Technology startups success determinants in Egypt

Technology startups success determinants in Egypt

Technology startups success determinants in Egypt

This blog is part of the study i recently published on my blog. you may download it from the following link.

As mentioned in the title, this blog targets the success and failure factors and determinants of technology startups in Egypt. Although, i see it is applicable to any developing country or in countries where you find bureaucracy and corruption.

The factors and determinants mentioned here are the factors we studied. some of them are major others are minors. Factors are defined from literature reviews and peers interviews.

Factors are defined into four groups:

  1. Factors related to the entrepreneur himself
  2. Factors related to the Ecosystem and its maturity
  3. Factors related to the market and its size and purchasing power
  4. Factors related to the government

How do we define success. Success in business usually defined in terms of profit, usually expressed as “increasing shareholders wealth”. In startups, and specially in a country such as Egypt, the definition could be more deeper.

Success is described by; the longer the entrepreneur can survive and prevent involuntary exit, the more successful he is.

Below are the definition of each factors studied, and in a coming blog, we will study the effect of each factor.

ُEntrepreneur Factors

Leadership Skills: entrepreneur motivational attitude to motivate the employees to achieve the company vision and strategic objectives and goals.
Focus Strategy: entrepreneur motivational attitude to achieve focusing on a few target markets who are distinct groups with specialized needs (Focus strategy rather than diversification strategy).
Entrepreneur Qualifications: the effect of education, general experience and industry experience on all the business aspects.
Interdisciplinary of the founding team: the founding team diversity in experiences, education, culture and even nationality.
Business Skills: entrepreneur skills for recognizing opportunities and the entrepreneur’s willingness to take risk  and their orientation to make money.
Soft Skills: The characters and capabilities of attitude and behavior instead of knowledge or technical ability, Innovation, ambition, optimism, flexibility and adaptability.
Ethical Behavior: Ethical entrepreneur is committed to achieve business success, without contradicting with personal ethics and values, his/her humanity and honesty are motives against unethical business temptation.
Networking and Social Skills: The strong relationships with potential customers, business partners and government bodies.
Luck: The force that causes things, especially good things, to happen to entrepreneur by chance and not as a result of his own efforts or abilities.

Ecosystem factors

Availability of Incubators, Accelerators and Advisors: Availability of entities that provide know-how for the new business entrepreneurs, such incubators act as business accelerators for the ICT startups, also they provide advisors and consultants in various fields like legal and marketing advisors.
Availability of Financing Agencies: availability of Venture Capitals or Angel donors who have intentions to provide fund for small and medium enterprises
Non-Governmental Organizations Support: The efforts done by NGOs aiming for social and economic change which eventually helps the private business sector especially SMEs
Availability of Business Partners: All partners that provide entrepreneur with important activities necessary for his success.

Market Factors

Egyptian Market Opportunity: The presence of business need in the market to develop new products and services which are not fully supplied in the Egyptian market.
Egyptian Market Risk: The sum factors that make working in Egyptian market is risky
Customers’ availability: The potential for the market current customers to purchase the product/service to generate profit.
Demographic Factors: Unemployment, poverty, high dependency ratio, and illiteracy rates.
Government Support Program Efficiency: The measure of how efficient the government support programs to provide financial, technical and non-technical support for ICT companies.

Business Environment

Governmental Regulations: The governmental laws, rules and policies that affect the ICT industry either directly or indirectly.
Corruption: The misuse or the abuse of public office for private gain.
Military Service: The compulsory service in Egypt for males, from 14 months to 36 months based on the age and education level.
Infrastructure: The basic physical and organizational structures and facilities (e.g. power supplies, buildings, roads,) needed for the operations of ICT enterprises.
Political and Economic instability: The tendency of a government to collapse.
Internet Services: The availability of different internet technologies  which are efficient with reasonable prices, required for ICT companies in Egypt.
Legal Form: How the business entity is formed as per the local commercial law In Egypt
Legal Environment: The power of law enforcement represented in laws’ entities, procedures and environment that protect rights and provide justice for ICT small business in Egypt.
Availability of Qualified Employees: The ability to headhunt qualified and talented employees.

Lesson in a graph, Relation between product life cycle and Marketing message, Distribution, Price, and management style

Relation between product life cycle and Marketing message, Distribution, Price, and management style

Lesson in a graph: Classical 4P’s and its components

classical 4Ps

Sales, Marketing, and Strategy !

strategy-marketing-innovation_615x358

The Cash flow template…

download the excel template

Many visitors who visited my 3 parts article that talks about how to make a financial plan that rocks, and also those who red the article about “how to valuate your startup company” asked me for the template i used…

here is a link for the template, enjoy …

Cash flow planing and valuation template based on DCF

this template is well explained in the four blogs below

How to Rock your start-up project Financial plan – Part.1 (Build the template)

How to Rock your start-up project Financial plan – Part.2 (Make different scenarios)

How to Rock your start-up project Financial plan – Part.3. (Financial decision criterion)

How much your Software startup company worth

the first three blogs show how to plan your cash flow, the fourth shows you how to calculate the discount rate…

if you find it useful and helpful, please don’t forget to share it and to follow my blog.

Thank you all

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I am starting a SCRUM course…

I am starting a course on SCRUM frame work. For those who do not know it, it is a management framework that you can use  to manage any rapid changing project or business. Usually used to manage software development teams. But i believe, any project manager in any business domain, any entrepreneur or any executive should know about it.

At the end of the course, I am planning to have video lecture on how to use scrum to manage your life and family activities.

Please subscribe to the channel hosting the course to know about new lectures, and please like and share the lecture.

Channel URL https://www.youtube.com/user/MoveITChannel

Thanks

Being CEO

evernote-0295

people have this vision of being the CEO of a company they started and being on the top of the pyramid…

What it’s really like: everyone else is your boss – all of your employees, customers, partners, users, media are your boss. I’ve never had more bosses and needed to account for more people today.

The life of most CEO’s is reporting to everyone else … if you want to exercise power and authority over people, join the military or go into politics. Do not be an entrepreneur.”

Phil Libin, CEO of Evernote.

How much your Software startup company worth

business_valuations

Three years ago, i planned to raise an investment in my company. The first question i asked myself then was, How much equity the investor will take for the money he will invest. That was a very hard question …

The first thing came to my mind then is to go for a financial expert to do the company valuation. Their rates was shocking and i get back and decided to do it myself. From the first moment i decided that, i realized that it will take a lot of time, could be months. I am an engineer, but i already have a good accounting background from a 3 months dedicated course. And hence I started by Google and red a lot of articles about “company’s valuation” just to decide the study road map. After a one month of reading articles. i searched for a course about financing. Coursera was a very good destination and i got a course there for 8 weeks from Michigan university. After that course, i went back and red again all the articles i red before. and you can definitely say that this article is a summary of my findings. I hope you like it and find it useful, if you do please share it and leave me your feedback and comments.

For a company that all its value is in intangible asset like a brand or software or portal, You will not probably find a way to valuate it except with the “discounting cash flow” approach. In this approach, you valuate your company with the business it can generate in the future. simply, how much business you can do in the future defines your current value.

to work with this approach you need to know two major things:

  1. Your Sales and profit forecast over five years at least.
  2. The discounting Rate (the rate you going to use to discount your future cash flow into present value).

discounting approach

In a recent article i have wrote about “how to build a financial cash flow plan“. and Soon i will write about “how to build your business plan“. This article is focusing on how to calculate Discount rate.

A major factor in applying discounted cash flow approach is the discount rate. Discount Rate is calculated based on three sub factors, below we will talk about how these three factors are calculated and how they are affected by the country you live in. I have made two examples, one from USA where i live and invest now, and the other from Egypt, where i used to do business before.

Rate of Return of the risk free:

The risk-free rate of return is the theoretical rate of return of an investment with zero risk. It is a theoretical concept as there is no risk free business. and it is used as starting point for calculating the cost of equity and capital.  For instance, a bank considering a loan application will start with the risk-free rate and then add additional interest for other risk components such as default risk, inflation risk, and, if the loan is to a foreign company, currency risk.

Usually it is calculated based on the return on government bonds as it could be the most safe investments.

In Jan 2015

  • Return on USA ponds is expected to reach 3.4% at the end of 2015 for 10 years bond.
  • And it is almost 15.27% for Egyptian government over the same period.

Definitely we can not take the market risk free factor as a discount factor for our business. the Discount factor in other project rather than government bond is higher, because the risk is higher, so how much higher is it …

Market Risk premium:

Market Risk premium are percentages that you just pick it up from the internet, we don’t much care about how it has been calculated. It reflects the economical and political stability of the country.

As per Jan 2015:

Egypt: Moody’s rating: Caa1, country risk premium is 4.42%.
USA: Moody’s rating: Aaa, Country risk premium is 0.00%

In 2011

Egypt: Moody’s rating: Ba1, and the country risk premium is 3.6%

Ref: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

Beta industry factor:

In finance, Beta is generally a measure of risk. so each industry has a calculated beta factor. it changes every year based on global economy health. You can check beta factor of each industry from this link:

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html

By jan 2015…
software (entertainment): 1.12
Software (internet): 1.19
Software (system and applications): 1.1

so based on three mentioned factors and considering that i work in the software (internet) industry then the discounting  factor in Jan 2015 is as follow:

For USA: (3.4%+0.00%) * 1.19 = 4.046%.

whereas for Egypt: (15.27%+4.42%) * 1.19 = 23.43%

Now you know the Discounting factor in which you going to use to discount all your future cash flow that your company can make … into today value.

Now you must have cash flow forecast for 5 years ahead. please review my article ” How to Rock your start-up project Financial plan – Part.1 (Build the template)”  and i prefer you plan your forecast based on this template.

Also review the article “How to Rock your start-up project Financial plan – Part.3. (Financial decision criterion’s)”  to know how to calculate your project Net present value. when you calculate your Net present value, you will use the discounting factor we calculated before.

Many entrepreneurs stop here and assume that the NPV is equal to their startup value, actually i did that before… 🙂

I think you may do that, if your idea is not tested in the market yet, and you have no good prove that your idea can fulfill and meet your forecast expectations. But if your idea is already generating money and you used your cash flow history as a prove that you can fulfill and meet your forecast, then your will be less estimating your company value if you sold it at the NPV.

You have calculated your NPV based on a 5 years cash flow. In real life, your project will not stop and terminate at the end of the 5 years… right ? … your project will continue generate money, and the company could last for decades making profits. how do you include this factor.

Here comes a factor named:  Perpetuity net cash flow (NCF). A perpetuity is a constant stream of identical cash flows with no end. we will keep things simple and make it equal to the net profit at the end of the fifth year. (assuming that you continue generate the same profit every year, not more nor less)

Then we will calculate the “Future value of perpetuity NCF” by dividing the perpetuity NCF over the discount rate calculated above.

Then we will calculate the Present value of the Future value of perpetuity NCF.

And finally the project value is equal to the NPV over the 5 years and the present value of the Future Value of perpetuity NCF.

Feeling lost 🙂 …. here is the Example…

I will make an example using a cash flow stream of one of my projects. i will assume that the project will have the same cash flow stream in Egypt and USA and valuate the project based on the discounting rate calculated above.

In Case the project is valuated in Egypt:

eGYPT

NPV = 1,115,929.50$
Perpetuity net cash flow (NCF) = 2,397,099.94$ (net profit in the last year).
Future value of perpetuity NCF = Perpetuity net cash flow / Discount factor = 2,397,099.94/0.2343 = 10,230,900.30$
Present value of perpetuity NCF = 3,571,167.39$ (see the following figure to know this value is calculated)

Then the company value Equals 1,115,929.50 + 3,571,167.39$ = 4,687,096.89$

PV

Now lets repeat it with the discount factor in USA.

NPV = 2,769,570.18$
Perpetuity net cash flow (NCF) = 2,397,099.94$ (net profit in the last year).
Future value of perpetuity NCF = Perpetuity net cash flow / Discount factor = 2,397,099.94/0.04046 = 59,246,167.56$
Present value of perpetuity NCF = 48,588,408.69$

Then the company value Equals 2,769,570.18 + 48,588,408,69$ = 51,358,050.87$

An important note i should mention here, is that i compared USA to Egypt, assuming that the project will make the same cash flow stream in both countries which is not right, and assuming the same taxation rate, which is not right too.
I just fixed these two conditions to have some insights on the effects of Risk free return and market risk premium.

I did my best to simplify it, if you have a basic knowledge about financing, i mean you know about the NPV, FV, …etc. then mostly you will not find a problem understanding this article. If not, you may need to read about it from the internet. and you may follow the steps i provided to you in this article even if you don’t fully understand it.

Finally, if you like it please share it. If you have any question, i will be very happy to answer you…

You can also download the template from Here
download the template

Creative Marketing

iwc_watch1

I once red about a marketing campaign led by Judy Genshaft, the president of Florida university. The University was building a a specialized research center in biological engineering and bio-economy, and they did not have enough money for that.

Judy sold the the bricks that going to be used to build the center for business men who graduated from the university. Each who wants his name to be written on a brick on the center walls, pays 100$. And those whom want their names to be written inside the center halls pay 10,000$ !!!

And it works, the center has been built using the money paid by those who want their names to be written on the center bricks.

Funding and investments are not necessary come from the usual channels we know. Try think out of the box, find alternative ways, extend your mind, stretch your capabilities, and think in groups.

What kind of business investors seek

high quality revenue

Investors simply like high quality revenue, that is it :)…

In business valuation, high quality revenue—the kind of earnings that investors seek—is defined by three essential characteristics: Predictability, Profitability, and Diversity.

Predictability is the most important, so we will take about it the last.

High Quality revenue2

Profitability:

It defines what is your gross margin, which is (net sales – net cost). investors usually likes business that generates gross margin of 70% and more !!!

Diversity:

When we evaluate companies we look closely at revenue concentration. Investors do not like a business with main revenue stream coming from one product or one customer. It could be accepted for a company in its early stages, but they should have a plan on how to diversify their revenue stream.

Predictability:

This the most critical and important factor, we can define it by the following sentences:

  • How many paying customers you have from the last year.
  • How much cash you can confirm that you going to earn this year or the next year.
  • how many customers you lose each year.

Investors look for the bushiness with recurring revenue.

As an example, if you are in the IT business and have a cloud application where each customer pay 100$ per month. You are at the end of 2014 with 100 customers. You usually lose 10% of your customers each year (churn rate), then we can easily predict that you going to have recurring revenue of 9000$ per month during the next year. If you know your growth rate just like you know your churn rate, then this will be better.

You can count on recurring revenue month over month and year over year. Cash flow is steady and improving all the time. You don’t have to stress about payroll and other expenses, so you can put your energy toward more strategic business-building activities. Having a steady income stream liberates you to take risks and get more aggressive with your business plan. Move into a new market. Go after larger, harder-to-land clients. If you miss a sales target one month, your cash flow remains unaffected.

Recurring revenue builds a valuable legacy for whenever you decide to exit your business. Increasing the amount of monthly recurring revenue coming into your business raises the quality of your earnings and the overall value of your business.

Some professionals estimate that a business with recurring revenue is worth 16 times more than a one-time revenue model (such as rip and replace). Another recent article estimated that an owner can expect to receive 4 to 6 times EBITDA [earnings before interest, taxes, depreciation, and amortization] for a company on a one-time sales model, while owners with recurring revenue can expect a payday of 6 to 8 times EBITDA

Focus on growth and growth alone is always a temporary strategy. Over time, a company’s value becomes a function of both growth and cash flow. Superior earnings eventually lead to superior value creation.

It’s a simple enough framework, but often difficult to achieve. High-quality revenue requires predictability, profitability and diversity. Do you have highly predictable revenue with high gross margins and without revenue concentration? …

Think about it