Ideavelopers is the first technology incubator in Egypt. Ideavelopers has come out of a project that started at CIIC, the equity firm that merged brokerage house EFG-Hermes in 2002. CIIC had one of the largest portfolios of IT startups in Egypt, but was looking for a more structured way to raise capital for young firms and provide the management guidance that they may not have the experience to have accumulated. It worked on the idea with the Ministry of Communications and Information Technology (MCIT), which was keen to support a private-sector initiative that would help new companies. However, MCIT saw itself as a regulator and facilitator of the industry, not an investor in its own right, leaving CIIC looking for other investors to back the project.

Two years and much market research later, the final result is Ideavelopers, a company that pools venture capital from several investors, finds young companies to back, and provides them consultancy services and guidance in achieving their business plans.

With the state of investment in Egypt, technology companies have a tough time - whether debt or equity-based, said Walid Bakr, Ideavelopers’ Chief Business Development Officer. This is especially true when there is an economic downturn. Banks do not want to back intangible assets.

Bakr is veteran of the US IT industry, where he ran several successful software companies. Although keen to apply the lessons and dynamism of the America’s venture capital-funded IT boom, he says that the incubator idea common in the developing world had to be adapted to the realities of the Egyptian market. With the scarcity of capital that is available in the country, he said Ideavelopers would be much more hands-on with its investments.

We decided to build a venture capital fund that has a pool of money to fund the startups we choose, and alongside that to have another company that helps in the pre-investment stage in selecting the investments... That post-investment provides an array of what we call strategic services. This is the support that a company needs: strategic planning, business models, financial structure, human resources, sales and marketing and so on, Bakr explained. You get these PhDs from MIT approaching you - they have great technical skills, but no managerial skills. We try to support these people.

Ideavelopers is split into two parts: a venture capital fund and another company that provides management support that a young company might need: strategic planning, business models, financial structure, human resources, sales and marketing. The advisory company, which charges for its services, was formed between CIIC-EFG Hermes and Telecom Egypt, with the former owning about 80% of the capital. The fund part of the business regroups seven local investors that have committed a total of LE50m: CIIC/EFG Hermes, Telecom Egypt, Faysal Islamic Bank, Misr Iran Development Bank, Misr Insurance, Eastern Insurance and Egyptian Re-Insurance.

Bakr also had to devise new exit strategies for these investors to recoup their investments. In the US or Europe, the traditional method is to have a company carry out an initial public offering (IPO) on a stock market such as the NASDAQ in New York. Otherwise, startups may opt for a second round of investment to continue developing (with the second round investors buying out the first round ones). The last option is to merge and be acquired with an existing company.

I would say that in 90% of cases we will be looking at mergers and acquisitions, Bakr said.

But Ideavelopers’ success in selling its investments to other companies will largely depend on the health of the IT sector, since after all a bigger company needs to exist in the market in the first place to acquire a start-up. In Egypt, there are only a handful of IT firms that are large enough to acquire startups - as for instance the Orascom Telecom-owned Linkdotnet did in 2001 when it bought eight smaller companies to add to its core internet service provider business. That merger remains the single biggest dotcom merger to have taken place in Egypt’s young IT sector.

Three startups have already been selected by Ideavelopers - a software developer, a professional service provider and a chip design firm. Eventually, though, he hopes that a total of 15 will be selected from the hundreds of business plans that are sent to the company for evaluation. For the most successful of these, Bakr hopes to realise 300-400% per year profit, adding that his conservative average return rate will be to the tune of 30-50% per year. On average, each company will received about LE4m in funding and investors should be able to recoup their investment in 3-5 years.

Depending on the success of this first round of investment, Ideavelopers will then knock on the doors of local and foreign investors for another round of fundraising. With a little luck, this time it will be able to provide Egyptian success stories that will show that the risk of investing in the Egyptian market is worth it.

The Oxford Business Group