The Plight of Startups During COVID-19

Samrawit Fikru’s Account of the Difficulties

The world has come to a grinding halt because of the coronavirus pandemic. Factories have stopped operations. Corporations that generated millions of dollars every day have ceased functioning. No one seems immune to the health, economic, and social hazards of the ongoing crisis. With no end in sight yet, businesses are being forced to lay off their highly valued employees as their expenses surpass the revenues they generate.The problem is severe on entrepreneurs and small & medium enterprises that have low capital to stay afloat for a long period of time. This does not only affect the owners; rather the spillover effect will also adversely impact their employees who lead a hand-to-mouth life and always struggle to cover their daily expenses.

The situation is no different in Ethiopia, where startups have mushroomed over the last few years. These startups were fighting to achieve their final goals of making profit through services that solve society’s problems. In fact, even during the best of times, startups found it difficult to stand on their own two feet and make their project a reality. The situation is even harder for tech startup companies. Let me explain this from my experience mainstreaming Ride.

I came up with the idea of providing a taxi hailing service, Ethiopia’s version of Uber, after noticing the transport problem faced by society and the absence of convenient platforms to call a taxi. Once I set things in motion to realize my plan, I was not able to get support from various stakeholders. Although I sought support as a small and medium enterprise, they were not willing to accept my idea and help me grow.

I then tried to get financial access from banks. I even went to a bank that claims to support women entrepreneurs. However, the reality was far from the advertisement I heard. I also sought financial access from a bank that clams to finance ideas. But all of my efforts bore no fruit. This is the common trend for all startups. Almost every entrepreneur in Ethiopia is expected to pass through such challenges.

One thing that needs to be understood here is that the absence of financiers is not the biggest problem; rather the attitudinal problem that makes it difficult to pitch ideas and be listened to is the fundamental challenge. If those who claim to be supporters of startup businesses became candid and showed willingness to listen to innovative ideas, everything would be smoother.
The other problem that discourages startup businesses is the lack of convenient laws and policies. First, government officials are not keen to follow new global developments and draft legal frameworks before anyone tries to pursue fresh ideas. Second, as soon as new businesses become successful, there is a tendency to make their work complicated by introducing absurd laws and regulations that tend to discourage new entrants. Laws should not be barriers to innovative ideas that change people’s lives for good.

As a developing country, we are living and dealing with many socio-economic problems. However, this can be taken as an opportunity for people who would like to capitalize on solving the problem. Unfortunately, the education system is not producing such type of graduates as most of them lack practical skills that could help them become self-employed and create job opportunities for many others.

Another cumbersome activity is access to finance. Most startups with smart ideas are still struggling to make their ground breaking discoveries and outputs public as persuading banks to finance their ideas is like sucking blood from a stone. Even after they setup their business, most startups start making profit and experience positive cash flows after four or five years of operation. That is what my experience in setting up Ride shows.

Now, all the above listed problems are complicated by the coronavirus and this should be addressed promptly. As the pandemic disrupts business activities in Ethiopia and beyond, startups and entrepreneurs have become the most vulnerable groups that have been directly affected by the crisis.

But their problem is overlooked and they are not being given equal attention as other sectors. They are also not benefiting from incentives that are provided to small, medium, and large businesses. To make things worse, such a situation forces them to be financially weak and fragile.

In these trying times, it should not be forgotten that even big companies find the economic shock hard to absorb. Investors who were keen to support startups are bearing the brunt of business slowdown. Yet it is only those who think outside the box that can drive the economy out of the crisis. It is thus imperative to support startups that can indicate the way out financially and through governmental support, which includes uninterrupted and very affordable internet services.

Way forward
Having short- and long-term strategies is vital in helping entrepreneurs and startups. As a short-term strategy, making the bureaucracy smoother for entrepreneurs who want to start a new business will play a crucial role. This may go as far as letting new entrants sustain their businesses without being stressed about paying punitive taxes. Tax should not be a barrier for new entrants and it should be understood that today’s startups have a potential to be a big corporation that could pay billions of Birr in taxes.

Be that as it may, policymakers should draft new laws, instead of making the absence of proclamations or regulations an excuse to discourage or ban startup businesses. In this regard, it is very important to draft a very flexible policy that takes into account current problems and challenges faced by startups. Now is also the time to make tech businesses a priority.

To make this a reality, the government must give direction to banks to finance innovators with tech ideas by evaluating their business plans. This also requires amending existing loan policies adopted by commercial banks. It is understandable that some businesses may lack the expertise to administer their finances. But this can be avoided by providing training on how to run their businesses and stay afloat.

As Prime Minister Abiy Ahmed (PhD) has a background in tech-related matters, I hope techpreneurs would be given the necessary support. Taking its current importance to solve the COVID-19 crisis into account, this should be done now, rather than later. The government may start with channeling resources towards financing startups with innovative ideas.

Existing financing schemes (SMEs and Youth Funds) and priority areas should also be redesigned based on their importance in solving current problems faced by Ethiopians. In this case, identifying all problems and inviting entrepreneurs to come up with solutions and working in partnership with the government would minimize the catastrophic effects of the virus.
Providing tax relief to startup companies is another way to help entrepreneurs survive. Tax exempting startups for one or two years will allow them have a positive cash flow and survive the pandemic.

In addition, after the outbreak is over, reforming the education system to make it more practical is very important. The other important point is that business owners should embrace what is currently happening and shift to businesses with better returns in the time of COVID-19. A good example for this could be restaurants that have started delivery services. Instead of waiting for their customers to come through their doors, they embraced what was happening and acted accordingly. This is helping them survive the crisis. At the same time, they are creating business opportunities for delivery service providers. The same is true for detergent producers and garment factories. While distillers began producing hand sanitizers, garment factories started producing protective materials like face masks. Working on import substitution is also necessary. Now that the world is either in partial or total lockdown, international trade is declining. This could be a good opportunity for local producers.

If they can produce quality products and build a positive perception towards their brand, they can retain their customers even after the pandemic is over. This will have many benefits such as creating more job opportunities, reinvesting profits to expand the business, and reducing the demand for foreign currency. On top of this, data mining is very important. Without having the right data, coming up with the right solution would be very hard to achieve.

9th Year • Mar 16 – Apr 15 2021 • No. 96