There was a surge in startup activity during the pandemic that saw record-breaking investment channeled to some of the region’s most promising startups. Valuations soared, startups hired and expanded rapidly and investors kept ploughing money into what founders promised would be the next unicorn. This rapid growth, while it may look great on the surface, is unsustainable in today’s economic climate. The existing uncertainty in global markets makes it hard for even the most qualified founders to make ends meet, but some businesses are found to be lacking the foundation that is sturdy enough to withstand the damage.

For Capiter, an Egypt-based B2B e-commerce platform, adopting a “growth at all costs” strategy has proved nothing short of disastrous. Since 2020, the company managed to raise $66 million according to Crunchbase from a host of regional and global investors including Foundation Ventures, Shorooq Partners and MSA Capital. But the startup has now fallen apart, less than two years after it was launched. 

Rumours surfaced on social media last week, accusing the founders, brothers Mahmoud and Ahmed Nouh, of funneling the company’s finances into their own private accounts and fleeing the country. 

The company’s board on Friday issued a statement in which it disclosed that Capiters’ co-founders were forced to leave their positions as CEO and COO by its board of directors, adding that the current CFO, Majid El Gazouli, will act as an interim CEO. 

"This action follows the co-founders’ inability to fulfill their fiduciary duties over the past week and not reporting to representatives of the Board and shareholders during on-site in-person due diligence meetings for a potential merger," the statement said.

In a phone conversation with the local TV show "ElHekaya" (The Story), Mahmoud Nouh, who is also a co-founder of SWVL, denied the news by saying that neither he nor his brother had been notified of their removal from company, adding that they had to leave the country to "deal with investors" abroad and that they regularly attend board meetings virtually from their current location in the UAE. 

But a couple of the startup’s investors have denied Nouh’s claims. One early investor has already written the company off, another described the current situation as “complicated” and a “horror story”.

According to Waleed Rashad, the founder of VOO, a marketplace for delivery services, said in a now-deleted Facebook post that the company was racked with debt. He claims to have spoken to the brothers who supposedly told him that they had to leave the country after being repeatedly harassed by debt collectors including retailers they work with. Rashad added that the founders were offered a down-round opportunity from new investors, which they refused. 

An employee at Capiter told Wamda of the ongoing uncertainty. While the company’s website has been taken down, some departments are still operational. The source asked to be anonymous. 

They said that it remains unclear who is going to be at the helm. "We have no idea who is running the company at the moment. There are still some operations going on and each department works independently without reporting to anybody. The founders just disappeared," they said. "We did not see any of that coming. Expansion plans were underway.” 

When the startup closed its $33 million Series A round in September 2021, it claimed to have 50,000 merchants and 1,000 sellers with more than 6,000 SKUs on its platform.

Internal structural issues 

This foggy situation and conflicting reports speak volumes about the company's deep-seated structural maladies.

Over the past few months, Capiter had resorted to multiple rounds of layoffs and salary freezes, citing cash flow challenges. In fact, the company had been struggling since the beginning of the year, and reports about mismanagement, unexplained spending and company culture issues started to surface even before the financial and economic crisis that is gripping Egypt. 

As soon as the news about the founders' sudden absence broke out, a slew of Capiter's former employees took to social media to ruminate over their experience working at the company, and many of the testimonies were not positive in nature. 

In a Facebook post, Mohammed Abu Rayah, a facilities manager at Capiter said that poor business planning was a key reason behind the company's low productivity, adding that it had focused heavily on striking partnerships with lesser-known brands with a low sales volume.

Citing glaring flaws in the overall internal culture, he added that the top brass unfairly favoured onboarding global talent over local ones, adding that they were overconfident to the point of undermining subordinates' opinions. 

"As companies grow, they often overlook the significance of enabling a strong organisational structure, culture and behaviour, which can help companies stay afloat during the most challenging times,” says Kareem Hemdan, founder of local VC firm Denare. “More and more founders are becoming aware of the importance of working with experts from different areas instead of running the show solo or relying on less experienced individuals. More importantly, the role of the board will be magnified in terms of the overall business performance and not just be exclusive to finances management.”

The repercussions 

Capiter is not the only highly-valued Egyptian startup to struggle as of late, several other startups have faced similar challenges, especially those in the mid-to-late funding stages. Hemdan attributes this to the fact that the local market is going through a key phase of development.

"The bar should not be too high because the market goes through a correction phase. If you have to look at the ratio of the startup portfolio for any fund, it is usually very low but projected to be higher in the coming period following this correction. All in all, businesses that stick to achieving profitability, sustainability and growth formula are the ones that are going to survive," Hemdan says. 

He expects that the impact of the crisis will trickle down to all stakeholders across the entire ecosystem, adding that more financial control practices are likely to be at play, meaning that "funding injection might be conditioned on companies achieving measurable milestones, especially at the earliest stages of business development". 

Funding in Egyptian startups touched $317 million during the first half of 2022, a 135 per cent increase when compared to the first half of 2021, but recent economic woes have slowed down investor interest and this recent episode will likely detract investors, particularly global ones. 

Capiter’s story highlights the need for greater accountability and governance. It suggests that Egypt, while one of the biggest startup ecosystems in the region, is still young and has not matured enough to instil the right checks and balances. The majority of startups fail, we expect more to follow Capiter’s demise, but there is a right and wrong way to fail. Being honest to the employees, board and investors about the struggles and honouring their time and commitment can help to mitigate the pain of failure. 

While the story reflects poorly on the region's startup ecosystem, it will not challenge Egypt's position as one of the region’s most active and biggest startup hubs. It does however, put a greater onus on investors to undertake more thorough due diligence, not just on a startup’s finances, but the character of the founders too. Company boards will need to maintain the right governance structures and take action more swiftly when required. The ecosystem regionally will have to question what it desires more - high valuations and growth at all costs or a sustainable path to profitability.