason for the grim outlook among some investors could be the high expectations after lockdowns that made digital interaction an imperative. “It is a sector that has been growing by 30% and 50%, and when they are growing by 25% or 15% there is disappointment and then you see the stock sinking,” Maurice Levy, chairman of the board at French advertising giant Publicis Groupe told CNBC in May. “So we should not take [the tech] sector as a barometer because the expectation … is very high.”

Axel Lehmann, chairman of Credit Suisse, told CNBC in May that while “a lot of companies probably will disappear,” technology and digitization will remain important.

New landscape

Whether the current tech downturn is temporary or early signs of another dot-com crash, some are more concerned about the global forces surrounding that trend. Jeremy Grantham, the co-founder of the asset management firm Grantham, Mayo & van Otterloo, noted that today’s economy is in much worse shape than in 2000.

One of the biggest reprieves was “the 2000 crash was exclusively in U.S. stocks; bonds were great, the yields were terrific, housing was cheap, commodities were well behaved,” Grantham told Fortune in May. It was “paradise” compared to now.

In 2022, inflation across all sectors and commodities is reaching peaks unseen for decades as central banks raise interest rates to cool it down. The benchmark U.S. inflation rate reached 8.6%, the highest since 1980. In housing, “we’re selling at a higher multiple of family income than we did at the top of the … housing bubble in 2006,” noted Grantham. “We are really messing with all of the assets. This has turned out, historically, to be very dangerous.”

That turbulence hurt bottom lines. “Companies face slowing growth as [sales and marketing] budgets get tighter, if not from weaker fundamentals during a potential recession,” Mathew Kennedy, a senior IPO market strategist at Renaissance Capital, told CNBC in May.

To survive these uncertain times, tech startups and high-fliers should rethink their expansion plans. “The new view of growth is not at all costs, but growth at a reasonable cost,” said Rosenbaum.

Despite tightening their belts, SWVL, Fawry, and Careem and parent company, Uber Technologies, are still touting rapid growth in annual letters to shareholders. However, they will be under more scrutiny when seeking outside funding. “How are you going to generate cash flow in the future, because that future might come faster than you think,” said PitchBooks’ Stanford.

Kennedy sees 2022 as a turning point in the dynamic between startups and financiers: “For years, entrepreneurs have been in the driver’s seat — we expect that to become the exception rather than the rule.”