The team behind the pan-Arab regional accelerator tells us how they are building an ecosystem where risk-takers can thrive and take the Arab world forward.

Stephanie d'Arc Taylor has covered Middle Eastern entrepreneurship and business for four years from Beirut, Lebanon, specializing in arts, culture, and the hospitality sector. Follow her on Instagram @zerodarctaylor.

If you ask the folks behind regional startup accelerator Flat6Labs the hows and whys of them coming so far so, they are likely to tell you, with a wit that seems to run through all of them, that the blessings the universe has bestowed on them outnumber the curses so far.

But it hasn’t always been smooth sailing. The most challenging setback, perhaps, was a function of timing.

News of the program’s Cairo launch had only been in the public consciousness for 11 days when, on January 25, 2011, a massive protest movement erupted. Those protests eventually led to the ouster of then-President Hosni Mubarak, reverberations from which continue to be felt throughout the Middle East—marked in history as the Arab Spring.

But it’s not the protest movement or resulting instability that bothers Ahmed El Alfi, founder of Flat6Labs and its primary financing vehicle Sawari Ventures, as well as a veteran of many other startups and funds in Egypt and the US.

It’s that journalists like me keep on talking about it.

“In spite of our best efforts,” says a nonplussed El Alfi, over Skype from his home in southern California, “it has been fashionable for reporters to make that association [between Flat6Labs and the Egyptian revolution]. I hope that it goes out of fashion.”

El Alfi, if you’re reading this, please bear with us: We won’t say, as others have, that the Flat6 phenomenon is a result of the revolution, or that the two even have any causal relationship. In fact, it’s more instructive to contrast the two.

In these past seven years, Flat6—named after the elegant old Cairo apartment that houses the accelerator’s office—has launched three accelerators in Cairo, Jeddah ( both in 2013), and Abu Dhabi (in 2015).

Two more, in Beirut and Tunis, will accept applications for their first cycles this year. The revolution, according to some, has achieved far less.

As a whole, the accelerator has graduated over 100 companies founded by over 220 entrepreneurs in 19 cycles. Flat6 reports that half its companies get follow-on funding upon graduation; Chief Investment Officer Dina el-Shenoufy tells us that the value of Flat6’s portfolio of Cairo companies, in as-yet unrealized returns, has increased by 32% since 2011.

But success is a tricky subject to broach with Flat6’s upper management, both concerning whether they’ve achieved it, as well as how they define it in the first place.

Hany Al Sonbaty, co-founder at Flat6, and managing partner of Flat6’s parent company Sawari Ventures, and according to El Alfi, the accelerator’s original idea man, subscribes to two seemingly incompatible philosophies.

In some lights, he seems like a libertarian arch-capitalist, speaking of the ‘cream rising to the top,’ and a winner-loser dichotomy. These views are reflected in office decor: Tattered Ayn Rand paperbacks can be found on the office’s communal bookshelf next to books written (ostensibly) by the world’s most famous uber-capitalists.

To this version of Al Sonbaty, the Flat6 model is financially defensible: “We started this as an extension of the venture capital business. We want to make money…we do everything with that in mind. If I can’t give a return to investors that is a return they like, there’s no point in doing this….We are in the top quartile of our asset class, so we make money.”

Another side of Al Sonbaty perceives an overlay of metaphysical inevitability in the conception of Flat6, how it has developed, and, indeed, everything in life.

Part of the program’s origin mythology involves a tweet posted by Ramez Mohamed El-Serafy, who became Flat6’s CEO, in 2010.

Retweeted by a mutual friend, the tweet (the contents of which nobody can remember) caught the eye of Al Sonbaty, who became interested in El-Serafy’s profile and set up a meeting.

Today, both El Alfi and Al Sonbaty largely credit El-Serafy with the achievements of the program. “The X factor in [Flat6’s success] has always been the cosmic good fortune,” Al Sonbaty says about the tweet that launched a hundred startups. “I don’t think the cosmos shines on us necessarily, but there are a lot of unexplained chance encounters.”

For this side of Al Sonbaty, success is almost a vulgar word.

“Wow, you’re actually asking that question,” he marvels when I wonder how he accounts for Flat6’s success—meaning fast expansion, lots of applicants (Cairo’s last round attracted around 400 candidates), good rates of follow-on investment, and investor confidence—compared to the other startup accelerators launched in the region around the same time.

Success, for the metaphysical guru Al Sonbaty, means something quite a lot more: “We’re nowhere near having survived; we haven’t achieved nearly what we want to.”

Cycle Zero

Seven years ago, the team’s aspirations were of a smaller magnitude. After working in private equity, unhappily, in Cairo for a few years, El Alfi and his friend Al Sonbaty started Sawari Ventures as a venture capital fund in 2010.

While they got that house in order gradually, they also started picking on a mentality shift.

“People’s ability to start and scale a company increased by a couple of orders of magnitude,” says Al Sonbaty. “The cost of producing and distributing a product changed, which shortened dramatically the period from start to failure.”

This put entrepreneurship within the reach of some people, for whom it hadn’t previously been a reasonable choice, he points out.

There was a mismatch, though, between the raw talent of the people who were approaching El Alfi and Al Sonbaty at conferences and events looking for “small amounts of money,” and their business savvy.

“The fundamentals that entrepreneurs in the US get through schools and osmosis from the environment around them didn’t exist” in would-be Egyptian entrepreneurs,” says El Alfi.

Amr Saleh, a recent computer engineering graduate from Helwan University in Cairo, was one of the hopefuls who met Hany at an event announcing Flat6 in 2011. Having won international competitions for a final project at university, Saleh and his co-founders wanted to continue working but didn’t know how.

“We weren’t looking for funding, didn’t know anything about startups, or what an accelerator was,” says the co-founder of the project that became Integreight during Cycle 2 in themid-2012.

“We wanted to capture the grassroots innovation, from idea to fundable entity,” stresses Flat6’s Al Sonbaty, and we ideated that “the accelerator model, with a little bit of money and a lot of coaching was the best way.”

Despite his experience founding and managing the startup incubator Netcubator in Pasadena, California back in 1998—one of the world’s first, El Alfi characterizes the first cycle of startups to come out of the Cairo outpost as a failure.

The social climate in Egypt in 2010-11, he says, was different enough from southern California in the 90s -—few of the lessons he learned during that period were relevant.

“We call it Cycle 0 because we were trying something new, and we got it wrong. There were 5-6 companies and all of them failed…Flat6’s screw up was that we didn’t properly conclude what we learned later: That we could teach entrepreneurs just about anything except desire.”

Saleh’s company Integreight went on to raise a follow-on seed round from Cairo Angels after graduation from Flat6, as well as over $85,000 in a 30-day Kickstarter crowdfunding campaign that shattered its $10,000 target in six hours.

For him, “the most important thing we learned was how to manage a business; not how to build the product you want but how to build the product the customer wants.”

Integreight is hoping to raise another seed round this year.

For Cycle 1, Cycle 2, and then the next 17, the team adopted the mentality of valuing the potential of the entrepreneur over the strength of the idea. It has also been agile, continually evolving its offering so as to attract the best talent and reflect market climates.

Currently, in Cairo, startups accepted to the 16-week Flat6 program get seed funding of around EGP250,000 (increased to reflect the recent devaluation of the currency). This is substantially up from EGP70,000 available in 2011.

“You could say we’ve increased the valuations of the companies,” says CIO el-Shenoufy. “But this is funding that is meant to last [companies] during the program, and for about 3-4 months after.That’s the time they need from Demo Day to raise their funding.”

Flat6Labs was (and is) itself a startup. The two founders pooled their own cash to create a fund within Sawari Ventures that would support the first batch of Flat6 startups. When the coffers started running low after the first few Cairo batches, the team began looking for external investors.

As the first player in its asset class, to use Al Sonbaty’s parlance, angel investors were wary of getting involved, especially given Egypt’s instability.

“When we started in Egypt,” says el-Shenoufy, who until 2014 was investment manager at Sawari Ventures, “the risk we were taking was significant, even though the amounts were small because it was so hard to find angel investors.”

In all Flat6Labs locations, the cash grant, weekly pitch dinners, mentorship, and access to investor networks are offered against a 10-15% equity share in the company, says el-Shenoufy.

About 90% of the program remains the same from location to location, but “you have to leave some room for tweaking based on what the market needs.”

For one thing, Flat6’s equity stake differs by location to reflect competitiveness in the local market: “In Abu Dhabi, we rarely go up to 15% because we need to stay competitive with other offerings” in a less risky ecosystem with lots of other accelerators, el-Shenoufy tells us.

The team recruits local partners, like Abu Dhabi media free zone twofour54, or development company Qotuf in Jeddah, prioritizing “on-the-ground know-how, knowledge of the local market and culture,” as well as access to fundraiser networks, says the CIO.

Institutional investors in the region, typically more conservative than angels, still won’t touch risk capital, says Al Sonbaty, so fundraising to support each country program takes place on an ad hoc basis.

In Tunisia, Flat6’s principal lending partners are a family-run corporate investment firm (Meninx Holding) and a private sector bank; in Beirut, meanwhile, the lending partners are all banks in compliance with Lebanon’s Circular 331, whereby Lebanon’s Central Bank guarantees 75% of non-government banks’ investments the knowledge economy.

The Beirut program is an example of the Flat6 team gambling on the comfort levels of regional financiers; the program was announced at the Arabnet Beirut conference in 2015 but has yet to accept applications for its first round. The team says the accelerator will launch formally at Arabnet Beirut in February 2017.

“It took a year to get the central bank approval,” El Alfi says by way of explanation.

El-Serafy is more forthcoming: “Most VC [funds] in Lebanon are later stage than what we are planning to do. We needed to go public [early] so we could raise the fund….it took a bit longer because we’re introducing a new model.”

Job Half Done

The most difficult stage for startups in the Middle East, El Alfi believes, is right when they are starting to grow: “This is when, in many countries, they need money for scaling up, and simultaneously they are running into the bureaucracy of the government.”

To combat this challenge—at least the first part of it—Flat6 announced in December the launch of an EGP75 million ($4 million) fund, sponsored by the International Finance Corporation (a member of the World Bank Group), and the Social Fund for Development.

The plan is to invest in and otherwise provide support for the next wave of companies graduating from Flat6Cairo over the next five years: 100 Egyptian startups and 300 entrepreneurs. The fund is intended to match capital raised from other, external  investors.

“Usually five out of the 10 graduating startups get follow-on investment from other investors, and we anticipate that we’ll match the capital raised in three of those five,” says El-Serafy.

Similar structures have been developed for the new Flat6 locations in Tunis and Beirut, El-Serafy continues, to provide ecosystem-wide support in markets that need it most.

“In ecosystems that are more nascent [as opposed to Abu Dhabi or Jeddah], it’s very important that startups get offers [and valuation estimates] from other investors. We don’t want to crowd anyone out.” 

Developing profitable and scalable companies is part of the vision. The other part is creating the climate where raw talent can emerge and be nurtured.

In the seven years since Flat6Cairo launched, El Alfi believes it has played a role in the development of the ecosystem. The entrepreneurs applying to Flat6 cycles are “much more sophisticated, their thought processes are much more developed, and their teams are better put together,” he says.

“This is a result of the dissemination of information among a generation of aspiring entrepreneurs….if the applicants keep getting better and better,” El Alfi adds, “I can say mission partially accomplished.”

Flat6Labs was conceived amidst a climate of possibility. Internet penetration was soaring, graduation rates were increasing as well, and young people weren’t satisfied with the opportunities offered to them.

This climate of possibility was also an ideal incubator for the Egyptian revolution. One didn’t lead to another; rather, if any thing, they’re siblings.

“The people who went out into the streets,” says El-Serafy, “came home and asked what’s next. They started thinking about starting a business when thinking about starting something new. There are things you can change and things you can’t, but you can take control over your personal life. Entrepreneurship is a function of that.”

While Al Sonbaty might be loathed to admit it, Flat6Labs has succeeded in coalescing many goals of its temporal counterpart: Creating opportunities for people across the economic spectrum and supporting those who don’t accept what they’re given.

“For us, it’s important to have a class of individuals who are risk-takers, who are willing to push the envelope across the board. It’s really about having a group of people out there experimenting with new status quo to take any aspect of our lives forward. This improves our overall productivity,” says the founder. “For us, that’s the power.”

Photographs by: Forest Casey

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