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This interview was conducted, transcribed and edited by Timothy Motte.
Biography
Mahmoud El-Zohairy is the managing partner and co-founder of Camel Ventures, an Egyptian VC & venture debt fund. He was previously the CEO at EFG EV Fintech, an Egyptian corporate-backed fintech accelerator.
He also served as a senior economist for the Egyptian Ministry of investment and international cooperation.
What is venture debt?
Venture debt financing is a financing option for startups that have usually received VC funding. Unlike VC, which trades equity for capital, venture debt allows founders to retain their equity but the loan must be paid back over time.
Venture debt loans can include interest, fees, warrants or equity conversion rights to the lender. The returns on venture debt are lower than traditional VC, but lending is also less risky. (Deloitte)
Your fund focuses on fintech. Can you define fintech and why it’s the most pertinent vertical for venture debt?
Fintech is a broad category, especially in Africa where many startups eventually veer towards financial products. It may vary from payments to B2C neobanks, but can also include a B2B logistics startup that lends money to merchants.
A startup that lends money raised through equity faces a conundrum: scaling implies raising more equity, continuously diluting the founders and investors. That is if the company even manages to raise more equity financing, which is tough for everyone at the moment. Equity money should finance SG&As and cover the company's losses, not be lent out.
A better solution for these companies is to raise debt , and lend from their respective balance sheets. In doing so, they face another conundrum: banks don’t want to lend to tech startups, since many aren’t profitable and don’t have much physical asset collateral. Enter venture debt (VD).
VD is a flexible lending agreement built for unprofitable, high-growth startups. Terms are adapted to the company’s runway, risk profile and cash flow cycle. VD finances a company’s revenue growth with minimal or no dilution.
Startups are notoriously high-risk. What happens if a company fails and can’t repay its debt?
It’s contextual. If the company is asset heavy, we might have a claim on some of those assets. If it’s asset-light, collateral might include intellectual property, customer lists, swapping outstanding debt for equity, etc… It differs from one business model to another.