The UK Nigeria Tech Hub ran a survey to measure COVID-19’s impact on Nigerian startups. I finally got around to reading it, and it was well worth the 20 minutes. One section of the report looked at “runways”: how many months different types of startups can keep paying their bills for, using only money already in their accounts.
79% of surveyed startups (check it out here) had a runway of 6 months or less. So, only 1 startup in 5 (21%) would be able to stay afloat if something (like say, a pandemic-induced lockdown) froze business for half a year. This isn’t a shock, of course. Nigerian MSMEs tend not to be liquid. And even in the USA, a survey from April found 35% of startups could beat the half-year mark. But what intrigued me about the Nigerian report was its sector-by-sector breakdown of startup runways.
The sector with the fewest 6-and-done companies is health-tech. Only 33% of health startups would collapse after half a year of no income. Apparently, the business of keeping the wealthy and tech-savvy alive has been good. My guess would be that decent margins in top tier health services has given these startups good reserves at the best possible time: a very bad time.
On the other end of the spectrum, 4 sectors have the shortest runways:
- Agriculture. At the best of times, Nigerian farm businesses live hand to mouth (ba-da-pah), with razor-thin margins. Tech companies in that space – e.g. investment crowdfunders and market-makers – are living off a slice of that slice. They increase revenue by aggregating more farms and moving more products. The more volume they trade, the more they make from their small margins, and also the more savings they can make on economies of scale. But still, it’s a slice of a small slice, so I understand why runways are short. I also imagine the seasonal nature of farming revenue is a serious cashflow constraint. Revenue only comes in at the end of harvests, with lean periods in between.
- Real Estate. As with agriculture, the underlying business has long incubation periods. Investors plant money into estates and other developments, spend months or years building them, and then wait months or years to sell them. Every startup that adds value to this process (crowdfunders and brokers) is ultimately tied to that life cycle. The money comes when it comes, and doesn’t come when it can’t, pandemic or no pandemic.
- E-Commerce of course has suffered because the economy has slowed, and people are buying less.
- I think Education startups were also victims of the Calendar, since the lockdown began at the tail end of the second term, and they missed the expected cash infusion at the start of the suspended third.
Faring slightly better than these un-fabulous four, we have 3 sectors where 70% or more of the startups would tap out in 6 months. I think the common denominator is that their business isn’t seasonal, although they have low margins which make it difficult to hoard cash.
- Transportation and Logistics (75%). While transport services are notoriously allergic to profits, the biggest players are also well-funded by investors. Plus, heavy daily transaction volumes mean SOME cash on hand, even if the books are in the red. Unfortunately, the lockdown restrictions took a toll on transportation as a service.
- Travel and Hospitality (75%). People are still eating and drinking during COVID-19 (maybe that’s why it’s still raging: you people aren’t fasting), so nobody should be surprised if these guys still have some money to stretch out.
- Financial Services (73%). There’s a lot to unpack in this number. Some of it is a sign that electronic payment adoption is still low. But also, a large slice of the payments pie is already on the plates of the banks and other big players, so the startups most likely to respond to this survey were already battling for scraps before the pandemic.
I think (most of) the startups in these 3 sectors will do just fine, because the underlying activity will pick up as the economy reopens. Among the un-Fab Four, I worry the most about Agriculture. The interstate travel ban is hitting farmers in the rural North hard, and so the next planting season may be poor. Plus the 2020 report of the Global Network Against Food Crises is pessimistic about what insecurity and Climate Change will do to those same farmers. Reading the cowrie shells, I see strong opportunities in real estate tech, as depressed demand for their property may push landlords to accept innovations from founders.
Here’s to all of us getting through the next 6 months.