What is happening in the markets?

The tech space globally has been taking a hit in the last few months. Tech companies and crypto assets’ valuations have been dropping rapidly. Although the decline only caught the attention of the media recently, a closer look shows that this downturn has been happening since the beginning of the year. Some of the companies that were thought to be stable in this space such as Netflix and Meta (Facebook) have also been declining in value. The leading crypto assets have also gone through the same devaluation.

The local markets have not been any different. The NASI has dropped by 22.8% and NSE 25 by 19.5% since the beginning of the year, with some of the stocks taking a bigger hit. The graphs below paint a picture of what has been happening in the both the local and global markets in 2022 where we examine the Year To Date (YTD) and Month To Date (MTD) performance:

Source: NSE

Source: NSE

The Kenyan equity market has been on a downward trajectory in 2022, led by declines recorded by large cap stocks such as Safaricom, EABL, Equity and KCB, mostly attributable to foreign capital outflows in frontier and emerging markets. In Kenya, all the above is compounded by the upcoming elections in August and the continued currency depreciation.

Source: Yahoo Finance

 Source: Yahoo Finance

Source: Yahoo Finance

Global markets have also recorded declines in 2022, driven by rising interest rates, high inflation, supply chain disruptions and geopolitical tensions caused by the Russia-Ukraine war.

What is the implication of this to companies?

Startups usually work on a model which does not require them to be profitable and cash generative in the short-term as they can raise capital from investors to fund product development, operations, expansion, etc. This model has also been creeping into traditional businesses. The key impact of this devaluation is an increase in risk perception by investors where traction will now take center stage when companies are looking to fundraise. The era of cheap and fast cash from investors, at least for now, is over. Traction will no longer just be on the topline but also on the bottom line and as such:

1. If you are a startup you need to think about your path to profitability sooner than you had intended (assuming you had not done this already). Investors will focus more on companies where they see this clear path.
2. If you are in the middle of a funding round, be prepared for it to take longer than you had planned.

With this in mind, cash will take center stage, as the old adage goes “cash is king!” You need to think about how you can extend your runway as much as possible by conserving what you already have and look to generate more though sales and running a more efficient ship.

What others in the industry are saying:

Investors in tech companies are currently giving the following advice to companies in their portfolio:

Source: Sequoia

Source: YC Combinator

Our thoughts:

Similar to the advice being dished out, one of the most important questions to consider at this point is how to improve your liquidity. We believe there are 5 key questions that CFOs and CEOs need to ask, these are:

1. How much cash do you have?
2. What is your average burn rate?
3. What is your current runway?
4. What runway do you want to achieve?
5. What actions should you take to achieve this runway?

There are 5 key items that you need to consider to achieve your desired runway:

1. What are your key revenue lines, how will each be affected? What actions can you take to improve these lines?
2. If you sell, can you collect, can you be paid in advance?
3. Looking at your costs, which are the key ones?
   1. What must you pay today?
   2. What can you negotiate for a write off, hair-cut or postpone paying?
4. What is your debtor’s position?
   1. Who can pay now?
   2. Who cannot? Can they pay if you give discounts?
5. Who do you owe money?
   1. Who must be paid today?
   2. Who can wait?

We believe that a flexible financial model with various scenarios will help to answer some of the questions above and support you in making a well-informed final decision. Once a scenario has been chosen, the company should divert resources toward this target.

We had done a webinar and blog on this topic at the start of the COVID-19 pandemic in 2020 to show how companies can respond in a crisis, how to take the advice being given and execute on it. So, if you are wondering how to execute the advice you are getting (as a founder, adviser, or board), we are the right people to talk to, give us a shout, we can help!

By Valentine Wahome and Robert Karuiyi