A note to GreenTec Capital Start-ups on adjusting to the COVID19 Pandemic

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Dear entrepreneurs,

We have been approached by partners and a few of our Africa-based portfolio companies regarding advice on how to weather the storm presented by the COVID-19 pandemic situation unfolding around the globe. While it is not the purpose of this letter to dispense medical advice, we strongly encourage you to put the safety of your teams & families first, and to closely monitor the situation in your countries.  While to date, there has been only 585 cases of COVID-19 reported in Africa, a small number relative to the 200,000+ cases globally, it will surely affect you and your business in the next few weeks.

It is our in-house view that the situation with the Coronavirus pandemic will continue to deteriorate over the next few weeks, with the current growth rates, we estimate that easily 0.5 million cases are likely to be reported by the end of March. The global trends with countries implementing more severe quarantining measures, are causing great logistics disruptions and are contributing to an economic slowdown over the next few months. Global stock markets are now pricing recessions across the board, and this necessitates more thoughtful business planning to weather the storm over the rest of 2020.

Based on our experience in Africa, we wanted to take a moment and share some thoughts on the key areas to keep an eye on, both in terms of challenges and opportunities, as the coronavirus debacle plays itself out over the next 2-3 months. Thinking beyond the personal health risks, we focus on key market, operational and financial areas which we think will be impacted in the short- and intermediate- terms.  We know entrepreneur’s time is limited and for those of you just about readying to skip the next few pages, we start with a quick summary on actionable recommendations below, and for others we hope you dig-in further.

SUMMARY:

The Checklist and Your Action Plan

For our readers with limited attention spans, here is a recap of the operational and financial recommendations we advise you to follow over the next 2-3 months, to increase the probability of your startup’s survival and long-term success:

 

  1. Revisit your short-term sales forecast, update it for a low- and high- scenario
  2. Adjust accordingly all short-term operating expenses (marketing, HR, overhead, admin)
  3. Minimize capex expenditures for now, conserve cash
  4. Account for all your liquidity and cash reserves
  5. Re-calculate your months of burn-rate, based on above updates
  6. Review your funding need based on the low scenario
  7. Call your GreenTec Venture builder to help you with all those steps, and beyond

For founders with a bit more time on their hands, and interest in the details, please read through across the following few pages and we hope you get further insights on how to capitalize on the opportunities, as well, when businesses and the economies start to rebound.

Market effects

For most of you sitting on the African continent, the current health impacts are currently low, as so far Africa has less than 1% of the global COVID19 cases. Market dislocations may however still present challenges to your business as both demand and supply for many products/ services is expected to decline over the next couple of months, particularly in certain product categories. If you are a hotel/ travel booking platform – plan for a substantial drop-off in sales; if you are an agriculture platform selling food, you will most likely not see substantial drop-offs in demand.

The brunt of the Coronavirus’ effect is expected to hit small- to medium- sized business in the short-term, as their staying capacity and funding resources may be limited. Prioritize servicing B2B contracts for businesses with low risk, to maintain strong recurring revenues for your business. Either way, plan accordingly, and immediately revisit your short-term sales and business projections.

Risks to your operations

Based on your revised sales estimates, consider early on the potential effects on your supply chains and cost structures, and revisit accordingly. Supply chain disruptions will affect your ability to deliver to your clients, especially if you are in the product business dependent on global logistic chains. Plan inventory and stockpile product ahead of disrupting deliveries.

From a cost structure standpoint, your head count is usually the biggest recurrent cost outlay, and evaluating your needs there, should allow you to plan for more efficient allocation. Consider furloughing and keeping your most loyal workforce on a part-time engagement, so that you don’t end up missing the upside and having to hire in 1-2 quarters when everyone is looking for employees. Your team will continue to be your most valuable resource, so making sure that you take care of your employees today, during the time of distress, will go a long way in obtaining long-term loyalty from your employees and extended stakeholders.

Your financials and Funding needs

That’s the big one, and you should carefully deliberate your current financial standing, available liquidity, months of run rate at your current expense structure and when you would expect to need more financing.

The typical rule of thumb for start-ups where you target at least 18 months of operating expenses worth of cash in the bank, should even more important to apply now to your business planning. Your cost structure might have reflected the current high-sales/ MRR recurring revenues, but if demand falters, your 18 months run-rate may quickly drop to 3-6 months. Account for your liquidity and conserve cash by any means possible, until the risk appetite in the equity markets recovers.

Most importantly, while some costs could be cut and thus you still exercise a lever on your burn-rate, the amount of short-term debt you carry should be immediately revisited and you should plan for re-financing options and/or other funding alternatives. Your business will continue to exist, even if you have to lay-off some of your employees, but if your loans come due – and you do not have liquidity in the bank – this can be trouble. Refinancing in times of crisis is next to impossible, so start thinking of your funding options 3-6 months ahead of time before a loan is due.

Wait patiently and prepare for the Up-swing

Thinking beyond the next 1-2 months, will also most likely allow you to differentiate and build yourself a unique advantage in the marketplace. What are some areas that could prosper going forward?

  • Triumph of the Digital Workplace

The digital workplace is now solidly entrenched in our mentality, for the long term. Connectivity platforms, remote work startups, and other remote digital content applications will be on the rise. Despite global stock markets dropping 25-30% over the course of the week, Zoom Video Communications (US ticker: ZOOM) is up 55% during the last month.

  • E- & Distance Learning

Education – is going more and more digital. As large swaths of countries are closing their schools and universities, Digital education/ e-learning platforms will have a substantial increase in demand. The opportunity is large, especially against the back-drop of prohibitively expensive traditional educational channels; so if you figure out how to reach a global audience with your low-cost learning content platform – you will be a winner.

 

 

 

  • Digitalize, Digitalize, Digitalize

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Be ready to serve new and emerging consumption patterns and utilize targeting new segments – digitally. Selling face-to-face will be more and more outdated, especially when you can source, contact, deliver, and collect payments from your client digitally. Go digital in all aspects of your client-facing business parts. While other brick-mortar stores will continue to lose sales from lack of clients walking into their stores, your e-commerce platform or delivery app should strongly capitalize on all those emerging needs.

 

 

 

To cut a long story short, this is the right time for you and your co-founder(s) to reflect and plan strategically for the coming 6-12 months in terms of market, operations, financials, and potential opportunities. We at GreenTec Capital, always like to position ourselves as co-founders as well, so please don’t hesitate to reach out to discuss this, your plan, or your concerns with us over this complicated time.

 

Erick Yong, CEO GreenTec Capital

 

 

 

 

 

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