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These four policy responses could cushion COVID-19 impact on startups

Buhari Mu (1)

Nigerian tech startups have continued to count losses as a result of the COVID-19 pandemic. Although the government at the centre said it is planning some financial assistance and has eased the over one-month lockdown, for many startups time is running out as they burn through their cash reserves.

A report released in the last week of April by Startup Genome showed four policy responses that could help startups survive through the COVID-19 crisis. The responses come in the form of grants, provision of investable instruments, payroll support, and loans to startups.

The report found that 65 percent of all companies, including 34 percent of Series A+ startups, have less than 6 months’ worth of cash, 74 percent have had to let go of full-time employees, 26 percent have to let go of 60 percent or more of full-time staff.

The report also showed that it has not been all losses as 12 percent of startups have seen a ten-fold increase in revenue since the beginning of the crisis. One out of every 10 startups is in industries – like health, fintech, and education – actually experiencing growth.

In Nigeria, a few startups in the health and fintech sectors have even attracted funding that will keep them going throughout the period of the crisis. In the first quarter of 2020, these startups were responsible for the $55.37 million that came into the ecosystem, according to a Techpoint Africa report. Over 99 percent of the funding came from foreign investors.

While the COVID-19 crisis has forced a deeper collaboration between the government and the tech ecosystem, there is still a lacuna between policymakers, policy-making, and the businesses in tech, which has reflected, to a large extent, on the response the space have received from the authorities in a time of crisis.

“This is the non-sexy part of founding and growing companies in emerging markets. In the rest of the world, there are trillions of dollars in palliatives being pumped into resuscitating the economy. But in Africa, we have none of that. No-one is going to save us, we need to save ourselves,” said Jason Njoku, founder of Irokotv.

The video streaming service had to send approximately 28 percent of its Nigerian team on compulsory leave without pay and sacked about 100 contract staff in the offline and outbound marketing teams as a result of the crisis.

The 1,070 startups from over 50 countries that responded to the Startup Genome report highlighted these four policy response areas that could help their businesses through the crisis.

Grants to preserve company liquidity

The COVID-19 crisis has led to a liquidity crunch for many tech startups. This is despite promises by the Federal Ministry of Communications and Digital Economy that it plans to provide financial relief for startups facing existential threats. But a month after organising an intervention group – Tech4Covid Advisory Committee – created by the National Information Technology Development Agency (NITDA), a department under the ministry, startups are yet to see the promised palliatives.

But in other parts of the world, grants are one of the ways some governments are using to save their technology businesses from drowning during this unprecedented crisis. The Australian government, for instance, announced a $17.6 billion cash stimulus to startups and businesses. According to the Startup Genome report about 60 percent of the founders who responded across Europe, US, and Asia are receiving assistance or expect government policies to support their businesses directly or indirectly.

In the case of Nigeria, the Central Bank of Nigeria (CBN) provided N100 billion to support the health sector, N2 trillion to the manufacturing sector, and N1.5 trillion to affected industries in the real sector. No provision was made for the tech ecosystem which – interestingly – has become the most active space supporting the government in the crisis.

Lagos which received an N15 billion grant from the federal government to fight the COVID-19 pandemic only recently announced a 250 million fund for innovation and research. The fund, however, will mostly fund new ideas and research.

Instruments to boost investment

Financial instruments are designed in such a way that the government takes a part of the risk in case the startup fails to fulfill the obligations.

The instruments may come in three forms such as a risk-sharing loan, based on the sharing of risks between public and private resources, and a capped guarantee instrument, where public money acts as a guarantee against default inside a bank’s loan portfolio. Both instruments aim to provide startups with better access to finance. The third instrument is a renovation loan, for energy efficiency and renewable energy projects in the residential building sector.

Investors around the world have been impacted by the crisis and are more distrustful of putting capital in certain markets. But a government-backed financial instrument will help in building investor confidence and bring in critical capital for startups who need it to survive the crisis.

 

Support to protect employees, like payroll supplementation grants

While a direct intervention of the government in this regard is practically impossible given the new realities in the oil market and the consequent drastic drop in foreign exchange, it can make it easy for startups to continue to pay their staff especially as the lockdown eases.

“The hardest decision I have ever had to make in my life isn’t shutting down a non-performing company like I have done a few times; but rather letting go of high performing and dedicated staff because that’s what the data told me to do,” Edmund Olotu, founder of GPay, an electricity payment infrastructure provider.

Experts have suggested relaxing company taxes and Pay As You Earn (PAYE) obligations so as to help companies and workers survive the crisis. The government can also leverage its platform to drive the adoption of tech products by allowing startups to bid for its services. While it helps promote the services of the tech ecosystem, the government can also increase the patronage of the services.

Loans to preserve company liquidity

This is one area the government tried to tidy up from the beginning with the provision for a three-month repayment moratorium for all TraderMoni, MarketMoni, and FarmerMoni loans with immediate effect. A similar moratorium was also given to all federal government-funded loans issued by the Bank of Industry, Bank of Agriculture, and the Nigerian Export-Import Bank.