Keith Jones, co-founder of virtual accelerator Sw7, takes us through the impacts of the COVID-19 pandemic and likely economic crash for B2B tech startups, and how to mitigate them.
What has changed?
Everything. We are entering a new business market with new business drivers.
We are going into a recession – how long will it last?
“The lift is going down, we are just not sure what floor it will stop at”. We have the lead and lag indicators, the lead indicator is the health situation, the lag indicator is the business market. As soon as the lift stops going down on the health situation and we can see the bottom of the decline and the top to the curve on the number of COVID-19 related deaths, the business markets will be able to plan for the future. The decline in economies and the destruction of capital is so severe that every week we are in decline adds six months and more to some kind of recovery. Plan for a steep crash and a long and slow recovery. In Africa we have to balance the destruction of our economies against lost lives to COVID-19. Our economies cannot afford sustained lockdown and the loss of lives to COVID-19 is placed against the backdrop of food security, poverty, social stability, HIV, TB and malaria. In South Africa, so far, our leadership has done what can only be seen as a fantastic job.
What businesses will be more affected?
In Africa our business economies are underpinned by a relatively small number of corporates. These corporates, never the most agile to start with, are likely to shift into “bunny rabbit in the headlights” mode. Most will freeze, they will have employees that are justifiably petrified about their future and don’t have the resources to adjust to the new realities. If corporates are able to respond and adjust quickly, they could grab market share as their competitors are still reeling. If a business is ‘inside the beast’ with a signed contract and an essential service and approved budget, the corporate should pull them through the downturn. If a business is in a corporate sales cycle, it is likely to slow down or stop and not restart for a while.
The mid-markets are likely to be the most resilient depending on the sector. E-commerce is in a growth spurt. Ed-tech relating to online learning is booming however our traditional education systems will take a while to recover. Certain areas of health-tech will boom. Most fintechs are linked to liquidity in the economy but those that offer a low cost to serve could boom. B2B digitisation looks like it will be a relatively stable sector in the short and medium term, if businesses can get over the crunch. Smaller businesses will have pockets of high growth but the majority will slow down. Sectors like hospitality, eventing and some supply chain and manufacturing business will be hit the hardest. Newer businesses that have not built up the client base or balance sheet will struggle for resilience.
What about the rescue packages?
Rescue packages tend to serve lower risk more established businesses. The best bet are the three-month packages offered by the banks, however remember the banks are preserving their balance sheets and are not trying to increase their risk so the business will need to demonstrate that they are not going to incur any kind of increased future risk. Many small businesses may not have their paperwork up to date and may not have the resources to submit an application in time. In Africa disbursing a new instrument effectively at scale and at short notice has never happened before. The disbursers will, as always, err on the side of caution and will be challenged in their capacity to ramp up and disburse capital effectively in a short time frame.
Bootstrapped vs funded
There is a great meme doing the rounds. “We were born in the darkness, you were merely adopted”, says the bootstrapped business to the funded business. Funded businesses typically seek growth above profit and will need to reframe and go back to basics to survive until they reach break-even or receive a bridging finance round. Established bootstrapped businesses have a large element of resilience built in and whilst they won’t necessarily find adjusting easy, they will find it easier than funded businesses. Early stage bootstrapped and funded businesses are likely to have a rough time.
We are seeing the VCs markets split. Some funds, typically those that are balance sheet based, have simply disappeared. For other funds, it’s business as usual, they have the fund and are now faced with the challenge of getting the fund out the door into new markets with massive opportunities for growth but without the ability to travel to meet people and do normal due diligence. Many of the more mature funds that already have large portfolios have stopped a lot of deal flow as they choose which businesses in their portfolio to keep going. We need to see the bottom of the decline before we can see what the new capital markets will look like. Deals, now, more than ever, will happen through existing trust-networks. Any business looking for a new investor that is not in their network will most likely be going on a challenging journey. Very little capital will flow to businesses that can’t prove the path to profit and there are likely to be less ‘land grabs’. The upside is that this may create a new early stage VC market, where a fund makes ten investments, none fail, and all show a compound annual growth rate of 30%. This will be a breath of fresh air.
Cash and capital
The value of any cash has just gone up 10x. Any budgets, business plans and assumptions need to be revisited. Cash has gone from ‘cash flow’ to ‘oxygen’. Businesses won’t spend money next week in the same way they spent it or planned to spend it three weeks ago. It is critical that businesses revisit “givens” as variables, manage and control their cash and lower expectations around revenue in the future. Capital markets will change drastically. If we go into low interest inflation economies, investments will seek capital preservation. There will be much lower liquidity in the markets and less appetite for capital to cross borders. Capital will have more realistic tempered value-based outcomes as it seeks lower returns with lower risk. The juxtaposition will be the digitisation boom we mention below.
How do we engage our teams?
This is not a time to be telling everyone it’s all under control. We are in uncharted territory, and facing the single largest economic event the planet has seen in eighty years. We need to ensure that we bring people around us that we can trust. Our employees may be scared so providing strong leadership whilst being open is important. Whilst skilled employees have generally had the option of leaving the country as uncertainty was localised, this may no longer be an option and their job may be all they have. Look at what is critical to preserve the business and maintain the team and culture. Cross the board salary reductions run the risk of upsetting everybody, they will all need their whole salary and laying people off runs the risk of placing the few in untenable situations. Businesses that do more than three rounds of retrenchments will create a workplace that feels unsafe with low trust and low productivity prevailing. Benching some employees may be the best option with the promise to take them off the bench as soon as possible however labour law can make this hard and businesses will need to find a way to keep going.
How should we act?
This is not a time to freeze and ‘see how it plays out’. This is a time to act and engage with the markets, customers and employees and begin coping with the uncertainty. The only guarantee is that not acting will not lead to a good place. Small businesses are agile. In the current market, the agile will survive and could thrive. Agility is the single most important skill right now. Go back to basics, consider costs, review and revise old projections and assumptions and start building projections for a variety of new scenarios starting from the current state of the business.
Is there a silver lining?
As difficult as it is right now, we need to look to the future and see what we can do to recover and create jobs in low resilience economies that do not have capacity for a sudden and drastic impact of this magnitude.
● We are in the middle of the single largest catalyst we have ever seen to digitise businesses. This will persist and is likely to gain pace as we come through the slow down.
● Dematerialised products (which covers most SaaS products), will have preference over material products going forward. They are able to be distributed globally with little or no supply chain risk with less reliance on employees.
● The appetite of customers to engage in long or risky projects will diminish. The SWAS (Software With A Service) market is likely to grow as customers seek shorter, high value turnkey projects that don’t place an additional load on existing overwhelmed teams.
● African markets are likely to become marginalised as businesses focus on domestic or more stable markets. This means while large international businesses want global distribution they will have less appetite for a direct presence. This is a great opportunity for local entrepreneurs.
● Gaps in our markets will become chasms as the larger businesses are unable to address them. Opportunities to claim significant niches will be very real.
● This time is an opportunity to reconsider assumptions around the strategy of the business, the product, solution or service being offered, the product roadmap, cashflow, budget and how to be highly relevant to and delight customers, how to apply marketing efforts and what the business is trying to accomplish. Restate and simplify the desired end goal and what you want your business or product to look like as we come out of this challenging time.
● You will have clarity around who your supporters are (and who are not) and the people around you who you can trust.
What can we do to cope?
● Aim for break-even – Plan to get the business to a point of sustainability as soon as possible.
● Farm before you hunt – Service existing customers, in theory this will mean shorter sales cycles.
● Unit economics – Everything going forward will be underpinned by unit economics. Have a clear understanding of the cost drivers, income and margin by product and product line as this will define the future shape of your business.
● Customer ROI – The markets will digitise and just as every business will focus their efforts on unit economics, so will customers. Products that offer a short Time to Value and have a direct and demonstrable impact on the Unit Economics to the customer will be at the front of the queue.
● Customer retention – Many customers will not be in a position to continue paying for your product or service and they may terminate. This is a lost customer that may never come back. This is the time to reach out to customers, get in touch and understand how they are coping and see how you can help. A three-month payment holiday may retain the customer and build loyalty. After three months they may or may not go, however you will retain more than you would have lost and you will have built more trust.
How to stay sane?
Find a peer community and keep talking. Your mental health and that of your team through this process is one of your most important assets. This will be the single largest factor in determining the outcome for your business. The best way to do this is keep in touch with a community of peers. Whilst this is a personal journey for everyone, remember that you are not and do not need to feel like you are on your own.