{"id":578807,"date":"2023-01-15T04:11:16","date_gmt":"2023-01-15T04:11:16","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/whatsnext\/more-shakeouts-down-rounds-and-ma-for-startups-in-2023-but-investors-are-still-bullish\/"},"modified":"2023-01-15T04:11:16","modified_gmt":"2023-01-15T04:11:16","slug":"more-shakeouts-down-rounds-and-ma-for-startups-in-2023-but-investors-are-still-bullish","status":"publish","type":"whatsnext","link":"https:\/\/enterpriseam.com\/egypt\/whatsnext\/more-shakeouts-down-rounds-and-ma-for-startups-in-2023-but-investors-are-still-bullish\/","title":{"rendered":"More shakeouts, down rounds and M&A for startups in 2023 \u2014 but investors are still bullish"},"content":{"rendered":"

<\/a> More challenges to come for startups in 2023:<\/strong> Our year in review<\/a> on StartupLand in 2022 recapped the biggest trends of the past year, with the most dominant themes (unsurprisingly) being the global VC squeeze, the ensuing high-profile downfall of Capiter and the waves of consolidation (and layoffs) across startups in various industries.<\/p>\n

Many of these trends will carry through to 2023<\/strong>, as the global economy braces for more headwinds and a looming recession, and as VC investments continue to be viewed as a risky asset, our sources tell us. Startups going into 2023 will need to rethink their approach to growth, extend their runways, and look at alternative financing in order to come out stronger, investors say, and there\u2019s a huge potential upside for those who play it right.<\/p>\n

The VC squeeze is here to stay \u2014 but 2H 2023 could see some relief: <\/strong>Investors we spoke to agreed that the VC squeeze will continue to be a thorn in startups\u2019 sides for most of 2023. Simon Tkachenko, partner at Modus Capital, expects the squeeze to see some relief in the second half of the year, as pressure amps up on VCs to deploy their capital.<\/p>\n

Also here to stay: A weaker currency. <\/strong>A lot of startups have commitments that need to be paid in USD, like purchasing CRM systems or paying wages for foreign talent, said Aly El Shalakany, managing partner of Acasia Ventures<\/a>, the VC arm of local investor outfit formerly known as Cairo Angels. The devalued EGP can also impact startups\u2019 valuations, because most are expressed in USD terms but paid in EGP, which has made sharp FX fluctuations an issue in the past, Tkachenko said.<\/p>\n

This will likely mean more flat and down rounds in the short term:<\/strong> \u201cI think startups are going to have a hard time raising at an up round,\u201d Tkachenko said, adding that the dominant narrative in the VC ecosystem now is that \u201ca flat round is the new 3x multiple.\u201d This is especially true in Egypt, where valuations since 2020 have been too high and at times \u201cillogical,\u201d El Shalakany told us. \u201cThe ones who raised at inflated prices last year are going to have to take down rounds and flat rounds, whereas those that raised at reasonable prices are less likely to have to do so,\u201d he added.<\/p>\n

That\u2019s not necessarily a bad thing:<\/strong> \u201cUltimately, this will shake out a lot of bad companies, and a lot of good companies will be built and funded right at decent valuations,\u201d Tkachenko explained. \u201cThe more sober environment we\u2019re in means that companies that perform well will be able to find funding,\u201d Algebra Ventures Managing Partner Tarek Asaad told us. \u201cIt doesn't have to be through mega rounds, but it will be enough to support companies through to the next milestone,\u201d he added.<\/p>\n

That\u2019s a mixture of good and bad news: <\/strong>The less competitive environment is good for early-stage startups, especially when it comes to finding talent, Assad explained. However, companies hoping to raise their second and third rounds to survive are going to get tested, Karim Helal, executive chairman of Sequence Ventures, told us. Investors will be taking a closer and more critical look at startups\u2019 expansion plans, asking how they plan to fund them, and if their plan is to fund them with their second or third rounds, that could be a concern, he added.<\/p>\n

This could lead to more consolidations:<\/strong> \u201cAs funding is more limited, companies need to think of options,\u201d Asaad said, adding that \u201cthere is a lot more potential for consolidation.\u201d Tkachenko agrees, though he notes that the majority of acquisitions and cost-cutting is likely to have already happened in the past year. Global Ventures General Partner Noor Sweid has made the same prediction for the MENA region at a broader scale. \u201c2023 will see increased M&A in the MENA region as a direct consequence of trends that permeated 2022, and which will intensify\u201d this year, she wrote in an emailed note. \u201cThese trends are investors becoming more conservative, profit superseding the notion of growth at any cost, reduced liquidity and down rounds.\u201d<\/p>\n

And more startups prioritizing runway + steady growth:<\/strong> \u201cCompanies are focusing more on fundamentals; looking at runway and profitability,\u201d Asaad said. Instead of layoffs, companies should now be focusing on improving their other metrics, including how to increase the lifetime value of their product for customers, Tkachenko said.<\/p>\n

Many are also looking at expanding outside of Egypt as a way to hedge against risk:<\/strong> Expanding outside of Egypt diversifies startups\u2019 operating financials and, potentially, their investor base, Asaad said. \u201cI'm seeing several companies think of that as a sort of a hedge against some of the challenges in 2023,\u201d he added.<\/p>\n

And others are looking at diversifying their funding sources: <\/strong>More startups are in need of debt facilities to help plug working capital costs, Tkachenko said. Venture debt has a lot of potential in the region, he said, adding that he also could see new funding models take hold, like revenue-based financing, where investors provide startups with capital in return for a percentage of the company\u2019s revenues. He also sees startups using crowdfunding as a method to fundraise, as well as venture building \u2014 which he says could thrive this year.<\/p>\n

Those heeding this advice will find takers: <\/strong>Several investors we spoke to are still bullish on Egyptian startups. \u201cI think the Egypt story will be even better\u201d this year, El Shalakany said, adding that he expects to invest in around 16 startups out of one of Acasia\u2019s funds \u2014 Fund I \u2014 this year, a big portion of which will be Egyptian startups. Asaad is also looking at fintech and agritech startups, while Tkachenko has named these two sectors and sustainability startups more generally, as some of the potential hot sectors for this year.<\/p>\n

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Your top stories on future trends for the week:<\/strong><\/p>\n