Coffee With: Karim Hussein, managing partner of Algebra Ventures: The home-grown tech-focused VC outfit Algebra Ventures has become an important part of the local startup scene and increasingly in the Middle East and Africa after raising USD 54 mn in 2016 and a further USD 100 mn in 2022. Algebra has invested in and supported many now-household names, including Elmenus, Sakneen, Trella, Yodawy, ShiftEV, Khazna, and MNT Halan.

We sat down with Algebra Ventures managing partner, Karim Hussein (LinkedIn) to discuss how the VC has been handling economic headwinds, what it looks for in startups, and what Algebra has planned for the coming period.

Enterprise: It has been one and half years since your second fund’sUSD 100 mn close, what have you been up to?

Karim Hussein: Obviously, last year was a difficult year for many startups around the world and we've been really working hard to fill the funding gap in these challenging times when most international investors were not investing in Egypt. So, we have been working to support our founders, making sure that they have sufficient funds to continue in these difficult times.

We've also been doing a lot more to support our companies in terms of talent acquisition. It's always difficult to find the right talent to build up teams, so this is something we work very hard on to help with — you know, a startup or any technology company is all about the team. We're always looking to make sure that the teams are well-rounded and have all the different capabilities in place to ensure success of the project.

E: How much have you invested since then?

KH: We invested over USD 10 mn in ten companies in 2023, three of them were previously announced: Sylndr, Mtor, and DXWand. Our fund is focused on Egypt, but we are also looking at Morocco, Kenya, and Nigeria, where we see untapped potential and possible cross-market synergies.

And we plan to invest another USD 20 mn this year. We have a very strong pipeline of interesting businesses.

E: How have you handled recent challenges facing the startup scene?

KH: Last year, we were sort of the only ones investing in startups. We had a view on what the true value of the businesses were because we operate in Egypt and we understand the market. For an international investor, that’s too much risk. We are hopeful that there will be more investment this year from both ourselves and from other regional and international funds — and we're already starting to see those transactions coming through.

I think it's taking a while for many startup founders to understand that the valuations are different now than they were before. Interest rates have gone up, which means there's no more low-cost financing. So, the valuations of companies across the globe, particularly in the technology sector, have gone down significantly.

E: Do you still see us in a down round era for sometime?

KH: It’s not a down round era, it’s a revaluation based on the macroeconomic environment, whether it’s interest rates across the globe, whether it’s the valuation of EGP and inflation in the market. Prices go up and down, and it doesn’t have to be because of issues within the company.

Many had to take flat rounds or down rounds. Taking it down is actually a good thing. It's not an indication of failure. It's an indication of a new environment. It’s a refined expectation with more transparency and a more realistic valuation. Companies don't have to feel the pressure to grow exceedingly fast.

It's an important process to reset expectations and bring in new investors that can carry startups forward. It’s important to really be focused on the fundamentals of the business, make sure that every USD spent is spent towards improving profitability, improving the customer base, and that there is no waste in the process.

E: How has the float of the EGP affected the local startup scene?

KH: One of the reasons that there were so few international investors here last year was because they had a very difficult time valuing a business, there was no real price for the EGP. In the past, there was very little FDI in any field, but now the gates are open for international and regional investors to start looking more seriously at Egyptian businesses. It’s still slow, but it’s starting to pick up.

E: I think we have all learned a lot of lessons in the past few years. What do you now look for in startups?

KH: Operating in Egypt needs resilience no matter what. All of our businesses did survive that very unusual time and that’s really because of the resilience of these entrepreneurs and their ability to shift focus and continue to build their businesses — even in very uncertain times.

The important lesson is that the days of focussing only on high growth at any cost are gone. We never really invested in companies that are just talking about growing their revenues, we invest in potentially profitable business models. The most important thing is not to just run and run as fast as you can, but to build a solid business first.

E: What do you think will be the most interesting sectors in the next few years?

KH: There are a lot of interesting sectors here in Egypt. We will continue to look at agriculture and agritech, healthtech, and we’re of course always interested in fintech and logistics.

We’re also looking at intelligent uses of AI, but only when these offer practical solutions to problems needed by the market. We’ve been very selective with our AI investments and we’ve done only two investments in this field.

E: Successful exits are always good news for VCs and founders, but where do you see these funds being reinvested?

KH: The amount of funds invested in Egypt and in the region as a whole is very very low as a percentage of GDP compared to the rest of the world. We are very far behind. I think once we start seeing more exits, we will start to see even additional inflows of funds, and more capital being raised, both locally and internationally.

Another important part of exits is that they create new entrepreneurs, and not necessarily the founders, maybe the senior managers. Many of the founders who made good returns from the exits become angel investors and the cycle continues. This is what built Silicon Valley and many of the startup centers of the world.

Many of the alumni from these companies are the ones who are leading the new startups. We’ve already seen it with alumni from Fawry, or Careem, and other successful exits in the market. We, in Algebra, always look for exceptional talents that have been through the process of building the company from zero to a hundred.

E: Why do you think so many startups are expanding overseas? Is it pure growth or more of a brain drain?

KH: Egypt is a big market, but it’s not the only market in the region. It’s natural for any business to diversify its risk across geographies and across products. It’s a great opportunity and something we hope many of our businesses will do. Any significant business globally is a multinational, so one market is not enough.

Having said that, there are some markets that are easier for traditional startups to enter. These markets are the ones that are more similar to Egypt from a consumer perspective. They might be in Africa like Nigeria, Kenya, or Morocco. Maybe the more natural markets will be countries in the Gulf, where they have a similar business culture and you're able to sell right to them.

E: On the regulation front, what do you think can be a game changer for Egyptian startups?

KH: Reducing red tape across the board will always make things easier for any business to start and for any business to close as well. The ability to close a business quickly is important. Many startups fail and this is not the problem. If failure means the bankruptcy of the founders and that they cannot do anything again, then that is a problem.

Startups' access to debt is also important, and it’s important for the government to provide a level of guarantee so banks will be willing to lend to startups. Just simple working capital loans, we are not talking about anything more complicated than that.

And it’s not easy for startups to hold an IPO in Egypt. The Egyptian Stock Exchange requires years of profitability for a startup to be listed. A company like Amazon wouldn't have been eligible to be listed in Egypt until maybe five years ago. These kinds of rules need to be adjusted and changed.

E: What’s next for Algebra?

KH: We will continue to do what we do, find great teams that we believe are changing the economy and the market around them and creating new solutions that solve many of the problems we have. And we’ll continue to engage with our startups and support them — not only financially, but through any means we can.