The Financial Regulatory Authority (FRA) has issued a resolution to amend the Egyptian standards for the financial evaluation of establishments, to suit the nature of startups and help them obtain the necessary financing for their growth, expansion, and business development.
The resolution, issued by FRA’s head Mohamed Farid, defines startups as newly established companies with a short operating history and a high potential for growth and innovation. The resolution states that startups face many challenges in obtaining financing, especially in the stage before they achieve revenues and sales.
The resolution adds new methods for evaluating startups at this stage, such as the risk capital method. This method is based on estimating the value of the company at the time of exit, determining the expected return on investment, calculating the investors’ share upon exit, and deducting the future capital increase. The resolution also specifies some key elements to consider when using this method, such as the exit value, the investment multiplier, the retention ratio, and the investment recommendation.
The resolution also stipulates that some general considerations should be taken into account when evaluating startups before they generate revenue, such as conducting a preliminary analysis of all the tangible and intangible factors of the company according to its activity and sector. These factors include the company’s purpose, current status, management’s efficiency and experience, work team’s qualifications, market size and potential, technical characteristics and indicators, product features and differentiation, competitive advantages, technology used, and financing stage. These factors should be analysed and their impact should be studied to assess the nature and risks of the company.
The resolution also emphasizes that an analysis of the strengths and weaknesses of the company under evaluation should be conducted, as well as a review of the opportunities and threats that it may face. Moreover, the resolution stresses that the company’s commitment to governance principles and its ability to fulfill its obligations should be evaluated.
Farid stressed that developing the standards for financial evaluation primarily takes into account the nature and business models of startups that have great growth opportunities and need different methods of evaluation to obtain the necessary financing for expansion, enter new markets, and add new activities, products, and solutions.
He added that the process of developing standards is a reflection of the Authority’s keenness to continue the hard work to provide an environment that empowers economic entities. The aim is to help them explore growth opportunities and business development, through the services provided by non-banking financial markets and the entities operating in them.
