ⓘ The following interview came as a part of our annual magazine issue ‘MENA TOP 35 POWER BUSINESSWOMEN‘
Here’s to our second conversation in the series #StartupsVCovid19 about the impact of COVID-19 on the MENA startup ecosystem, the opportunities, problems, and solutions with Laila Hassan, who is the Principal at 500 Startups.
LAFFAZ: What are the risks involved for MENA-based startups, Investors, VCs & accelerators) amid COVID-19 outbreak?
Laila: The predominant risk for startups is ‘running out of cash and going out of business’. The most vulnerable startups are:
- Startups operating in highly impacted sectors such as travel where operations have effectively frozen,
- Non-SaaS businesses that do not have a guaranteed monthly revenue source, and 3) startups that are not in a thriving sector and are out of runway.
To soften this risk, I strongly advise startups to:
Trim the fat – now is the best time to take a hard look at your operations and economics. While a big part of that entails the layoff of underperformers and/or none-core employees and consolidating roles, it is also important to look at the business full operations and the optimizations that can be done.
Raise cash – whatever cash is available on the table, a startup will likely need to accept discounts on valuations and/or additional protection rights needed by investors. Once this storm passes and the company is back on its feet, these terms can be adjusted by issuing ESOP or letting go of aggressive protection, though of course that’s not guaranteed.
Capitalize on downtimes – make use of the slower demand (if applicable) and look into your product to improve funnels, run experiments, launch new features, etc.
Swallow your ego – I expect to see a wave of mergers/consolidation during this time. If you’re not able to float the company on your own, it’s time to open acquisition or merger discussions with potential acquirers to survive.
Don’t spread your operation too thin – while the general sentiment for thriving startups in these times is to capture as much of the market as possible. I would actually advise to be on guard and only accept volumes that the business operations can sustain. I’ve seen one too many companies that run out of cash because the business grew faster than the operational platform.
For Venture Capital firms, just like it’s currently an employers market, right now it’s a VC market. If you’re still early in your deployment period, you have the opportunity to make great deals at attractive prices. However, funds that have been fully/mostly deployed have the following risks:
- Not having dry powder to protect their investments.
- Going through further dilution as companies recapitalize the business to survive.
- Potential setback in fundraising for a new fund.
The flip side of that would be:
- Strong companies would be able to weather the current situation as per above points and/or have other investors to float the company.
- While recapitalization is not great, it’s still better than company going under.
- Educated LPs would also view this situation as an opportunity to invest in funds that posses attractive investments.
LAFFAZ: Should startups and investors keep focusing on funding amid the pandemic situation? Or should they stay put and wait until it’s over?
Laila: For Startups, if you have enough cash to keep you operational for the next 12 months (after you trim down your fat), then don’t raise further. Conserve your equity, focus on your business and live to fight another day.
On the flip side if you don’t have enough runway then cash is king. It’s important to bring in whatever cash is available on the table to sustain/grow the company – depending on which bucket the company falls in – until this period is over. Startups need to be willing to take a discount to their perceived fair valuation for two reasons:
- Unprecedented risks involved which impact the future sustainability of the company on different fronts like execution and customer purchasing power hence ability to sell product or service, etc.
- With limited cash available most VCs approach is towards preserving cash to back their existing portfolio which comprises of thrivers, survivors and strugglers and they need to prioritize cash allocation. Hence there needs to be an incentive for this as opportunity cost comes into play.
For Founders, I think they shouldn’t worry too much about a discounted valuation because once they get out of this:
- They should be able to build a stronger company (shed the fat & optimized costs, improved product).
- They will raise money at a higher valuation in the future.
- Many investors may be willing to adjust team’s ownership (issue additional ESOP) to do right by a company that was able to come out stronger.
From a VC’s perspective, it’s important to close existing deals and continue investing, you have the opportunity to make great deals at attractive prices. In good times a lot of companies’ problems are covered by throwing cash at it. Right now is the opportunity for VCs to look at companies clear of this noise; to dig in the fundamentals, into the product, to look through historicals and validate the business model.
For Venture Capital, my main advice would be:
- Stick to commitments (however might soften valuations or add downside protection)
- Double down on why you started investing in MENA. Possible affirmations could be:
– More digitally educated market
– Stronger founders or team
– Clear business validation
– Cost-efficient startups
- Pre-empt rounds to get into companies before the market bounces back
LAFFAZ: According to you, where’s MENA startup ecosystem is heading up next? What will be the impact of Covid-19 on MENA startup ecosystem in 2020 and after?
Laila: While we are in quite unfortunate times with the current Covid-19 outbreak, we are hopeful for the great opportunities that have been presented for tech startups. Social distancing has pushed people quicker into acquiring new habits, specifically digital. In the MENA region, the internet was mainly consumed with minimal transactions, having no other choice, social distancing has encouraged people to transact online. While the pace/growth of these volumes will not remain at the same levels after this wave is over yet it would have created a new baseline for which the ecosystem will operate at. Tech based solutions are set to take a massive leap forward around the world and more significantly in the MENA region.
In my view, a good proxy to the current situation in our region is the Arab Spring that took place between 2011 and 2013. It was also a time of high uncertainty politically and economically, clear restrictions against social cluttering and curfews were enforced in most of the Arab countries. Companies that were able to survive during this period came out to be the stronger and more successful companies.
LAFFAZ: Please let us know about any initiatives that 500 Startups has planned or planning for startups amid Covid-19.
Laila: As 500 Startups, we are doing the following initiatives:
- We’ve engaged with our corporate partners to offer free or reduced-fee services to our startups.
- We are hosting a series of webinars globally to provide planning recommendations and support for our portfolio companies.
- We are also hosting a series of webinars for MENA called the Falcons Chat Series that is arranged by sector to share stories & knowledge.
- We are hosting MENA founder’s therapy sessions for the next few weeks to increase founder knowledge sharing within the portfolio.
- We’ve opened up continuous daily office hours for our entire MENA portfolio so they can speak to someone from the team more frequently advising them on survival and strategic planning.
LAFFAZ: Please enlighten us with your view of the current state of the MENA startup ecosystem.
Laila: I would classify startups into 3 main buckets:
- Thrivers: mainly companies in e-commerce, media & content, edtech, communication, healthtech and some fintech sectors. We’re seeing increased demand with minimal worries with supply chain.
- Survivors: companies like industrial/frontier, that are experiencing flat or slower business, but have runway and cash-flow management that will carry them through the next 3-6 months.
- Strugglers: companies that operations have froze such as travel and some sectors of logistics, and have no runway to float during these times.
For VC Funds, there are ones that are:
- Early in their deployment period: hence have a great opportunity to get in on great deals with soften valuations.
- Partially deployed: having more of a wait and see approach, reserving cash to their existing portfolio.
- Fully deployed: would not be able to support their portfolio. Potential set back in raising a new fund,