What are the repercussions of Capiter’s downfall?

There was a surge in start-up activity during the pandemic leading to unprecedented investment channeled into some of the most promising start-ups in the region. Valuations soared, startups hired and expanded rapidly, and investors continued to pour money into what the founders promised would be the next unicorn. This rapid growth, while it may seem excellent on the surface, is unsustainable in the current economic climate. Uncertainty in global markets makes it difficult for even the most skilled founders to make ends meet, but some companies are found to lack a foundation strong enough to withstand the damage.

For Capiter, an Egypt-based B2B e-commerce platform, adopting a “grow at all costs” strategy has proven nothing short of disastrous. Since 2020, the company has 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 collapsed, less than two years after it launched.

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

The company’s board issued a statement on Friday revealing that the Capiters co-founders had been forced to leave their positions as CEO and COO by its board, adding that current CFO Majid El Gazouli , will act as interim executive director. .

“This action follows the co-founders’ failure to fulfill their fiduciary duties over the past week and failing to brief Board and shareholder representatives during in-person on-site due diligence meetings for a potential merger,” it says. the notice.

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 saying that neither he nor his brother had been notified of his retirement from the company. and he added that they had to leave the country to “deal with investors” abroad and regularly attend board meetings virtually from their current location in the United Arab Emirates.

But a couple of the startup’s investors have denied Nouh’s claims. One of the early investors has already canceled the company, 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 allegedly told him they had to leave the country after being repeatedly harassed by debt collectors, including the retailers they work with. Rashad added that the founders were offered a negative opportunity from new investors, which they declined.

A Capiter employee told Wamda about the current uncertainty. Although the company’s website has been removed, some departments are still operational. The source asked to remain anonymous.

They said it is not yet clear who will be in charge. “We have no idea who runs the company at the moment. There are still some operations going on and each department works independently without reporting to anyone. The founders just disappeared,” they said. “We didn’t see any of that coming. Expansion plans were underway.”

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

Internal structural problems

This confusing situation and conflicting reports speak volumes about the company’s deep structural ills.

In recent months, Capiter had resorted to multiple rounds of layoffs and pay freezes, citing cash flow problems. In fact, the company had been struggling since the beginning of the year, and reports of mismanagement, unexplained expenses, and company culture problems began to surface even before the financial and economic crisis hitting Egypt.

As soon as news of the founders’ sudden absence broke, scores of former Capiter employees took to social media to reflect on their work experience at the company, and many of the testimonials were not positive in nature.

In a Facebook postMohammed Abu Rayah, facilities manager at Capiter, said poor business planning was a key reason behind the company’s low productivity, adding that it had largely focused on building partnerships with lesser-known brands with low volume of goods. sales.

Citing glaring flaws in the overall internal culture, he added that senior leadership unfairly favored bringing in global talent over local ones, adding that they were overconfident to the point of undermining the views of subordinates.

“As companies grow, they often overlook the importance of enabling a strong organizational structure, culture and behavior, which can help companies stay afloat during the toughest of times,” says Kareem Hemdan, Founder from local venture capital firm Denare. “More and more founders are becoming aware of the importance of working with experts from different areas rather than running the program alone or relying on people with less experience. More importantly, the role of the board will be magnified in terms of the overall performance of the business and it will not only be exclusive of financial management.”

repercussions

Capiter is not the only highly valued The Egyptian startup will be in trouble lately, 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 shouldn’t be set too high because the market is going through a correction phase. If you have to look at the startup portfolio ratio for any fund, it’s usually very low, but it’s projected to be higher in the next period after this correction”. In general, the companies that stick to achieving the formula of profitability, sustainability and growth are the ones that are going to survive,” says Hemdan.

He expects the impact of the crisis to ripple across all stakeholders across the ecosystem, adding that more financial control practices are likely to be in play, meaning “injection of funds could be conditional on companies reach measurable milestones, especially as early as possible. stages of business development.

Funding in Egyptian startups reached $317 million during the first half of 2022, an increase of 135% compared to the first half of 2021, but recent economic problems have dampened investor interest and this recent episode will probably it will deter investors, particularly global ones.

Capiter’s story highlights the need for greater accountability and governance. It suggests that Egypt, while one of the largest startup ecosystems in the region, is still young and has not matured enough to instill the right checks and balances. Most startups fail, hopefully more will follow after Capiter’s demise, but there is a right and wrong way to fail. Being honest with employees, the board, and investors about difficulties and honoring their time and commitment can help ease 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 largest and most active startup hubs. However, it places greater responsibility on investors to conduct more extensive due diligence, not only on a startup’s finances, but also on the character of the founders. Company boards will need to maintain the right governance structures and act more quickly when needed. The ecosystem at the regional level will have to question what it wants more: high valuations and growth at all costs or a sustainable path to profitability.

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