Building Through Crises

April 30, 2020

As we continue to weather the unprecedented COVID-19 pandemic, and its second order effects on the economy, hat lessons can we learn from those who have lived, survived or even thrived through somewhat similar circumstances in the past? In this episode, we hear stories from three entrepreneurs whose past experiences may be useful for the entrepreneurs of today.

[02:07] - 'Tokunboh Ishmael, Co-founder and Managing Partner of Alitheia Capital, shares her experience attempting to fundraise during the 2008 Global Financial Crisis. Her firm wound up pivoting to a partnership-centric approach - a strategy which has endured for the past 13 years.

[08:38] - We hear Appfrica's origin story from its founder, Jon Gosier. Through Tech for Good and other client-based work around the continent, Jon was able to bootstrap Appfrica and ultimately make investments out of the company's balance sheet.

[14:25] - Much like Jon funded his business and investment activity through cashflow, Craig McLeod, the CEO of BoxCommerce, has bootstrapped his business through service-based revenue. Craig shares how he's built his business to service his clients, while leveraging that revenue to build their main business. The Business Insider article referenced is here.

[17:34] - We hear again from 'Tokunboh Ishmael on the resiliency and diversification of one of her firm's portfolio companies, MAX.NG, and the advice she is presently giving her entrepreneurs.

[20:38] - My b-mic, Sayo Folawiyo, and I discuss this episode, and the way in which Sayo is approaching the situation caused by the COVID-19 pandemic.

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Tokunboh [00:13]: The important thing is, you can't prepare for lockdowns. You can't prepare for bans. But what you can do is you can prepare to pivot.

Justin [00:24]: That's Tokunboh Ishmael, Co-founder and Managing Partner of the investment management firm Alitheia Capital.

Tokunboh [00:30]: You can prepare to have that entrepreneurial mindset that says, OK there's this thing that's come along, there's not a lot that I can do about it, but what can I do to mitigate the impact of it?

Justin [00:46]: As we continue to weather the COVID-19 storm, we find ourselves operating in an ever-evolving new normal. One that features total economic shutdowns, funding scarcity, and existential risk for startups, SMEs and big business alike. While of course there are much bigger and more pervasive issues facing African countries right now than the survival of tech startups, mission-driven social enterprises are nonetheless tasked with finding new ways to operate in our new normal. So what lessons can we learn from those who have lived, survived or even thrived through somewhat similar circumstances in the past? From those who found themselves trying to fundraise during the 2008 Global Financial Crisis? Or who built businesses amidst and in response to other crises in Africa, including other infectous disease and political crises. In this special episode of The Flip - we speak to those with first-hand stories to tell and insights to share. Lessons from the past for the entrepreneurs of today.

VO [01:54]: You're listening to The Flip, the podcast exploring more contextually relevant stories from entrepreneurs around Africa.

Justin [02:03]: Welcome back to The Flip, I'm your host Justin Norman. As the COVID-19 crisis - and the second-order effects of the lockdown on the economy continue on, I've seen many around the world compare what we are experiencing today to the 2008 Global Financial Crisis. The accuracy of the comparison notwithstanding, it is perhaps the closest comparable experience in recent memory - so I started my research for this episode by looking into what startups on the continent were founded at around the same time. However, as many countries in Africa experienced a positive GDP growth while the developed world saw significant downturns, I had initially thought - as others had concluded - that the Global Financial Crisis did not have an outside impact on the continent. In my conversation with Tokunboh Ishmael, who we just heard from in the opener, she readily set the record straight from her experience in Nigeria at that time.

Tokunboh [02:50]: When it first happened people thought Africa is shielded, Nigeria is shielded. But if you look at the chain reaction - there is no bank in the country that didn't depend on international financing flows. So when financing dried up in the US & the UK, the first areas where fund providers began to cut down on was beyond their borders.

Justin [03:22]: While African economies were believed to be rather disconnected from the global economy, the crisis of 2008 did have an impact on local financial institutions.

Tokunboh [03:30]: So the banks began to feel the crunch, and at the same time, some of the international firms who also had direct funding were feeling the crunch. Which also included oil & gas companies - which were the major part of the banks portfolios. So it did have an outsize impact.

Justin [03:56]: And right around this time, Tokunboh set out to build her own firm, Alitheia Capital.

Tokunboh [04:00]: For funds like mine at the time, when we started, where we looking to see if we could raise money locally because we felt that local fund providers should be interested in solving some of the developmental problems and challenges that we wanted to focus on. We found that it just wasn't a priority, at all. So, it was definitely not of the magnitude of the US - but certainly it rattled our cage.

Justin [04:35]: Alitheia Capital is an investment management firm that manages Private Equity funds on the continent. They specifically invest in business that have a positive impact on economic development - and their funding is utilized to enable access to essential services - financial services, health services, energy, education. And their most recent fund, the Alitheia IDF Identity Fund employs a gender lens investing strategy. This fund is a partnership between Alitheia and a South African firm IDF Capital. This partnership approach has become an enduring strategy for Alitheia - and is one that was borne out of necessity while Tokunboh was fundraising in 2008.

Tokunboh [05:09]: I realized that in started Alitheia Capital back then and trying to raise funding that I had to find a partner -

Justin [05:19]: Her desire to find a partner was also due to personal circumstances, which limited her travel at that time.

Tokunboh [05:25]: I also had a baby in 2007 and I didn't want to be traveling the world and also traveling the world at the time of such crises fruitlessly. So, fortuitously met Goodwell and they were also looking for a partner who could make investments on the continent and raise funds with them.

Justin [05:51]: Goodwell Investments is an impact investor based in Amsterdam, with offices in Nairobi and Cape Town. Their desire for local partners in West Africa created a mutually beneficial opportunity for the two firms - where Goodwell focused on the fundraising, and Alitheia focused on deploying capital.

Tokunboh [06:06]: What was brilliant for them as well at the time, which was that, because of the crisis, they had to think of a different kind of investor. They didn't rely on your typical development finance institution but they were actually in a place where they could speak to high networks that wanted to have this impact as well in Asia, and in Africa and the Dutch pension funds at the time, and they were able to sort of aggregate that funding. So it was a good sort of marriage, where they were in the place, and could speak the language of the people that wanted to have an impact. And I was in a place and I could speak the language of the people that needed the funding to make that impact.

Justin [06:52]: While Alitheia's partnership approach has endured, it wasn't a strategy Tokunboh originally set out to implement.

Tokunboh [06:57]: It was a pivot. I previously worked at Aureos which became Abraaj. I was a partner there. I knew a good number of the investors because of my time at Abraaj and so the intention was to leverage those relationships to be able to source the right kind of funding. But as a consequence of the way the world went and my personal situation, not being able to travel as much as the next fund manager because I was still nursing, it made more sense for me pivot the firm into partnerships.

Justin [07:38]: And while the partnership approach solved a specific problem at Alitheia's founding, its benefits have continued to be realized.

Tokunboh [07:44]: In the past 13 years, we've always partnered because we find the synergies that make it work across geographies. Our most recent fund is a partnership with another fund manager in SA to invest in female-led businesses because one of the narratives we're looking to build on is how businesses can partner through regional integration. How we can fund an entrepreneur in SA who then wants to get their wares to the rest of Africa and vice versa from West Africa down into other parts of Africa.

Justin [08:38]: As our current crisis continues on, we've certainly heard of advice of the "never let a good crisis go to waste" variety. But it's a sentiment that holds true for Alitheia Capital pivoting to a partnership model, and for another entrepreneur - the founder of Appfrica, Jon Gosier. Jon, who was born and raised in the US, first moved to the continent in 2008, relocating to Kampala, Uganda, and shortly thereafter founded Appfrica.

Jon [09:02]: Appfrica was sort of like Andela but in 2008, much smaller, completely self-financed, but it was meant to solve the problem of companies, multinationals, telecoms, communications companies, tech companies that were doing business in Africa but were still hiring foreign talent. I made it Appfrica's mission to find tech talent and to hire them, pull them into our organization, and then we would either hire them out on contract or we would work as a consultancy and build products on behalf of the companies that hired us.

Justin [09:40]: At the same time, in 2008, another organization called Ushahidi was founded in Kenya, in response to the 2007-2008 political crisis over the Kenyan elections. And shortly thereafter, Jon and Ushahidi developed a working relationship, which then took Jon down the path of doing work in the Tech for Good space.

Jon [09:57]: A lot of the clients that Appfrica ended up with were dealing with things that Ushahidi wasn't. We had elections in Uganda that ended up being pretty tense and contentious and during that election - one of the things we became aware of was that the government was using the mobile networks to filter out dissent sent via text message, So the team at Appfrica, we put together a solution that we spun out as a separate company that was only around briefly, but spun it out to specifically address situations where freedom of speech and communication was being suppressed in developing countries. We started it because of what was going on in Uganda, but it aligned perfectly with what ended up happening in North Africa in the Arab Spring.

Justin [10:48]: From there, Appfrica's work in the civic tech space continued.

Jon [10:50]: Appfrica also on occasion worked closely with UNICEF on some things that were not conflict or national disaster-related - but disasters of poverty; water shortages, floods, crops failing, etc. so we would help develop solution for that.

Justin [11:12]: At this time in the African tech ecosystem's development, there was not much private funding available, and Appfrica's client work allowed them to bootstrap.

Jon [11:19]: I remember, what did not exist back then was a robust private capital network. Try as I might, I never raised… So we just bootstrapped. That ended up helping a lot because if we had been financed by outside VC or PE groups that were affected by the financial crisis it probably would have been existential to the company.

Justin [11:42]: And beyond keeping Appfrica alive, their client work allowed Jon to start investing in the ecosystem, as well.

Jon [11:47]: I was doing a lot of the tech for good work to make money, and then I would use that money to invest in African technologists all across the continent.

Justin [11:57]: So even while building technology to help a country like Uganda through its crises, Jon took the money from this Tech for Good client work and invested it right back into the tech ecosystem. It's fair to say that Jon was and is bullish on the opportunities for the continent.

Jon [12:10]: Yeah, super bullish - my driving philosophy still is that investment is the only long term solution to African problems. My philosophy was always - I want to invest in Africa's private sector and I want to do that in ways that empower local Africans to solve their own problems as capitalists - in the best sense of the word.

Justin [12:35]: And to facilitate investment, Jon and Appfrica tapped into additional funding resources that were made available for the environment at that time.

Jon [12:42]: At one point, Appfrica was working with the US Dept of State - a public/private partnership where they gave us support to go across the continent and offer our support as businesspeople to African startups. We had a campaign called Apps for Africa - 16 companies across 12 countries. 16 companies across 12 countries, where we gave them, but we invested in them as if we were VCs so we gave them term sheets & treated it just like any VC would - but in the fine print it was a forgivable loan. And a lot of great companies came out of that campaign - one is still active in Ghana right now, they're called Farmerline.

Justin [13:20]: This is an experience that seems to mimic what we're seeing today, as development banks, impact investors and other ecosystem support organizations activate impact challenges related to COVID-19. And it culminates in a piece of advice Jon would give to current entrepreneurs.

Jon [13:34]: It's a matter of figuring out how you can address - whatever the business verticals they're in - how they can address problems that maybe feel a little opportunistic, but those are the problems that society is dealing with, and that's why businesses exist - for convenience or to solve a problem. Find the opportunity in the moment - it doesn't mean you have to... you might decide to change your whole business model to be something completely different that you didn't see before. But you could also turn this into an opportunity to find new customers through what it is you already do. Those short pivots can get you through the crisis, and they might lead to whole new experiences or business lines that you weren't aware of before.

Justin [14:25]: Earlier in season one, during our three-part series on venture capital, Keith Davies, the ex-CFO of South African fintech Zoona had this to say:

Keith [14:34]: The best competitive strategy is to survive. And the best way to survive is to be cashflow positive.

Justin [14:38]: It's a sentiment that holds true for Jon and Appfrica - where he leveraged client work not only to survive but to then make investments out of their balance sheet. And it holds true as well for BoxCommerce CEO Craig McLeod, who as an ex-VC himself believes strongly in the negotiation leverage gained by not needing cash from investors to survive.

Craig [14:56]: We knew that raising takes time. So we needed a business model and we needed regular revenue, and I didn't want to be too dependent - I knew that the worst bargaining position as a startup is needing money.

Justin [15:06]: In our the final episode of the three-part series on VC, Season One Episode Eight, we also talk about innovative finance - and the ways in which entrepreneurs cobble together funds from a variety of different investors using a variety of different investment vehicles. For BoxCommerce, their method of survival has been service-based revenue.

Craig [15:23]: We were able to parlay that into decent, 90-day projects, and that helped us have continuous and good revenue.

Justin [15:30]: As with any startup who sets out to diversity - as we've seen many startups on the continent do - it raises a question: how do you manage your resources? How do you balance the utilization of your resources for your main thing versus spending time, money and energy on diversified priorities?

Craig [15:46]: I think there is a needs must portion, if you're not well funded and you do want to survive & you're determined, you're going to find a way.

Justin [15:52]: And that may even mean delaying product launches if you have to.

Craig [15:55]: We've delayed one of our products once or twice - we're building things for 90 days with our people, but over 6 months we haven't delivered our item.

Justin [16:03]: But for Craig, setting up their service-based business with strong margins was crucial to ensure they didn't have to delay delivery of their main thing with regularity.

Craig [16:11]: The first rule is margins - one of the biggest mistakes you'll make is you'll undercharge just to get work. Have a decent margin. The moment you have a decent margin - what we're doing right now is, I'm running a team for my startup, and a focused team just for the customer. So neither delivery is having to be compromised, but it comes from learning the very hard to do thing of saying no this is our price and sticking to it, and being willing to live with that, because what can also happen on the other end is you go in, you undercharge, you spread yourself too thin, you compromise both the customer and your startup.

Justin [16:48]: Proper margins has allowed BoxCommerce to ringfence separate teams to focus on deliverables for the company and the clients respectively. Meanwhile for Craig and BoxCommerce, and now more than ever, especially in a funding scarce environment, it's all about cashflow.

Craig [17:00]: And there's a great Business Insider article about this, and it says how long can companies survive with a large enough cash buffer.

Justin [17:07]: In the article, which I've linked to in the show notes, the relevant category here is called high tech digital services.

Craig [17:13]: And they're only set for 33 days, and that horrified me. In my business, I run minimum forward cash flow - and forward cash flow buffer says, how much money do you need to survive for how long with no revenue coming in and I run 6 months to 1 year.

Justin [17:33]: Craig's reliance on cash flow - due to his experience fundraising for a South African-based business, has left BoxCommerce relatively well-positioned to weather the COVID-19 storm. And they're not the only ones who, given the inherent challenges of operating on the continent, may be better positioned to make it through an economic downturn. Here's Tokunboh Ishmael again, whose Alitheia Capital is an investor in the Nigerian mobility company MAX.NG. And you may recall - MAX and other ride-hailing companies went through a crisis of their own not too long ago when the Lagos State Government banned Okadas back in February of this year.

Tokunboh [18:05]: Hindsight is 20-20, when you look back you say that was lucky because they had to start thinking earlier and I think as entrepreneurs, if there's one thing that I want to emphasize more for entrepreneurs it's that we must always wake up thinking there's a crisis, even when there isn't one because we need to have that fire in our belly to continue to reimagine ourselves.

Justin [18:33]: Certainly the Okada ban left MAX more resilient and diversified than before.

Tokunboh [18:37]: MAX has already had to go through that re-imagining because they had to face a crisis before everyone else, which means that now with this lockdown they are actually more diversified than they would have been previously, such that they have a healthy portfolio outside of the locked-down states - at the moment in Nigeria, it's not every state that's locked down. So, having to deal with that problem almost prepared them for this time. It's a lesson to us all, really, that we should be preparing for a crisis even before a crisis.

Justin [19:15]: This mindset informs some of the recommendations Tokunboh has been making to her portfolio companies from a business best practice perspective.

Tokunboh [19:22]: We're also saying that where we've been telling you about actually proper risk management & business continuity planning - this is now real. Because if you weren’t thinking about risk management before, you now know that you need to be thinking about the different risks that your business is likely to encounter and how you mitigate against that and that doesn't necessarily mean that you're going to cover every risk - I'm not sure anybody would plan for a pandemic, But if you didn't have a risk management framework before, you can't be without it. And I've found that's an area where I have to keep on fighting with my entrepreneurs.

Justin [20:02]: With proper management procedures and risk frameworks in place, perhaps then the intangibles of entrepreneurs around the continent will get them through the COVID-19 crisis.

Jon [20:11]: I would just get scrappy - I don't think I've ever met an entrepreneur in Africa that wasn't constantly shifting with the landscape and the times and they get very natural with it, it's the state of being there

Justin [20:38]: As always, my b-mic Sayo and I sat down to discuss this episode - and in this case, we're very wary about how we, as The Flip, approach this COVID-19 situation. There are best practices, of course, and maybe more businesses will adopt more stringent risk management procedures as Tokunboh suggests, or hold a larger balance sheet as Craig suggests. But no one's putting global pandemic and full economic shutdown in their scenario planning. So what's most useful for entrepreneurs at this time? That's what Sayo and I had a chat about - take a listen -

Sayo [21:08]: There's certainly some good practices and best practices, but Tokunboh talked about 20-20 hindsight - so they're easier to say looking back. Some people adhere to some good practices, others adhere to others - and which ones were better in this time, I don't know? And I think no one knows? It's such a force majure - my approach to force majure is just like you are where you are, it happened, now what? The thing of what you should have done I find to be a really useless exercise.

Justin [21:39]: Yeah, the only piece of advice is figure out how to get money and survive.

Sayo [21:44]: Yup.

Justin [21:44]: Maybe we should just do, the episode should just be COVID-19 advice - make money, and don't spend it before the end of this.

Sayo [21:55]: Yeah maybe just like a 10-second episode.

Justin [21:58]: The biggest thing always for us is not wanting to be prescriptive, and I suppose it's hard because any suggestions of what to do right now is invariably prescriptive because the reality is like nobody knows when this thing is going to end or what the economy is going to end, or what the economy is going to look like or how long it's going to last - so in that respect, does hearing stories about 2008 and other crises, is that useful at all?

Sayo [22:28]: I think all information is useful and it's also sometimes useful in just being comforting. So something I've tried to do is ask a couple of the older folks around me what did it look like in the oil crisis of the 70s, what did it look like in Nigeria especially during the coup years. What did it look like the financial crises, dot com bubble. But the really interesting thing is like no one speaks with that much confidence about how well that has prepared them for this moment. So I do think there's maybe a certain resilience that you can get and that allows you to react quicker because you're just like - these things happen. No one was "oh yeah, I've survived this stuff so therefore I know exactly what to do now". But I have noticed a certain calmness that might make people better at reacting so I think if anything it's just knowing that everything is going to fall apart at some point and seeing it happen a couple of times probably just makes you a little bit more battle-wary.

Justin [23:42]: The other thing is like - at some point... I started this experience out by saying, we can't do business as usual podcasts, but at some point, this has become business as usual, like operating in a pandemic is in and of itself now business as usual. So at some point people are going to move on and still start building things and doing other things? So the content we had in the pipeline is going to become increasingly useful again as this becomes the new normal and as people stop saying like we're waiting til all this is over and they just start doing the things because who the fuck knows when this is going to be over. And this is what it is.

Sayo [24:22]: Yeah, I mean, that's my approach. Wake up, see what's in front of you, get on with it. Sleep. Exercise lots.

Justin [24:31]: Yeah… I'm ready to get back to normal accepting that this is normal.

Sayo [24:34]: Yeah, honestly. OK bruv I gotta go eat, I'm hungry now.

VO [24:42]: That's it for this episode of The Flip. If you liked this episode or any other episodes, please do share with a friend or leave a rating and review on your favorite podcast app, so that others can enjoy too. And don't forget to follow us on social media for bite-sized insights and other updates @theflipafrica. Thanks for listening, and we'll see you next time.