It's a new time for reckoning because it seems a recession is lurking, in fact, it’s already here. Top companies like Netflix lost over $50 million in April and they are currently cutting down staff, Tesla, Coinbase and Amazon are also rumoured to be on a firing spree; it just keeps getting worse.
The global impact of the recession will be soaring food prices, and cutthroat real estate prices, which will result in a living crisis and a lot more crazy in the months to come.
To understand the recession from a new perspective, we had a chat with the finance Manager at Kippa, Opeoluwa Fakayode, ACCA. With over 10 years of experience in the accounting and finance space, he had a lot of insight and information to share.
What is the recession, and what does it mean to start up that are funded by virtual capitalists?
Recession is something we hear a lot—but what does it mean? Does it mean a business is going wrong and losing money? Or does it mean that the continuity of that business is shaky?
But simply, recession means a general decline in the economic activities of a particular region, a country or the world as a whole
So what happens during a recession?
The power and value of money depreciate (inflation)— then comes the reduction or circulation of funds—at this point in the recession, everybody will try to huddle their funds and refrain from sponsoring business ventures.
During the recession, it is always deemed risky to put your funds into any business because there will be a general reduction in economic activities. As a result, everyone begins to tread lightly around investments, and spending becomes precautionary rather than unrestricted. So we can conclude that in times of recession, it's very valid that you want to hold on to your money for precautionary reasons because there's a huge risk of not getting your returns.
So a little diversion, who are venture capitalists?
The average person, me, and you are coming together to fund a business idea in exchange for equity. Kippa for example is funded by some top Venture capitalists like Target Global and Alter Global.
What does the recession mean for startups—in detail, what does it mean for companies that are sourcing for funding and companies that are already funded?
Funding generally for startups means fueling their businesses as they grow. However, venture capitalists may not be open or willing to invest during the recession due to the higher risk of low returns.
These people think, “if I invest in your business at the moment, how do I know I'll get my returns back” because of the instability in the economy, this is not so clear.
The numbers forecasted by companies may not be as reliable and the recession makes the projections of time and revenue even more unstable. So, we would very likely be seeing less early-stage startups raising.
Then concerning startups that have been in business and are already funded, they've raised their money and may still need to raise more in the future; it's still the same circumstance for them. The only exception is if their numbers are stable and businesses have started generating good revenue. They are making a case for business expansion, increasing revenue and profit. It will be easier for this startup to convince venture capitalists to invest with a detailed financial report and forecast showing their business progress. However, all companies that are VC-funded should start looking at 2 things: ways to cut costs and ways to generate revenue.
For a startup, what are some ways to cut down costs?
Cutting costs means steps to reduce your business expenses and improve your profitability.
There are different ways to cut costs;
- Reviewing staff responsibilities: From my experience, startups are spending a lot of money on staff salaries and benefits. While my first plan is not to let people go, I think something startups don’t do enough is expand employee responsibilities instead of hiring new employees.
- Hire Contract Staff: Not every startup needs a full-time accountant or HR. If your company is at the point where it can run on just a case basis for specific roles, my advice is to take it. Hire contract staff or contractors until the role is an obvious daily necessity.
- Negotiation: To manage fixed and variable costs, try negotiating with vendors for better pricing, implementing new strategies to help reduce expenses, such as working from home, avoiding unnecessary staff hire, developing strict policy around resource wastage, think of automation processes to reduce staff cost etc.
- Try out free resources: The cost of maintaining some activities in the business, such as the accounting system, may be reduced or entirely avoided. Use free accounting software like the kippa app for your accounting which comes at zero cost to the business. True, it's very easy to assume that those costs are small and not significant to the business, but I have looked at a lot of books and these costs add up.
- Leverage technology: Use digital marketing before you set up traditional marketing, use DocuSign instead of printing documents. So many tech startups don’t use innovative practices in their operations.
How will it affect the tech startup ecosystem in Africa? We know that the recession will push venture capitalists away from investing and drive technology companies to prepare for the worst, but, it’s important to remember that notable companies like Instagram and Uber launched during the great recession of 2008. Companies that are able to generate revenue and last till the end of the recession are on track to become powerhouses.
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