There is a rising number of foreign VCs investing in the Middle East. Of the 10 Egyptian startups that raised investment in September, four attracted investment from global funds, including US, UK and Japanese. For Mohamed Aboulnaga, co-founder and CEO of Egypt-based fintech Klivvr, this can have some consequences. Aboulnaga is also the co-founder of Egyptian super app, Halan.

When a tourist visits a place, they will often come across something called "tourist pricing". For example, a shopkeeper sells you a pen for $1 if you are a local but will sell the same pen for $5 if you are a tourist. This is very typical in many destinations across the world and tourists are often happy with the price they get (as they are often cheaper than in their home markets) and the merchants make good money out of this sale. If a tourist is visiting with a local friend they do not typically pay the inflated amount, because the local knows the real price of the product and will tell the tourist this is for $1 and not $5 and the merchant will accept this as they know that this is the right price. Interestingly, the same can happen for startups and in investments but on much bigger scale with a far bigger impact.

In emerging markets, and specifically in Egypt, there has been a lot of hype around startups. With the initial public offering (IPO) of Fawry, Egypt's largest fintech player and its great performance post-IPO, along with the big rounds of investments in well performing companies like Trella, the trucking giant, Maxab, the leading B2B e-commerce startup and homzmart, the furniture e-commerce startup with founders who worked with Uber, Careem and Alibaba. We are also seeing other investments in well-known local VCs like Algebra Ventures, Sawari ventures, Disruptech ventures and Endure capital who contribute to the solidity of the market in terms of deploying cash and making good returns without worrying about country instability. Egypt has been seeing good economic growth and political stability along with a clear vision of leadership that makes it the perfect investment choice for many big investors from the East and the West.

The other side of the story is the fact that this traction has lead to a phenomenon I call the "tourist VC". Global VCs who wanted to enter the market had one of two options: the first option which was taken by smart VC leaders was to appoint "local partners" or "local boards" and let them do the homework and scout good founders and companies and then they do their due diligence. This model has proven to be successful (especially in the case of the aforementioned startups) and most of their choices are spot-on, and are aligned with market insights on the companies and the founders. The second option is to just invest cross-border without asking locals or doing the right due diligence on startups and their founders. The drawback of this is that the amount “paid” can be much higher than what locals or "locally supported VCs" pay for the same product that should be much lower in price. This is a double-edged sword.

There are two drawbacks for the second model of the tourist VC investment:

1. It inflates the valuation of certain startups and puts a lot of pressure on the founder and the management team who feel like they have to perform multiples of the required performance in order to keep up with the stamped valuation, which creates a very tough internal culture.
2. The tourist VC is now under the impression that those are the prices of the market and this will be their measure of the performance of the market if this is their only investment. If this investment does not perform for any reason, then this will be the only impression they have and communicate on this market. (While we all hope this never happens, it is unfortunately common and still harms the ecosystem).

You never want to be the tourist who goes shopping at a local "souq" without having a local friend to make sure you get the right prices. It is crucial for global VCs to not only do their homework and carry out a market analysis before entering a foreign market, but to also have a footing on the ground through someone who knows the market well. Otherwise, you will end up seeing these VCs paying $5 for that same $1 pen. While it may sound attractive for local startups and founders to see sky-rocketing valuations, most of these numbers are unreasonable and unsustainable, and will ultimately lead to problems in the future. The founders should focus on the right execution, team and the right value creation rather than running after PR and noise.