Everything was for the best, in the best of all worlds: 645 incubators in 2019 were listed on the continent, compared to 314 in 2016 and 442 in 2017. $ 1.3 billion cap invested in African startups in 2019. For the first three months of 2020, more than 335 million dollars had already been invested! But the coronavirus has landed on the continent … brutally mowing down the hopes already raised. As infection rates rise, the global economy is slowing – sharply – and African economies are no exception.
It is too early to assess the full impact of the crisis on the continent, experts and institutions have alarmed us all. The African Development Bank (AfDB) has predicted a substantial drop in the continent’s GDP, which would drop from 3.2 to 1.8 points of growth, a direct consequence of the pandemic. In the real economy, the decline in consumer purchasing power and corporate income will be among the first effects felt. In the short term, small and medium-sized businesses are at greatest risk due to the lack of sufficient funds.
High-growth startups, such as the online payment platform Flutterwave (Nigeria) or the data management specialist, Sokowatch (Kenya), will not be the most weakened by the crisis, thanks to their Series A record fundraising in January and February of this year. Paradoxically there are no more startups without income, looking for initial seed funds. The risk of failure is also a reality for already stabilized startups who have recently proven the relevance of their economic model through stable income. Majority of them cannot muster great financial strengths to face a harsh economic reality of a great magnitude should it come. The establishment of development support by international and local agencies in recent times, in the face of the economic difficulties created by COVID-19, is a pointer in that direction. 80% of viable startups might not survive!
A sudden economic downturn on the continent could wipe out the expected successes and ruin the encouraging future of even stronger startups in Africa. A study (1- African startups raised $ 1.340 billion in 2019 GreenTec Capital Partners study – 2020. 2- GreenTec Capital Africa Foundation, For a better Africa, April 2020.) by the GreenTec Capital Africa Foundation and WeTracker2, to be published at the end of April, 2020 carried out before the start of the Covid-19 crisis, revealed a failure rate peaking at 56% for young African startups. 80% of these failed startups had not received seed funding.
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Many young African companies – over 80% – started just yesterday, could find themselves forced to shut down, in record time if ad hoc funds were not made available to them.
Ethiopia, Rwanda, Zimbabwe and even Morocco, countries where startups operate mainly on equity, are particularly exposed to the risks of cessation of activities in their evolving entrepreneurial ecosystems.
Since mid-March,2020, we have been witnessing panic that could begin with job destruction. Faced with this, players in the ecosystem are trying to remodel their solutions to buy time. The implementation of such off-the-cuff solutions to compensate for shortage of cash is crucial for many startups; otherwise, all the money invested so far will be useless.
It will cost more to rebuild a startup than to invest today. It is therefore essential to anticipate and propose concrete, doubly effective financial levers in order to emerge from the crisis unscathed. The anxiety linked to job destruction is becoming more and more real. Young African companies are no longer making money and among the 20 million jobs that will be destroyed in Africa, many will be in startups. Ben White, CEO of the Pan-African investor network Venture Capital 4 Africa recently pointed out that the 13,500 startups listed by his network had created on average 8 jobs, or 108,000 jobs in total. These startups are also particularly threatened in the current context.
While the European powers are busy rebuilding their bloodless economies, startups should not wait for the promised subsidies and grants for want of time.
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Among concerned entrepreneurs, the fear of a collapse of the African startup ecosystems is increasing. Voices are rising to demand effective support. This is evidenced by the statements of the presidents of the Small Business Institute in South Africa and the Small Business Owners in Nigeria, John Dludlu and Femi Egbesola respectively, who are reporting the great dismay of the members of their respective organizations.
These extraordinary circumstances call for no less extraordinary measures to save the continent’s startups from the impending economic tsunami.
Donors have already initiated several funding mechanisms to support African economies, but the consideration of startups on the agendas of development aid organisations remains uncertain. Governments and other private organizations are, however, not resting. Different initiatives are starting to emerge. The International Trade Center is developing, for example, a resource center dedicated to the impact of the pandemic on startups and SMEs on the continent.
South Africa and Nigeria, the continent’s two most advanced economies, have announced far-reaching emergency measures to help businesses cushion the shock of the coronavirus pandemic, without any announcement having yet been made regarding the beneficiaries and availability of the funds announced.
Authorities in French-speaking Africa also are also formulating their own responses. For example, in Senegal Papa Amadou Sarr, Director General of the General Delegation for Fast Entrepreneurship of Women and Youth (DER/FJ), has announced the temporary suspension of debts of young startup companies and a plan of 1.5 billion FCFA in aid awarded in the form of grants and various loans.
Organizations bringing together venture capital players on the continent such as the African Private Equity and Venture Capital Association (AVCA) or the African Business Angel Network (ABAN) are working on mechanisms to support investment funds in their mission alongside entrepreneurs. The challenge is for investors to find a balance between anticipated rounds of funding and compliance with allocation policies, so that they can support other structures with high potential. This is because, when faced with adversity, there is the temptation for investment funds to focus on their portfolios.
Supporting startups on the continent today must not diminish. Adjusting solutions in the face of urgency, we must try new methods to support these young startups in the adjustments they will experience in the coming months.
As an investment ambassador, in the form of operational support, GreenTec Capital Partners recommends that investors adjust their actions in light of this new reality.
Investors’ eyes must now adapt: first of all, save what has already been done and not project yourself into a vision of new creation.
The ambition of our operational investment policy is therefore partially redirected towards the implementation of resilient measures to optimize the resistance of companies facing the duration of the crisis and its consequences. Through this concrete action, we maintain a real human and technical support capacity, specific to Venture Building, our original investment model, acclaimed by many development actors in Africa.
The opportunities we have been given to scale up with partners such as A.F.D. (French Development Agency) or G.I.Z. (Deutsche Gesellschaft für Internationale Zusammenarbeit), allow us to understand the impending risks facing African startup ecosystems. It is for this reason that we are raising an alarm on this issue.
We have already alerted all our partners in Europe and Africa, in order to propose concrete actions that could be implemented in the short term. We are waiting for their reactions.
This action would consist of aid intended for the preservation of jobs in danger; putting up of emergency funds intended for startups carrying jobs, which without this crisis generated stable economic activity.
This initiative would start with the identification of these companies in collaboration with the ecosystem, followed by strong cash support depending on the needs of each startup, intended to cover their fixed costs for a limited period.
By granting today a monthly sum of 5 to 10,000 euros for 3 to 5 months maximum, to targeted startups – at least 2 years of existence, more than 10 permanent employees, recurring revenue and net activity stopped by the Covid-19, and which will restart at the exit of the pandemic – we could preserve the gains, without dispersing into post-crisis reconstruction programs which will obviously require a lot more resources to revive the ecosystem.
We therefore recommend the setting up of an emergency working capital program- a “Startups Bridge for Africa” - operated by actors capable of supporting operationally the beneficiaries, in addition to the funds released by the States in the spirit of measures taken in Europe and the United States to support local businesses. These measures would allow entrepreneurship in the African startup ecosystem to continue its ascent even more, while preserving the threatened jobs.
Finally, this could also be the best signal to send to all these young entrepreneurs, a sincere testimony of all the confidence that we have in them.
Erick Yong is the co-founder of GreenTec Capital Partners, the first German investment fund in African startups.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer