?? Extending Runway: A Survival Guide for African Tech Founders ??

Introduction

For tech founders across Africa, raising capital is often one of the biggest challenges. Once initial funds are secured, the focus shifts to managing cash flow effectively. However, even with the best planning, startups can find themselves running out of cash before they achieve the milestones needed for the next funding round. Extending the runway becomes critical to ensure the survival and growth of the startup. Here are strategies African tech founders can adopt to stretch their resources and navigate through lean times, along with examples of how these strategies have been effectively implemented across the continent.

Assessing the Financial Situation

Before making any decisions, conducting a thorough financial review is essential. Founders need to understand their burn rate, the remaining cash, and how long the startup can survive at the current spending level. This analysis will help identify areas where cuts can be made or additional revenue can be generated.

Strategies to Extend Runway

Prioritize and Cut Non-Essential Expenses:

During times of financial strain, the first step for any startup is to identify and cut non-essential expenses. This could involve negotiating better terms with suppliers or landlords, reducing office space, or pausing non-essential projects. For instance, Yoco, a South African fintech startup, successfully extended its runway during the early stages of the COVID-19 pandemic by prioritizing essential expenses. They negotiated with suppliers, reduced office space, and focused on their core operations, ensuring they could weather the economic downturn and eventually thrive.

Focus on Core Business and Revenue Streams:

When cash is tight, it’s crucial to double down on the core business and the products or services that generate the most revenue. For example, Swvl, an Egyptian mass transit system startup, faced financial challenges as it expanded into new markets. To manage cash flow and extend its runway, Swvl paused its diversification plans and focused on improving its existing services. By honing in on their core operations, they were able to stabilize their finances, improve margins, and set the stage for further expansion.

Increase Revenue through Creative Strategies:

Boosting revenue through creative means can provide a lifeline when cash is running low. Nigerian logistics startup Kobo360 did this by offering discounts for upfront payments and introducing a subscription model for key clients. These strategies brought in much-needed cash and created a steady revenue stream, which helped Kobo360 extend its runway and continue its growth across Africa.

Seek Bridge Financing:

If a startup is close to a breakthrough but needs more time, seeking bridge financing from existing investors or alternative sources can be a viable option. Here are some bridge financing options:

• VC Firm Bridge Rounds: Existing investors, such as venture capital firms, often provide bridge financing to protect their investments.
• Angel Investors: Angel investors might offer short-term funding to help startups reach their next milestone.
• Venture Debt: Non-dilutive capital provided by venture debt firms can be a useful tool for extending the runway without giving up equity.
• Convertible Notes: This is a type of short-term debt that converts into equity, typically during a future financing round.

Twiga Foods, a Kenyan startup connecting farmers to vendors, secured bridge financing during a critical growth phase. The short-term funds allowed Twiga to achieve key milestones, leading to a larger funding round that fueled their expansion.

Leverage Government Grants and Support Programs:

Many African governments offer grants, subsidies, and support programs for tech startups. Leveraging these resources can significantly extend a startup's runway. Here are some examples:

• The Innovation Fund (South Africa): This fund provides early-stage funding to innovative startups, particularly those in the tech sector.
• ICT Innovation Fund (Kenya): This government-backed fund supports startups in the ICT sector with grants and mentorship.
• iHub (Nigeria): A tech incubator that offers support, mentorship, and access to government grants for Nigerian startups.
• Rwanda Innovation Fund: A government initiative that provides capital to startups and SMEs in Rwanda, particularly those focusing on tech and innovation.

Zipline, a drone delivery startup in Rwanda, capitalized on government support to scale its operations. The Rwandan government’s logistical assistance and grants enabled Zipline to expand its services, eventually leading to operations in other countries like Ghana and Nigeria.

Negotiate Payment Terms with Clients and Suppliers:

Improving cash flow isn’t just about cutting costs—it can also involve negotiating better payment terms. Ghanaian startup mPharma, which manages prescription drug inventory, successfully navigated cash flow challenges by negotiating extended payment terms with suppliers and offering discounts for early payments from clients. These measures allowed mPharma to better manage its cash flow and continue growing its business.

Explore Strategic Partnerships:

Strategic partnerships can open up new revenue streams and reduce operating costs, providing another way to extend the runway. SafeBoda, a Ugandan motorcycle ride-hailing startup, formed partnerships with financial service providers to offer additional services like mobile payments and microloans. This not only diversified their revenue streams but also reduced their dependence on ride-hailing alone, helping them navigate competitive challenges.

Delay Non-Critical Hiring:

During lean times, delaying non-critical hiring can help conserve cash. Moroccan startup Chari, a B2B e-commerce platform, adopted this approach by maximizing the productivity of its existing team and using freelancers for non-core tasks. This allowed Chari to maintain its growth trajectory while keeping payroll costs under control, setting them up for successful future funding rounds.

Consider Equity-Free Funding Sources:

Equity-free funding, such as grants, competitions, and accelerator programs, can provide much-needed cash without diluting ownership. Here are some options:

• GSMA Ecosystem Accelerator Innovation Fund: Offers grants to African startups that leverage mobile technology.
• Seedstars World: A global competition that offers equity-free funding and support to startups from emerging markets.
• Orange Social Venture Prize (OSVP): Provides grants to startups that address social challenges using technology.
• Anzisha Prize: An annual competition that awards equity-free funding to young African entrepreneurs.

Tunisian AI startup InstaDeep took advantage of such opportunities by winning innovation competitions and securing grants, which provided significant funding. These equity-free funds allowed InstaDeep to continue its research and development, leading to partnerships with global tech giants.

Keep Communication Open with Investors:

Transparent communication with investors is crucial when extending the runway. By keeping investors informed about the company’s financial situation and the steps being taken to manage cash flow, startups can build trust and potentially secure additional support. Nigerian fintech startup Paystack maintained this approach, keeping their investors in the loop during challenging periods. This open communication helped them secure further investments and eventually led to their acquisition by Stripe for $200 million.

Conclusion

Running out of cash is a common challenge for many startups, but with the right strategies, African tech founders can extend their runway and navigate through financial difficulties. By focusing on essential expenses, increasing revenue, leveraging support programs, and maintaining open communication with investors, founders can keep their startups afloat and position themselves for future growth. The key is to remain agile, resourceful, and proactive in addressing financial challenges before they become critical.