Start-ups suffering from lack of funds, investments under pressure of expenses

Emerging companies are facing several difficulties in light of the scarcity of funds globally and the US Federal Reserve’s decision to raise the interest rates to 2.5% in the hope of calming the economy and limiting the rise in prices.

These factors have contributed to a decline in venture capital investments from pumping new funds in a flexible manner, with investment funds and venture capital companies becoming more careful with their funds, causing a decrease in opportunities for start-ups to obtain financing, which threatens their continuity.

Consequently, entrepreneurship officials and experts believe that start-ups should face this challenge by changing their strategy to work on achieving profitability instead of focusing on growth while working on compressing costs, reducing expenses, and abandoning the money-burning policy to achieve accelerated growth.

Omar Al-Monayar — CEO and Co-Founder of Sigma Fit for clothing technology — said that the start-up sector faces a strong challenge in light of the high inflation and the lack of injected investments by investors and investment funds.

Al-Monayar explained that there are many companies about to close, and some companies have already closed, others have laid off a large part of their employees in light of the lack of current investments, stressing the difficulty of attracting new investments to this sector in light of the interest rate hike on the USD by the US Federal Reserve.

Furthermore, he believes that start-ups should reduce their expenses and strive to achieve profits to keep pace with the current economic changes and maintain their continuity.

Tamer Ahmed — an expert in entrepreneurship — believes that emerging technology companies are changing their strategy in light of the scarcity of funds by laying off some of their employees and limiting their horizontal expansion with high inflation and changing market dynamics.

He explained that the model of start-ups relying on funds as a means to maintain growth is dangerous, especially in the current circumstances, and companies must rely on the returns they achieve from their products or services, not investments.

Ahmed also believes that most of the companies that rely on the financing model to drive the growth of companies will stop, as the market is currently in a stage of “filtering” companies based on unhealthy foundations from an economic point of view.

Furthermore, he believes that the phenomenon of exaggeratedly pumping money into marketing to achieve rapid growth rates in what is known as “money burning” to attract funding will stop given the lack of resources currently available for start-ups.

He advises technology companies that are in crisis due to the current situation to reduce their employees’ salaries by 10%, for example, instead of laying them off, especially since letting employees go leads to experience drain in the company.

Also, companies should change their plans to rely primarily on revenues to spend on the company and its expansion rather than attracting funds and investments.

Khaled Ismail — an investment expert in entrepreneurship projects — believes that the current difficult economic conditions require start-ups to search for quick solutions to overcome bad economic conditions and high inflation, which prompted many companies to reduce the size of their business and reduce their expenses.

Ismail believes that the market for emerging companies will witness a major movement represented by the closure of a large number of companies that depended on the money burning mechanism due to the lack of investments expected to be attracted in the current period, while other companies will face a great challenge to survive by transforming their business model to achieve profits instead of focusing on growth only.

Egyptian start-ups were able to attract $380m in foreign investments from the beginning of January until the end of last May — a growth rate of 190%, compared to the first five months of 2021, according to the Information Technology Industry Development Agency.