Salary cuts, customers not paying, as Covid-19 begin to bite even VC-funded startups

The economic fallout from the Covid-19 pandemic is beginning to bite, with even South Africa’s venture capital (VC) funded tech startups feeling the pinch.

In the last few weeks Sendmarc, a Johannesburg-based startup that offers email protection from phishing attacks and email spoofing, has seen a 30% increase in customers not paying on time.

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

However, having landed a multi-million rand investment in January from Kalon Venture Partners, the startup is still flush with cash (see this story) and  Hutchinson says he and his co-founders are “not stressing about it yet”.

Salary cuts, customers not paying, as Covid-19 begin to bite even VC-funded startups

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, none of the clients want to sign on at this stage. Hutchinson says most clients are waiting until there’s more certainty on how long the pandemic will last.

Because of this, investors have taken a prudent approach. They’ve asked Hutchinson and his team to put in place a plan based on goal posts along a 24 to 36-month period, forecasting what they would do it clients stopped paying.

For example, if three months go by without clients paying, the startup will look to cancel its rental agreement. After six months without any clients paying, executives will have to take a pay cut.

The pandemic has already had an effect in other ways too.

The new investment was supposed to allow the startup to make 10 new hires by the end of this year. But after making the first three hires, Hutchinson the startup has placed a freeze on all new hires.

In addition, the startup’s current seven employees are also beginning to feel the effect of the lockdown, which has forced those that can work to do so from home. “Staff are describing how they feel disconnected and lonely,” says Hutchinson.

While the startup continues to run regular morning huddle chats as well as a Friday call, the focus of the calls has mainly been on work. Gone is the day-to-day chit chat that comes about when people work from the same office.

To get around this, the startup has added regular 15-minute group Zoon calls where staff they are free to just “shoot the breeze”.

‘Time to reflect’

In Cape Town, Ntsako Mgiba, the 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 put plans for the startup’s to distribute its home security device nationally via resellers on hold, Mgiba says it has allowed him and Shezi time to reflect on their business, plot future developments and refine their technology.

Jonga, like Sendmarc is also lucky, having recently received an investment round. The Cape Town based startup announced in August last year that it had received an investment from the Savant Venture Fund. It did not reveal the investment amount (see this story).

Mgiba says the startup is still testing its security device with users in Cape Town townships Philippi and Khayelitsha and has had to offer payment holidays to subscribers.

However, he says he and his team of five core members and four agents are still able to liaise with customers via Whatsapp messenger to get feedback on how the device is working. He says the startup’s team aims to have meaningful interactions with at least five customers a week.

Salary cuts

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

Jaan says the startup, which runs a platform that facilitates lending to small businesses, has offered a payment holiday to all its clients directly affected by the pandemic, for the duration of the lockdown.

He said he and Noche have dissected and analysed the company’s lending book closely to predict which businesses will get affected and tried our best to prepare 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 might be preparing for tougher times ahead and may be safe for now, things for most businesses are likely to only get worse.

Nearly no business is going to come away from this unscathed.

Featured image: Free-Photos via Pixabay