It’s no secret that Egypt is riddled with problems. Just ask any of the millions of Egyptians who took to the streets earlier this year, or back in 2011. They were frustrated, angry and tired of the government’s apparent inability to alleviate mounting pressures, from rising energy costs and rampant inflation, to a failing education system and growing unemployment – the list goes on.
Nearly a quarter of the government’s budget is spent on energy subsidies: Egyptians currently pay about a quarter of the real energy costs of the country, something that may change very soon given the current political and economic climate. More than 25 per cent of the country lives below the national poverty line, and yet such are the state of Egypt’s schools, citizens spend as much as $3bn annually on private tutors. According to the country’s central statistics bureau, the unemployment rate among Egyptians aged 20-24 has reached 39 per cent.
This last number is proving both an enormous challenge and powerful catalyst. With so many unemployed youth, start-ups are flourishing. And many young entrepreneurs are embracing social models of business, finding ways to profit from solving the very same problems that are killing opportunities elsewhere. This vibrant class of social entrepreneurs, like Egypt’s youth-driven start-up ecosystem itself, is new. However, while few mechanisms currently exist to fund and support young business people and their ventures, even fewer exist in the impact investment space.
Steven Haley and his team are trying to change that. As well as being country director for Mercy Corps, a global non-profit, Haley is also the general manager of MC Egypt, a for-profit experimental offshoot that is working to establish Egypt’s first localised ‘impact fund’ to support and grow mission-driven businesses. The timing is right, he says, for a different solution.
“You have inspired entrepreneurs, an unemployed uneducated workforce, a generation who wants to make a difference, and geographic proximity to a large number of poor,” Haley explains. It’s a perfect cocktail for social entrepreneurship.
What’s more, he adds, “the best opportunity to enable significant [social] change is in a country already going through social transition… and that’s obviously [the case] in Egypt.”
Mercy Corps, founded more than three decades ago and operational in over 40 countries with an operating budget in excess of $300m, is testing the waters in a space few have ventured, and none have proved success in: seed-stage impact investing in the Middle East and North Africa.
“If we’re going to solve tough challenges we face, we’re limiting ourselves in these buckets: non-profit, for profit, public, etc,” says Neal Keny-Guyer, CEO of Mercy Corps. “We’re recognising in today’s world this concept of convergence… where we’re seeing new kinds of institutional structures, such as social entrepreneurship and philanthropic investment.”
“We’re realising the traditional model of NGOs [non-governmental organisations] hasn’t been able to solve the world’s problems,” adds Haley. “We have to be looking at different types of models, and the private sector has to be included.”
In Egypt, however, these two sectors couldn’t be more separate. Most big industry in the private sector has apparently thrived on legacy, inheritance, cronyism, and corrupt contracts. Only more recently has entrepreneurship become a compelling force, while the NGO sector has struggled for decades with strict government oversight and restrictions.
Loay El-Shawarby, chairman of Nahdet El Mahrousa (‘Renaissance of Egypt’), a well-established youth-led NGO in Egypt, says the January 2011 revolution exited and empowered people to launch their own initiatives, both non-profit and for-profit.
“Many people feel a sense of ownership of the country, and trust and confidence. They want to change the country for themselves,” Shawarby says. “But they also need to make money, which is where social entrepreneurship comes in.”
Muhammad Radwan, an activist and community manager at icecairo, a new co-working and training space in the capital for young Egyptians working on green technology projects, agrees, but views the change slightly differently.
“Before the revolution, those who wanted to change things channelled their energy into the NGO scene,” Radwan says, adding that now legislation is pending that is likely to restrict NGOs even further, young entrepreneurs are shifting towards the private sector. “These entrepreneurs are trying to fix the same problems in a different way.”
Impact investment funds are a growing phenomenon, led mainly by wealthy investors looking to disburse their dollars in a more strategic way, and large innovative foundations or special funds created by socially-motivated investors. It’s an investment strategy that seeks to strike a delicate, and often difficult and imprecise balance between financial returns and social impact, by investing in businesses that can generate profit while having a positive social or environmental impact.
However, while regions like sub-Saharan Africa are teeming with impact investors – in Kenya, for example there are at least half a dozen or more impact funds scrambling for deals – the Middle East remains largely untouched. So why isn’t anyone charting the waters?
Some have. A decade ago, Acumen Fund, a non-profit global venture fund that is considered a pioneer in the impact investing space, made three investments in Egypt supporting agricultural and livelihood creation, which it has since exited.
“We were happy with those investments, and entrepreneurs. So four years ago, we looked at how to do it again,” says Ankur Shah, Acumen’s head of sector strategies, based in Dubai.
The Acumen team looks for three things when considering market entry, according to Shah. “Is there a pipeline, is there existing regulation that allows a non-profit to make equity investments, and are there organisations and donors to help us build a truly local institution?”
Ultimately, their criterion wasn’t met. “Continued uncertainty in the region has delayed the creation of this infrastructure and it’s unclear if it will exist any time soon,” Shah explains. The organisation has grown significantly in other regions – East Africa and South Asia – but has “no immediate plans to expand into the Middle East”.
It’s not just Egypt that is struggling to attract impact investment. Heather Henyon, founder and managing partner of Balthazar Capital, a Dubai-based microfinance investment advisory firm, conducted a survey in 2011 of commercial and social investors for microfinance, seen as a form of impact investing, asking why they weren’t coming to the region.
“Part of it is positive,” she explains: over the years, more local banks have become involved with microfinance institutions (MFIs). “Around 75 per cent of funding [for MFIs] comes from local banks.” However, these MFIs are lending to small micro-entrepreneurs rather than scalable social enterprises hoping for national or regional impact. “These groups are not going to become Microsoft,” she says.
There is an even more troubling figure, however, that contributes to the tough environment. “This region has the lowest access to finance in the world, even worse than sub-Saharan Africa,” says Henyon. And financing is vital for getting small social enterprises off the ground. Most impact investors, like Acumen, focus on deals worth between $300,000 and $2m. What countries like Egypt need right now is support for smaller start-ups, deals worth around $100,000 to get a bright social enterprise off the ground.
MC Egypt is hoping to fill this space, helping early-stage social businesses launch and then reach the next level of funding. “We’re filling a gap, hoping to pave the way for firms to reach that higher investment mark,” says Cornelius O’Donnell, MC Egypt’s regional entrepreneurship advisor.
MC Egypt’s eventual range is between $50,000 and $300,000, below that of most traditional impact investors. Since the level of funding is relatively low, MC Egypt is looking for around $1.5m in initial philanthropic investment from high-net-worth individuals interested in seeing this model proven, to make their first half-dozen investments. Then it plans to find more established investors to help build a $5m fund. O’Donnell expects returns to come within seven to 10 years, or possibly earlier for technology ventures.
Technology ventures are at the forefront of a social enterprise ecosystem in Egypt that is already building itself. One new arrival, Innoventures, helps creative entrepreneurs build successful businesses and runs an accelerator for several clean-tech and ICT startups. Flat6Labs, a Cairo-based accelerator that has already invested in more than 30 companies, some of which are solving social problems, is generating a great deal of buzz.
One of the social startups, Nafham, which means ‘we understand’ in Arabic, is attempting to tackle education. It has created an online educational platform linked to Egypt’s mandated public curriculum, which has introduced a new concept called ‘crowd teaching’. This encourages students to create and upload five to 20-minute video lessons to share with their peers. “We don’t want it to be one-way learning,” says Mostafa Farahat, Nafham’s general manager. “We want to engage people to create videos themselves.”
The videos are vetted, before being categorised by grade, subject, topic and date, allowing for easier navigation.
Then, there’s Recyclobekia, founded by then 20-year old university student Mostafa Hemdan in 2011 with just $1,000 in capital. Recyclobekia takes electronic waste including cell phones, computers, printers, and monitors, from large firms and sells it on the global market to be recycled in a green-certified way. It now exports 25 tons of e-waste every month, and although the company’s valuation in July 2012 was around $400,000, “now it’s probably between $700,000 and $800,000,” says Hemdan. “There’s huge opportunity [for social businesses] because Egypt has so many problems.”
While there may be a clear need, or at least budding desire, to invest in sustainable solutions to Egypt’s enormous social challenges, it’s also clear that now is perhaps one of the hardest times to convince people to invest in the country – particularly when it comes to impact investing, a relatively new industry sector that hasn’t yet demonstrated clear returns. However at MC Egypt, Haley says it’s not just about today, or even tomorrow. It’s about the future.
“Any investor who sees Egypt as a place not to make an investment now, is not thinking straight,” he insists. It’s a “bargain market” because the situation opportunities aren’t entirely clear, for either financial returns or social impact.
“If you can imagine Egypt in five years, it’s obviously going to be better. We’re betting on some of the changes we foresee happening in Egypt,” Haley says, noting the rise of mobile money, a spike in tourism, the stabilisation of the currency, and changes in government subsidy programmes.
And even if the venture does not play out exactly as intended, Mercy Corps’ CEO is philosophical. “The investment may not pay off in the next month or the next year,” says Keny-Guyer, “but you’ll be on the right side of history.”