In COVID-19, Africa’s Tech Startup Ecosystems Face Their Gravest Challenge To Date

April 10, 2020
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In just a few weeks, the world has been turned upside down. The COVID-19 pandemic, with almost 1.5 million confirmed cases and the number of deaths approaching 100,000, has shut the world down, and an era of economic contraction is coming.

According to JPMorgan Chase, the outbreak pushed the global economy into a 12 per cent in the first quarter of the year, the most brutal global collapse since the Great Depression in 1929. With the coronavirus still rapidly spreading, much of the world’s economy is closed for business, and may remain so for some time to come.

The impact of this will be felt heavily in the African tech space, which until now has seen little but steady growth over the past few years. The damage could be very severe indeed.

“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,” writes Keith Jones, co-founder of the Sw7 virtual accelerator, in a guest post published by Disrupt Africa this week.

But who stands to lose the most as a result of the economic fallout of the COVID-19 pandemic?

Who will suffer?

At the most basic level, all companies have to adapt to the new climate, with remote working the new way of the world. Beyond that, some sectors will be affected more than others by the “COVID crash”. Most notably, any business that depends on corporate clients is likely to struggle. Having been a booming space, B2B is set for a troublesome period.

“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,” Jones said.

Younger startups that have not yet built up a client base or balance sheet will likely struggle, while sectors like hospitality, eventing and supply chain will clearly be hit the hardest. Fintech, the most populated tech vertical on the continent and the best-funded, may also face a challenging time, as such solutions are often linked to liquidity.

“For fintech companies that rely on field agents or staff, it will be a bit hard to adapt fully,” said Razaq Ahmed, chief executive officer (CEO) of Nigerian fintech startup Cowrywise.

Who may gain?

Conversely, some sectors actually stand to benefit from the COVID-19 crisis. With people unable to shop as regularly, e-commerce is booming. With schools closed, ed-tech is on the rise. Certain areas of e-health also look set to gain ground.

“Crisis accelerates change. Many people were forced to try e-commerce due to lack of alternatives, and once we get out of recession, many of them will stick to the new behaviour,” said e-commerce entrepreneur Marek Zmyslowski.

Sim Shagaya, CEO of Nigerian ed-tech startup uLesson, confirms the young company has benefitted from the changes made necessary by the spread of the coronavirus.

“The pandemic has generally lowered the threshold for families willing to try solutions like online learning as families look for solutions to keep learners on track,” he said.

Sheraan Amod, founder and CEO at South African online healthcare booking platform RecoMed, says his platform experienced a sudden growth spike of 35 per cent prior to South Africa’s 21-day lockdown, with patient bookings exceeding 3,500 per day. It also saw an unprecedented growth in flu shots, booking up to 1,500 per day.

“Telemedicine consults have emerged suddenly and are booming across our platform. The telemedicine sector as a whole has moved forward by five to 10 years in two weeks,” he said.

“When we started RecoMed, we pioneered the concept of booking health appointments online in South Africa. Getting traction was hard. The most difficult part of the entire journey was convincing doctors to try something new that could benefit them and their patients. It seems that the highly contagious nature of the coronavirus combined with societal lockdown policies have ushered in a new era of doctor behaviour overnight. Everybody wants to do virtual consults now.”

So it isn’t all doom and gloom.

African tech set to face a funding shortfall

African tech smashed funding records in 2019, with 311 startups securing over US$490 million worth of investment, according to the annual African Tech Startups Funding Report compiled by Disrupt Africa. The negative impact of COVID-19 on the global venture capital market may mean it remains a record year for a little while yet.

Tomi Davies, president of the African Business Angel Network (ABAN), said the COVID-19 economic slowdown has greatly increased challenges with access to revenue and capital funding for technology ventures. 

“Over 80 per cent of startups are expected to fail as a result of the recession. Even high quality startups are already having challenges raising equity financing and the resulting lack of working capital will mean having to lay off employees,” he said.

Jones said 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,” he said.

How much a startup will be affected by this drop in available capital will depend on its business model. Jones says funded businesses that have typically sought growth before profit will need to go back to basics to survive.

“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,” he said.

Essentially, cash already in the bank is now king.

“The value of any cash has just gone up 10x,” Jones said. “Any budgets, business plans and assumptions need to be revisited. Cash has gone from “cash flow” to “oxygen”.”

Support players also set to suffer

It is not just startups and VCs that are adjusting to a new world in the wake of the COVID-19 crisis. Davies said innovation hubs, incubators, accelerators and makerspaces have been hardest hit, as they have been forced to shut down their physical spaces to comply with government lockdown directives, losing income and clientele in the process. 

“Many are dependent on the acquisition of specific physical infrastructure which imposes a major financial burden. To survive, they will need to develop new business models and continue to run critical operational activities remotely,” he said.

Hannah Clifford, director of Kenyan co-working brand Nairobi Garage, confirmed that with spaces quiet and unable to host events, the company was having to rethink its approach.

“The uncertainty of when things will return to normal is the biggest worry right now, as well as the overall effect this will have on people’s livelihoods,” she said.

“Right now we are focusing on doing everything we can to continue offering value to our members – we’ve moved our events online; our members are offering up their services to other members for free or discounted.”

Is help at hand?

Many African governments have followed the lead of others across the world by offering some forms of relief for businesses in these troubled times. Yet there is a shortage of cash to plough into such initiatives, and they are typically aimed at bigger companies.

“I think that the South African government has done an incredible job showing bold and unified leadership during this crisis. That said, the paucity of their support package for SMEs shows what terrible shape this country’s finances are in,” said Amod. 

“I expect it to have negligible impact on affected startups and the SME sector in general. The message from government to small business is clear: you are on your own.”

Jones said this is because 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,” he said. 

“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.”

Reasons to believe

For all the challenges, African tech startups and ecosystem support players are reacting admirably to the crisis, rolling out a host of new products and initiatives. And there is hope that, once the COVID-19 crisis passes, the space can get back on track and continue on its upward trajectory once more.

“When we beat this pandemic, I expect markets to recover fast. I recall going through the VC fundraising process for my previous startup in the weeks after the 2008/2009 crash, and feel like the current environment for fundraising in Africa is a picnic by comparison,” Amod said.

“The greatest entrepreneurs and leaders are forged during times of crisis. This is as true now as it has ever been.”

Shagaya agrees, saying entrepreneurs should see the challenge posed by the coronavirus as an opportunity to make their businesses leaner and more sustainable.

“Operationally, I think this is an opportunity for startups to distill down to what is essential. This presents an opportunity to eliminate waste and inefficiency,” he said.

The only guarantee, according to Jones, is that not acting will not lead to a good place. Startups, however, have the capacities and mindsets to survive in the post-COVID world, however.

“Small businesses are agile. In the current market, the agile will survive and could thrive,” he said.

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