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In this Open Letter:
Time to innovate: Opportunities in the downturn.
Accidentally green SA, Twitter’s new CEO & how ChatGPT “stole” students’ diplomas.
How much is enough, we help you answer every startup’s burning question.
Gold fractional ownership & starting a fintech in SA.
TRENDING NOW
Opportunities in the Downturn
Looks like a recession
We’ve all kinda been dreading a recession. What we didn’t anticipate is that it would be caused by severe loadshedding and a ship called Lady R.
Last week, news of this mysterious Russian ship docking at one of our naval bases got an American diplomat’s tongue wagging about SA’s alleged support of Russia in the ongoing war, the rand dumped 5% to the US dollar and pain ensued on the JSE.
Sure, it was most likely an overreaction by markets fearing US sanctions, but there are consequences nonetheless. Just yesterday, RMB changed its outlook for economic growth this year from “upbeat” to a recession in 2023, with the economy set to contract by 0.8% this year.
Tightening of the belt
Recent data revealed by Capitec shows 20 million odd customers (a third of South Africans) are struggling to pay the bills – incoming funds increased by on average 4% YoY, but spending is up 5% while debit orders grew by 12%.
So what happens to spending in economic downturns?
Firstly, unemployment typically rises which further stresses spending, while those that keep their jobs spend less to keep afloat.
Capitec’s report highlights home loan payments are up 20%, vehicle finance payments by 15%, and personal loan payments by 15%. Interestingly, restaurant spending is also up 7% while fast food purchases grew by 36%, most likely due to loadshedding.
Some industries have taken a beating, though. Home maintenance (down 13% over the last year), alcohol (9% lower) and spending at pharmacies (a 30% drop).
Thirsty Thursday’s just not hitting that hard in recession
Startup opportunities in the downturn
Crisis breeds innovation, though, and, if you know where to look, opportunity abounds.
Debt consolidation. With rapidly rising interest rates, many consumers are facing challenges making payments and that’s where debt counselling can help. Meerkat provides these services. It helps customers get out of debt and then on a track to financial wellness.
Debt-free purchases. We all know lay buy – pay something off as opposed to taking on a loan at high-interest rates. LayUp provides a technology stack to enable this as an online and in-store service.
Innovate takeout deliveries. Loadshedding ain't going anywhere, and it will likely mean takeaway spending will stay consistently on the rise.
With MrD and UberEats adding up to up to 30% to food prices, there is some margin for disruption in the food delivery space. Perhaps a local player can make an impact here?
Delivery driver optimisation. With more food deliveries, making sure they spend minimum time on the road is vital. Loop does this for last-mile deliveries by applying the travelling salesman problem.
More delivery bikes mean more inventory. And whilst advertising spending might be down, it's simply because those that advertise are more likely to scrutinise returns for ad spend. And with more delivery bikes hitting the road, it could well make Motion Ads perfect for high-yielding, localised results.
We might be in this economic season for some time and we are keen to do a part two sometime in the future. Know any startups making waves in a downturn? Hit reply and let us know, we are planning a follow-up on the topic in a few weeks' time…
IN SHORT
🇿🇦 Flying the flag for Climate Change? Not quite. SA is ahead of its target for cutting greenhouse gas emissions. Yay! But not because we’re green – because our coal-fired power plants keep breaking down and we have 10 hours of loadshedding a day. Oh. So, kind of a good news/bad news situation.
⚡Lightning speed. South Africa is set to host the 6th fastest computer ever when a new installation at SKA is completed.
📰 The pain continues for online media. After Morning Brew cut staff in March, Vice Media recently filed for bankruptcy.
🐦 A little birdie told me… In case you missed it, Elon Musk has appointed a new Twitter CEO. Linda Yaccarino (formerly NBCUniversal’s head of Advertising) is set to officially start in 6 weeks to “transform Twitter into X, the everything app”.
💻The backlash. A university professor was so afraid his students would use AI, he failed half the class – in error, it turns out. Ironically using ChatGPT to help check his students’ papers, the AI falsely claimed authorship over most of them. Students retaliated by sending GPT his own doctoral dissertation and the AI claimed it wrote that too.
🥸 Have snoopers on your WhatsApp? Whilst we are struggling to think of a use case beyond doing something you probably shouldn’t, you can now lock a chat and keep them out.
THE FUNDER’S CORNER
How Much Funding can you Realistically Expect?
You have your Gold Idea, and it can scale! You’re scoping with an eye on MVP soon and then its growth, growth, growth. But you need the funding to get there – bootstrapping only goes so far. The question is, what is the true future value of your idea, and how much will investors realistically put in to get you there?
Building the Death Star cost an arm and a leg
It’s always vital to remember VCs are entrepreneurs themselves. They have a mandate to fill, costs to cover and their own investors to secure returns for. And most are looking for a 10X return (though sometimes 5X or 3X will do) over a certain time period.
So a lot depends on the real size and scope of your opportunity.
4 Steps to calculate your realistic fundable value:
Market Analysis – Find out how big, accessible and viable your (future) market is and might become. Make sure you know who has the need and the money to pay for your solution. Now this ranges in complexity as data isn’t always available, but using census data, Stats SA, Reserve Bank data, other public data sources and a little bit of interpretation and hustle, you can get a number down. Will it be perfect? No. But that’s not the point. If a VC agrees with how you get there and the logic is sound, they will move on to the next point.
Competitor Analysis – Find out who your competitors are, how many users/subs/clients they have, how much they’re making of them and how much funding they raised and when. Remember competitors aren’t always obvious, the original competition of the now world-famous Nespresso machine wasn’t instant coffee at home, but rather the espresso shop on the way to work. This free e-book, When Kale and Coffee Compete, will help you understand who your real competitors are.
Calculate your ceiling – How big is the largest competitor? If it’s a listed company, it’s easy, to use the market cap. If it’s another startup, try and backward engineer a number based on a recently publicly announced funding round. That’s the most value you can likely attain in that time. That’s your assumed ceiling. (Of course, you can do better, but you need to think like an investor here - they will likely do this comparison)
Calculate your funding – Now, with that total ceiling value in 5–10 years as a guide, you can work out 1) what valuation you can reach, and thus 2) what return you can offer investors over that period (remember they are looking for 10x), 3) and what money you need at every stage to get you there etc. Iterate and divulge a plan to make it work and there you go. Your funding plan sorted (not quite, but we are sure this helps)
Note: Of course there are exceptions. Times and markets change. If you’re doing something amazing with AI right now, for example, investors might throw their firstborns at you. But that could change next month…
Got a funding question? We chat with a lot of VCs and founders doing funding rounds, so hit reply and let us know what info will help you most right now.
THE THREAD
Gold Fractions & Building a Neobank
We recently covered how fractional ownership is changing the investment landscape for lower- to medium-income investors. This week on How Would You Build It we speak to Troygold’s Dane Viljoen about buying fractional gold through their platform, why gold still matters today and discuss some of the nuances of building such a complex business.
06:31 Why invest in Gold?
13:55 So why not Bitcoin?
21:01 Starting a neobank
24:12 Regulation in owning gold
Or if Spotify is your jam, catch it here.
Want to suggest someone to join us for our next podcast? Hit reply and let us know…
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