The recent turmoil at an Egyptian e-commerce startup amid fraud allegations has ignited the debate on startup overvaluations in one of Africa’s largest emerging markets.

Capiter, a two-year-old startup, has recently made headlines with reports about its founders allegedly fleeing the country after failing to meet their financial obligations. The startup ordeal came less than two years after the founders had secured $33 million from key investors.

“In the last three years, the value of startups increased tremendously, and it was unjustified in some cases,” said Ahmed El-Guindy, a founding partner of TCV Holding for Investment. “Since the end of 2018, the funding available to startups in Egypt exceeded that available to SMES or even to large companies, which resulted in overheated valuations.”

Investors were usually attracted to startups achieving fast growth, without paying enough attention to the resilience of the business model and its unit economics, he added.

In September 2021, Capiter raised $33 million in a series-A funding round co-led by US-based Quona Capital and Beijing headquatered MSA Capital. Other participating investors included Savola, Shorooq Partners, Foundation Ventures, Accion Venture Lab and Derayah Ventures. At the time, the founders said more than 50,000 merchants and 1,000 sellers were using their app and that they were aiming for annual revenues of $1 billion by 2022.

Last week, Capiter released a statement saying that the board of directors had relieved the two founding brothers Mahmoud and Ahmed Nouh from their duties as CEO and COO after their failure to attend in-person due diligence board meetings for a potential merger.

CEO and co-founder Nouh said on Saturday that he was not officially informed of his removal from office; however, he acknowledged that the company’s board had been recently divided over the best ways to keep their struggling company afloat amid a grinding economic crisis.

“Everyone knew that the company was going through a financial crisis. The money available was very little,” Nouh told a widely watched talk show on an Egyptian channel.

The company became the centre of the controversy after its failure to make payments on time. Nouh said that around 70 percent of August salaries had been paid and the company had promised to disburse the remaining salaries on September 5.

“However, a lot of chaos had ensued so we could not really disburse the rest of the salaries,” Nouh said in a phone interview from Dubai.

The local press had reported that the founders had fled the country with the funds, an allegation that Nouh dismissed, insisting that all the funds had been spent over the last 18 years on the company’s expansion plans.

He denied that he was on the run, arguing that he usually spends most of the year in the company’s Dubai office. 

“We are trying to reach a solution with the board members. Everybody is doing their best to rescue the company,” he said.

Some observers fear that the startup crisis might affect the future of venture capital in Egypt.

"If Capiter and its shareholders failed to do a soft landing, it will have negative repercussions on the ecosystem in general in terms of access to capital and the registration of new companies in Egypt," said an analyst with a leading Cairo-based financial research institution, who asked to remain anonymous.

Malek Sultan, a financial analyst and a co-founder of Disruptech VC, disagreed with this pessimistic reading.

Egypt is a strong market

“It is very common for startups to fail and to be impacted by the bust and boom cycles in the global financial markets,” he said. “Egypt as an emerging market is full of opportunities. This crisis will eventually end, and Egypt has all necessary fundamentals of a strong market.”

El-Guindy agreed with Sultan dismissing claims that Capiter’s potential fall is a signal that a so-called tech startup bubble is about to burst.

“Venture Capital is here to stay; however, there will be more focus on fundamentals and sustainability of a business model,” El-Guidy argued.

The economic turmoil spawned by the Russian war on Ukraine has resulted in a dip in startup valuations around the globe.

In July, Swedish payments startup Klarna Bank AB said it had raised $800 million of funds at a valuation of $6.7 billion, down around 85% from the $46 billion price-tag it had last year.

In the same month, Pakistan’s most-valued startup Airlift went out of business, less than a year after it had raised $ 85 million in a Series-round at a valuation of $275 million. The logistics-tech startup had blamed the downturn in capital markets for its demise.

Egypt is no exception to such market dynamics, experts believe.

“Egyptian Startups will find themselves obliged to raise funds at lower valuations,” El-Guindy said, adding that a value drop might even encourage more institutional investors to tap into the Egyptian startup market.

(Reporting by Noha El Hennawy; editing by Seban Scaria)

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