COVID-19 and startups: Is now the time to panic?

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Following the global recession of 2008, globalisation and development expert Ian Goldin, author of The Butterfly Defect, predicted that the next global financial disaster would be caused by a pandemic. His prediction, made back in 2014, is now becoming a reality as the Coronavirus disease (COVID-19) continues to slowdown the world economy.

The impact of the virus has now reached the region, with oil prices falling to their lowest levels since the First Gulf War at less than $30 per barrel. Students across the Middle East and North Africa (Mena) have been sent home, most offices are encouraging remote working and flights in and out of the region have been grounded in a bid to stop the virus spreading.  

The uncertainty has wiped trillions of dollars from global financial markets while the oil price war between Saudi Arabia and Russia has left investors in the region hesitant and cautious.

Businesses are beginning to struggle and startups could end up suffering the most.

Panic Time

For startups in need of investment and ones that burn a lot of cash, then yes, now is the time to panic. Investors are in cash-preservation mode and venture capital (VC) firms across the Middle East will face difficulty raising investment for their funds.

This however, has more to do with the falling price of oil than COVID-19.

“The immediate damage to the economy will be from the price of oil, it affects the budgets of countries, it cuts down on the investment programmes immediately,” says Michael Tamvakis, professor of commodity economics and finance at Cass Business School.  

For the GCC countries, oil constitutes the main source of income, accounting for about 80 per cent government revenue. This income pays for public sector salaries, government projects and economic reform. The continuous fall in the price of oil will force governments to prioritise their spending, resulting in fewer funds for entrepreneurship and VC investments and programmes.

“The effects of the Coronavirus is more short term, it might be a three to six month effect when we know where demand is going,” says Tamvakis.

Financing rounds for top-line growth and market share acquisition or expansion have already begun to wane and startups that lack the funds to sustain operations for the duration of the crisis will struggle to survive.  Macroeconomic factors including dipping consumption trends, a disrupted supply chain and a slowing global economy will also result in fast decline of valuations, especially for high cash-burn companies. The WeWork debacle highlighted to investors the importance of a healthy balance sheet over a good startup story, the Coronavirus will make them even more sceptical when it comes to scrutinising valuations.

As access to financing decreases, certain sectors and industries will be more affected than others, with many now either pivoting to maintain business or scaling back their operations to survive.

“I saw it coming four weeks ago. We had a very busy schedule of events for this month and next, and seeing them all cancelled in a few days was not easy. The uncertainty around our pipeline is the biggest element affecting our business,” says Mai Medhat, chief executive officer of UAE-based Eventtus, an online events management and booking platform. “We need to stay tight, look at the cashflow, identify different revenue streams and take some hard measures, but we also need to be responsible. We are trying cut costs, but definitely not on the expense of the team.”

Eventtus is extending client contracts so that they can postpone their events and is offering alternative solutions to effectively host virtual events.

“We try to be optimistic. We understand the context and support our customers, whenever they ask for our recommendation we advise they cancel the event,” says Medhat.

Greater Growth

Yet some industries are now enjoying an unprecedented boom, including e-grocery and education technology (edtech).

“Prior to this [outbreak], edtech was looked at as nice to have. Historically, we were not the first choice of investors,” says Badr Ward, CEO of UAE-based Lamsa, an Arabic e-learning app for children. “Now the use of technology in education has become a solution to the problem. We are witnessing an uptake of our product across Mena, this is where the consumer behaviour is at the moment.”

The uptake and investment in edtech is likely to continue once the Coronavirus pandemic is over according to Ward.  

“I have 100 per cent confidence that there is no going back, people have seen the need and impact of the use of technology in education,” he says.

The pandemic has also become a launchpad for startups to demonstrate their technologies.

Egypt-based e-commerce solutions provider Robusta has launched a two-day hackathon to explore actionable, tech-driven innovative ideas to help both healthcare workers and businesses deal with the COVID-19 outbreak.

“The ideas must be suitable for immediate execution and monetisation,” says Hussein Moheidin, CEO and co-founder of Robusta. “The winning team will get the opportunity to be awarded grants offered by our donors, including the EU Commission, Y Combinator and ministries of health, education, telecommunication and others.”

Yet despite the growth that some startups are currently experiencing, the overall business environment has become more difficult to navigate. Lamsa’s team struggles to maintain the same productivity levels due to the work-from-home policy and business dealings have implications of delayed payments because of bank closures and general sentiment of fear.

Stimulus Packages

In an attempt to allay such fears, governments in the region have announced economic stimulus packages. Dubai launched a Dh1.5 billion stimulus package for the next three months to enhance liquidity including a 90 per cent reduction of fees imposed on submitting customs documents of companies, renewal of commercial licences without mandatory renewal of lease contracts and freezing of fees charged for the sale of tickets, issuance of permits and other government fees related to entertainment and business events.

For a period of six months, the UAE Central Bank is waiving all fees for the payment services provided to banks operating in the UAE through its payment and settlement systems.

Similarly in Saudi Arabia, the Monetary Authority announced four stimulus initiatives to relieve small to medium-sized enterprises (SME) including a “Deferred Payments Programme” for loans, and a “Loan Guarantee Programme” for companies during 2020 financial year in addition to levying payment fees on local networks for retail and online payments.

Egypt and Jordan also announced plans to delay installment payments for SMEs and allow rescheduling of retail loans without penalties.

While this is good news for startups, they need to take additional measures to try to survive this accumulating economic crisis. Founders need to prepare for the worst by preserving cash, since the potential of replenishing it in the short term is low. In addition, prioritising spending where it matters the most is key.

Expansion plans should be shelved and the main focus should be on streams that generate the most returns on investment. Furthermore, startups need to consider flexible costs, such as freelance and part time work arrangements, to ease the load on their available capital until the worst of the crisis is over.

“You need three consecutive quarters of negative growth for a recession.  We just have a lot of uncertainty and it might be a matter of just being patient,” says Tamvakis.

 

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