The COVID-19 pandemic is not just a global health crisis, it is also ushering in an economic one.
It is clear the negative impact of the crisis on the African tech startup space will be significant, and potentially long-lasting, both in terms of startups making enough revenue to survive and being able to attract funding.
There are steps founders can take to mitigate the damage to their businesses, however. Disrupt Africa spoke to some of the most active investors on the continent to get their advice.
Keep a cool head
Businesses all over the world, including in Africa, are in crisis management mode. Nnena Nkongho, principal at the DiGAME Investment Company, says for most African startups and founders in my universe, this will be the first time that they have seen a material economic recession together with a public health crisis.
“I think that companies need to be aware that the decisions that they are making now, in the short-term, will have material, long-term impact on their businesses: operational, brand, funding, legal, and so on,” she said.
“Founders should be leaning on their boards and advisors to help them assess material risks, ensure compliance with local laws and directives, safeguard the physical and mental health and safety of employees, and communicate with candour and frequently with all of the businesses’ stakeholders.”
Clive Butkow, chief executive officer (CEO) of South African Section 12J venture capital (VC) company Kalon Venture Partners, advises founders to adjust quickly to the new normal and not wait for things to happen.
“I go through a best, middle of the road, and worst scenario with all Kalon investee companies to understand if we stop generating sufficient revenue what actions are we going to take to get our runway to 24 months,” he said.
“Entrepreneurs need to be cautious about being too optimistic and not taking action quickly enough. Rather assume the worst and expect the best when it comes to your revenue plan. As far as the revenue forecast goes for the next 12 months, most businesses need to throw this forecast out of the window. The entrepreneur needs to understand all the government concessions in place for businesses to help take the strain of affected staff.
Cash is king
“In the short-term, startups will really just need to extend their runways. This means cash. Either preservation or funding to bridge the gaps,” said Keet van Zyl, co-managing partner of Knife Capital.
Butkow advises entrepreneurs to look in detail at what they are spending in order to increase their runway to a minimum of 24 months. This will involve making tough decisions about things like headcount.
“My advice will always be the first cut has to be the deepest. There are ways a company can retrench people without paying retrenchment costs by using the furlough clause,” he said.
Mike Mompi, CEO at early-stage fund Enza Capital, said startups should focus on optimising revenues and decreasing their cost base.
“There may also be an opportunity for some tech companies across geographies to look at collaboration as an effective way of consolidating resources, talent, and a geographically diverse client base,” he said.
If you are offered capital, take it
“If you can raise capital at a lower valuation, take it and beef up your balance sheet as you don’t know the impact the virus will have on your ability to generate revenue,” said Butkow.
With raising capital set to get even more difficult going forward, even just bridge funding from existing investors, founders should take any funding they can get their hands on if they are not reaching break-even.
“Entrepreneurs should use the time to build their pipeline even if companies are not making decisions until there is more certainty on the virus. They should also use this time to focus on the important but not urgent tasks,” said Butkow.
Nkongho said startups should, of course, aggressively cut costs to extend operating runway, but added that they should also be looking at taking advantage of any unexpected positives thrown up by the crisis.
“Savvy founders will also likely look to capitalise on the opportunities that this economic dislocation may cause – with respect to long-term business recovery, new strategic lines of business and opportunistic investments in talent and other resources to drive future performance,” she said.
Innovate on product
According to Muthoni Wachira, investment lead for Africa at EWB Ventures, the crisis also gives entrepreneurs the chance to do what they do best, and innovate, saying a venture’s survival will depend far more on radical innovation than on tactical cutbacks.
“In an increasingly dynamic world, the fundamental business advantage is organisational agility. Explore adjacencies to your existing products and services. And if your work is related to coronavirus, seize the need and opportunity,” she said.
Focus on the long-term
Wachira called on entrepreneurs to be resilient, and also look to the future. Focusing on your company’s purpose, and continuing to serve your customers, will fuel you through the trying times.
“Don’t forget to invest in your brand. Authentic communication and consistent service delivery will win you mindshare and market share,” she said.
“The dot-com bubble and the 2008/2009 financial crisis were not setbacks for venture investing globally. Quite the opposite. They cleared the noise, acting as a filtering mechanism for startups and VCs. From it came global brands such as Uber, Airbnb, and Spotify.”
This is the first global crisis for the African venture market, and Wachira said she expects to see entrepreneurs with ideas for tools and services that can help people adapt to new trends emerge from it.
“Innovation and accelerated technology adoption will lead scale and to more exits,” she said.
“Don’t get me wrong, many ventures will fail, but the resilient will adapt. They will do more with less, they will exercise discipline and develop an acute focus on measurable results and impact. It will be a defining season for founders and fund managers.”