How to survive an economic downturn

Introduction 
The Africa funding report for Africa in Q1 showed that funding for African startups declined by 57% which represents $649 million as compared to $1.5 billion in this same period a year ago. This means that compared to 2022, there was a 43% success rate for fundraising by African startups and a number of businesses would have failed/closed down, laid off employees or/and passed through a rough, unstable phase which as we know is not over yet.
There are even speculations that by Q4 of 2023, there might be a global economic recession. This means we expect startups to continue facing difficulty raising or worse still, completely shutting down. We must understand how venture capital is affected by an economic slowdown and the ways founders, entrepreneurs and CEOs can survive this bear market. 

Impact on VCs 
Venture capital investing and the continent’s economic health have a tight and proportional relationship. On one hand, venture capital investing contributes about 1% to Africa’s GDP which is outstanding compared to other climes like North America, Europe and Asia where VC funding contributes less than 1% to the GDP even though VC investing has 33%, 13% and 10% share of total funding on the continent. This data shows that for Africa, VCs contribute largely to the GDP and every Dollar invested has a higher chance of prospering the economy, driving innovation and contributing to economic development. Data also shows that VC-backed companies grow twice as much as their non-VC-backed companies. In a nutshell, VCs contribute massively to the economy because startups not only receive funding to grow exponentially and enter new markets, but they have access to advice from experienced founders and builders that prevent mistakes from being made. 
On the other hand, VCs are affected by an economic slowdown but not in the way you might think. Ideally, LPs are sceptical about investing in startups, giving more confidence in less risky forms of investment. However, In an economic slowdown or downturn, experienced VCs are less concerned.  
Why?
Low prices 
In a slowdown, valuations are lower, and the funding rounds are smaller. The investor checks into their favourite companies at a lower price and gets returns years later when the market is stable and booming again. They end up owning more of the company by the end of the investing cycle due to the advantage taken during the panic. Typically, they invest at the last pre-money valuation regardless of the new multiples in the financials. Lower prices and smaller funding rounds mean less premature spending through hiring or sales, low burn rates that would have otherwise led to more unnecessary raises and overall better management of funds. 


Due diligence matters again 
The boom period of 2021 ushered in new sets of VCs who were not familiar with the game. Consequently, little to no due diligence was done on a number of startups they funded. This act led to an oversaturation of the market with less experienced founders thus causing a  ripple effect of an economy with underqualified talents. With an economic slowdown, due diligence has returned and the work of VC investing is back. 


Good startups will stand out
Investors typically look for founders that are not going to skip the work. The real economy of investing is many times tough, competitive and calculative. The ecosystem is in search of founders who are not overly entitled, who are ready to work, and who can collaborate with partners to achieve results. In a slowdown, investors are unperturbed because it is easier to spot these kinds of talents. It is really all about execution. 


Surviving a slow down 
Reduce valuations 
Founders must be careful not to be caught in a cycle of meetings with VCs who may not be interested in investing due to the valuations put forward by the founders. It would be more pragmatic to lower valuations, particularly when there are no metrics to justify the valuation, reduce expenses and extend the runway. 
In other words, raise money at a lower valuation to extend the runway and use the money raised wisely by focusing only on what is important and leaving the rest for later. 


2. Re-adjust product strategy: There are products that will do well no matter what and there are startups that will suffer more in a bear market depending on the time and season. In the present day, AI products will most likely be invested in more than crypto products. 
However, any company leveraging innovative technology to deliver value to their customers will win. Products like this which are a must-have cannot be disengaged no matter the situation. 


3. Get more hands on deck: This does not mean hiring. It means getting advisors, business developers and talents. The aim is to get them to contribute their services and knowledge to the survival of the enterprise without necessarily getting the standard payment. Founders should take advantage of the ones that have recently been fired and are looking to re-strategize and join startups. Leveraging their network to get across to these people is also really smart. 


Conclusion
While we have consistently heard that an economic slowdown is a horrible time for both VCs and Founders, it has been tested that with the right strategy and framework, startups survive a bear market, legendary startups are born during a recession and VCs look for startups and founder that stand out in execution.
Ecosystem Dive
Young African Catalysts launches to democratise access to venture ecosystem
The Young African Catalysts (YAC) is set to use the power of community, network and operation to invest in emerging talents in Africa and empower first-timers. 
“Given the nascent nature of the venture ecosystem in Africa, established, older stakeholders tend to hold a competitive advantage – at Young African Catalysts we are looking to empower first-time operators, first-time founders, and first-time venture capitalists with the infrastructure to ignite their journeys,” Co-founder of YAC and head of investments at Future Africa, Mostert, is quoted as saying.
YAC also seeks to launch its Fund 1 which will invest in African startups and facilitate an even more prosperous economy that develops and uplifts talents. 
More info here: 
https://disrupt-africa.com/2023/04/17/young-african-catalysts-launches-to-democratise-access-to-venture-ecosystem/


Q2 2023 Events 
Tech City has provided a list of events happening around Africa in 2023 that you should attend if you are looking to network and gain ground in the space. This is also for stakeholders in the startup ecosystem from founders to investors, mentors and advisors. 
More info here:
https://www.techcityng.com/upcoming-tech-events-of-q2-2023-you-should-not-miss/

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