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Liquidity crunch for African startups

Guest post: Ben White, CEO and founder of VC4A

The scope and magnitude of COVID-19 is immense and continues to scale rapidly in its reach. This is undoubtedly a tough and difficult period for Africa’s young startup industry, and for the early stage investor community at large.

More importantly, the storm brings major headwinds to VC4A supported entrepreneurs and their ventures representing thousands of important initiatives behind the continent’s most promising high-growth high-impact solutions.

Many African startups posted strong commercial traction and were on course to being profitable, but where any young company is limited in their capital and liquidity reserves. Two or three months without revenues, which was the duration of the Wuhan shut down in China, seriously endangers their survival.

Longer shutdowns, or more severe drops in economic activity, will make their situation even more critical. Without support, there is a real risk we lose decades of painfully gained momentum and many quality businesses. Even more significant, many of these companies are essential in Africa’s response to COVID-19. 

Unfortunately, African startups don’t make it to the top of the list of priorities for African governments scrambling to contain a health crisis, a growing number of state industries and national businesses in financial need, and national budgets already constrained by significant levels of debt.

Banks never gave startups a lot of attention, and it’s not realistic to think their position will change now as they reassess and lock down their exposure. Corporates are pulling back on any commercial development activities and put a stop on any joint ventures and/or mergers and acquisitions activity. Private sector investors cannot operate in a context of such high dynamic risk and are forced to pause their investing activities. 

The short-term focus of investors will be to double down on support for their existing portfolio, and to make sure they don’t lose their best companies during the COVID-19 crisis. Where the supply of capital dries up, startup entrepreneurs also see their markets shrink as government, corporate and consumer spending drops precipitously the longer the crisis drags on. This perfect storm is a starting entrepreneur’s worst nightmare. 

COVID-19 has major implications for the 13.5 thousand ventures listed on the VC4A.com platform, and where on average each startup creates 7,98 jobs.

Affordable capital to extend the runway of African startups is needed now more than ever. This should be short-term debt that doesn’t destroy the balance sheet or ruin the company’s chances of survival post crisis.

This capital has to be made available either as grant funding or with soft loan requirements. Government, Development Finance Institutions (DFIs), and philanthropic institutions can play a critical role as funding agencies and where VC4A is seeking partners and collaborators to make such resources available.

In the meantime, VC4A supports entrepreneurs with free access to online resources and networking tools :

  1. Learning materials, practical templates and exercises available on the Startup Academy;
  2. Quality mentorship and advisory support through the Mentorship Marketplace;
  3. The ability to find talent, mentors, partners and investors, via Venture Profiles;
  4. Chances to apply to Programs and Events(note that many events are moving to the virtual space for the foreseeable period);
  5. Access Business Development Support.

It is through VC4A.com that entrepreneurs can connect their companies to a global network of resources, otherwise a growing collection of companies essential to Africa’s future and most deserving of capital support. 

Return to the main coronavirus blog here: https://liveblog.africanbusinessmagazine.com/

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