Covid-19 Salary Cuts and Low Revenue – VC-funded Startups Affected

• The economic effect of the Covid-19 pandemic intensifies, with even South Africa’s venture capital (VC) backed tech startups feeling the strain.
• On the bright side, some startups are getting a lot of interest from clients, mostly corporates and small businesses.
• While some startups may be planning for difficult times ahead and maybe secure for now, things are likely to only get worse for other startups. Virtually no business can survive this unscathed.

The economic effect of the Covid-19 pandemic is starting to hit, with even South Africa’s venture capital (VC) backed tech startups feeling the strain.

Sendmarc, a Johannesburg-based company offering email security from phishing attacks and email spoofing, has seen a 30 percent rise in customers not paying on time in the last few weeks.

“We ask them to pay and they just don’t get back to you,” says co-founder Sam Hutchinson.

Nevertheless, having secured a multi-million rand investment from Kalon Venture Partners in January, the company is still flush with cash and Hutchinson says he and his co-founders are “not stressing about it yet”

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On the bright side, under the country’s lockdown, which started exactly a month ago, the startup is getting a lot of interest from clients, mostly corporates and small businesses. “In the last month we’ve signed as many POCs as the first six months of the business,” says Hutchinson.

The problem is, at this point, none of the clients wish to sign on. Hutchinson says most consumers are waiting for more information as to how long the pandemic will last.

Because of this, investors have taken a cautious approach. They told Hutchinson and his staff to put in place a strategy focused on goal posts for a 24- to 36-month span that avoided charging for what they might do.

For instance, if three months go by without paying customers, the startup will look to cancel their rental agreement. Executives will have to take a pay cut after six months without any consumers paying.

The pandemic has already had an impact in other ways too. The latest funding was expected to allow the company to make 10 new hires by the end of this year. But Hutchinson the company has put a freeze on all new hires since making the first three hires.

Moreover, the existing seven workers of the startup are also beginning to feel the impact of the lockout, which has forced those who can work to do so from home. “Staff are describing how they feel disconnected and lonely,” says Hutchinson.

Although the startup continues to run daily morning huddle chats as well as a Friday call, the calls have been based mostly on work. Gone is the regular chit chat which happens when people work from the same office.

To get around this, the company added daily 15-minute community Zoon calls where workers are free to simply “shoot the breeze”.

In Cape Town, Ntsako Mgiba, co-founder of security startup Jonga, says he hasn’t felt isolated from his team, mainly because he lives with his co-founder Ntando Shezi.

While the lockdown may have placed plans for the startup to distribute their home security system nationally via on-site resellers, Mgiba says it has given him and Shezi time to think about their business, plot future developments

Like Sendmarc, Jonga is fortunate too, having recently earned a round of investment. In August last year, the Cape Town based startup announced it had secured an investment from the Savant Venture Fund. It did not disclose the amount invested.

Mgiba says the startup is still testing its security system amid the Covid-19 pandemic with consumers in Cape Town urban centres like Philippi and Khayelitsha and has had to give subscribers payment holidays.

However, he says he and his team of five core members and four agents are still able to liaise with customers through Whatsapp messenger to get feedback about how the product operates.

He says the team of the company is planning to have positive connections with at least five clients a week.

Meanwhile, Idan Jaan and Jarred Noche, the founders of Johannesburg-based fintech Fundrr, who landed an undisclosed amount of funding from a Cape Town investor in May last year, have decided to slash their salary by a third to ensure they can afford to give clients a payment holiday.

Jaan says the company, which operates a platform that promotes the lending to small companies, has provided a payment holiday for the duration of the lockout to all its customers directly affected by the pandemic.

He said he and Noche have closely dissected and studied the company’s loan book to anticipate which companies would be impacted, and have done our best to plan for what was to come.

“Our current website traffic and loan applications have certainly increased during this lockdown, which paints the clear picture that businesses are indeed out there seeking finance as they are facing immense financial pressures,” he added.

While these startups may be planning for difficult times ahead and may be secure for now, things are likely to only get worse for other companies. Virtually no business can survive this unscathed.