The past 7 months have ushered in a new way of living, working and doing business across the world. The Covid-19 pandemic has forced everyone to adjust in some way, bringing real changes to people’s lives and businesses.
Businesses during this time have been forced by the prevailing circumstances to explore new ways to survive and thrive in the new normal, bringing creativity and innovation to bear especially for businesses who have seen this new normal as an opportunity.
Africa is not left out. According to World Bank’s biannual Africa’s Pulse report ”link here”. Africa’s economic activity will decline by 3.3 percent in 2020 due to the pandemic, ushering in the region’s first recession in 25 years. This decrease in economic activity will negatively affect Africa’s participation in the value chain and also reduce foreign financing. Even the biggest economies in Africa are not left out – Nigeria, South Africa, Egypt and Kenya.
When we examine the impact on VC investing we see a grim picture. At the end of Q1 2020 (just before the lock-down), TechPoint Africa reported a 313% increase from 2019 figures. However, according to AfricArena – an AfriTech ecosystem accelerator – Venture Capital investment in startups will reduce by 40% in the remaining of the year 2020.
Although there has been a forecast of massive reduction in Venture Capital investment during this time, African Venture Capital funds would still play a key role in working to support remarkable tech startups, startups with the ability and resilience to survive the reality of an economic recession.
The road to recovery for startups would require massive investments across the continent and also other forms of support. With the recession around the corner, the overall investment landscape looks grim, what are the ways in which traditional VC firms can evolve their model? We think there are at least 3 ways. While these are not exactly brand new, there is a need to emphasize these areas more in order to sustain a thriving innovation economy.
- Go beyond the cheque: The role of VCs should shift from capital investors to semi-operators. Almost like an extended hand in portfolio companies. Partners and senior executives in most VC firms typically would have an extensive network that can be leveraged to support portfolio companies. This kind of support can be through strategic partnerships, sales introductions, and in B2B scenarios, accelerating procurement and compliance checks with big enterprises. This is the time for such support, as it is in the best interest of VCs to see their companies thrive through the difficult economic era.
- Prepare for a slow recovery and adapt their processes accordingly: The recovery will not be quick as it was initially predicted. VCs should become comfortable with some seeming uncertainty in the roadmap of potential investee companies and even portfolio companies. Without a clear future outlook for 2021 due to the economic impact of Covid-19, there is a need to have a more flexible and agile approach towards evaluating the growth plans of the founders. We believe this is a time for VCs to place as much (or even larger) trust on the founder(s) as on the business model/product itself.
- Double down on critical market-creating innovations: Market creating innovations focus on non-consumption, they solve the most critical problems in the market hence their natural tendency to be resilient in the face of economic crises. We will see more market creating innovations thrive in the Covid-19 and post-covid-19 era. VCs need to double down on investing in such businesses and in supporting portfolio companies that are within such spaces. This will also include ensuring that there is a significant reserve for follow-on financing in such portfolio companies.
These are three ways in which African VCs can support the ecosystem of startups in the coming months. At Pacer Ventures, our goal is to ensure that the most critical needs of startups are being met. While this may be an uncertain and unprecedented time in history, how innovation is managed and supported in the months to come will determine a lot about how our continent will thrive post-covid.