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Wednesday, 29 April 2020

Infrastructure startups in the covid-19 era — will they go under, survive or thrive?

Infrastructure startups in the covid-19 era — will they go under, survive or thrive? The covid-19 crisis has seen a shift towards digitization the likes of which we haven’t seen before. Egyptians are using e-commerce, fintech, e-learning and edtech like never before. The situation has been less clear cut with infrastructure-related startups, which rely on physical roads, ports, hospitals, and utilities. Covid-19 is dealing a blow to some infrastructure startups, but the ones that are making it appear to be the ones that are mitigating the reliance on that physical infrastructure.

Healthcare, deliveries thriving in covid-19: Across the board, consumer interest in health companies and in delivery services that allow for less physical interaction has ballooned in recent weeks, say representatives from Algebra Ventures, Flat6Labs, Sawari Ventures and Falak Startups. Grocery delivery services such as GoodSmart, for example, have seen a substantial increase in demand, says Algebra Ventures managing partner Karim Hussein.

By cutting out physical interaction, healthtech is booming: With the urgency of the current times, we consider healthcare to be crucial infrastructure outside the traditional definition of the word. Successful online pharma apps like Chefaa, incubated in Flat6Labs, and 3elagi, incubated in Falak Startups, have seen a further spike in demand in the last month. Before covid-19, 3elagi saw some 100 orders a day, which has since doubled or even tripled. It is now in very advanced talks to raise Series A funding, with interest from local and regional investment funds heightened because of the current situation, says Falak Startups managing director Yousef El Samaa. Chefaa was also recently able to close a Series A funding round, says Flat6Labs chief investment officer Dina El Shenoufy.

Vezeeta seized the chance to offer telehealth services, helping to plug a gap: The rapid spread of the virus caused digital healthcare platform Vezeeta, which recently raised USD 40 mn in series D funding, to accelerate the launch of its new telehealth service, originally planned for June 2020, says CEO and co-founder Amir Barsoum. Before covid-19, physical consultations through Vezeeta’s platform would have numbered 300-320k transactions a month. Not including the telehealth initiative, they now stand at 230-249k, says Barsoum. Vezeeta has fared relatively well, even as the global healthcare industry has seen an estimated 30-50% decrease in transactions and industry size during lockdown, he adds.

But unsurprisingly, ride-hailing, sharing, and passenger transport are facing challenges: Consumers are tending to veer away from any kind of shared transport at the moment, says El Shenoufy. Transportation platform Wasel has seen a greatly reduced demand in intercity transportation, its weekly number of trips falling by 50% in the first two weeks of Egypt’s covid-19 curfew, impacting revenue, says founder and CEO Ahmed El Rawy. Mayday, which provides all types of roadside assistance through an app, is among the most successful companies on Falak Startups’ portfolio, and was doing particularly well before covid-19, says El Samaa. It has agreements with companies including Careem and Shell, hit revenue of EGP 1.2 mn in 1Q2020, and has raised some EGP 3 mn in funding. But with covid-19 it has seen plummeting demand, with orders decreasing from around 50 per day to 7 or 8.

Logistics or B2B transportation companies appear to be less badly hit: Digital trucking marketplace Trella, which is post-Series A, has benefitted from having diverse clients and an integrated supply chain in Egypt, including internal trade in raw and manufactured products, and distribution, says Hussein. The company has seen a shift in its client base, from cross border transactions to local ones because of covid-19, but with most of its shippers operating in core essential goods, it has not been materially impacted. Trella has found its clients are much more amenable to digitizing payment mechanisms and documents used to transfer equipment, such as proof of delivery, thanks to covid-19. This has improved business efficiency and reduced costs, says Hussein. The sector clearly benefits from providing essential goods, but again, a core factor in its success is effectively reducing personal contact.

Transportation startups have found that adaptation is essential for survival: Transportation company Halan quickly adapted its model to include service delivery, offering consumers products that are sold on credit to mitigate losses from reduced demand in mobility services, says Algebra’s Hussein. And Wasel has adjusted its financial models to make its services more cost-effective, as well as increasing sanitization, says El-Rawy. Both transportation services are following the same trend as Uber and Careem: rolling out delivery services and taking steps to increase sanitization, to meet essential user needs and alleviate concerns about physical proximity.

Meanwhile renewable energy saw an immediate knock that may last two years: Energy companies are bracing for reduced consumption over the next 1.5 – 2 years, say KarmSolar co-founder and CEO Ahmed Zahran and Cairo Solar managing director Hatem Tawfik. The situation will not affect KarmSolar’s planned projects, but is likely to reduce the energy consumption of those projects in the medium term, says Zahran. Cairo Solar had expected to see its sales revenue double this year, from EGP 25 mn to EGP 50 mn, but because of social distancing restrictions now expects revenue of EGP 12.5 mn, says Tawfik. It plans to weather the storm by employing a cost-reduction scheme, which has seen employees volunteering to take a salary cut, he adds.

But as an industry that partners with all sectors, it could have a strong basis for recovery: The impact on different sectors varies, with tourism hit harder than food and agriculture, says Zahran. Crisis management is core to KarmSolar’s approach, says Zahran, but so is strategic positioning. “We are also investors in other people’s energy infrastructure, and we expect that after the crisis there will be a lot of demand for our products. So we’re trying to prepare ourselves to see how we’ll pick who to work with.”

Environmental startups reliant on waste collection or in-person awareness-raising have had to expand or alter their services. Waste management and upcycling company Mobikya has been forced to slow physical production to 20-30% of capacity, and temporarily pause its agreements with all but two of its seven partner workshops, says founder Ibrahim Abougendy. It is adapting its operations to reduce the need for face-to-face contact, increasing its online media presence by publishing green news and videos, and teaching people how to upcycle themselves. Abougendy sees this as laying the foundation for Mobikiya to become an upcycling marketplace, where people could eventually sell their own products, as well as building a broader environmental movement. The company had initial seed funding of USD 100k at its inception three years ago, and has maintained its growth through sales since that time.

Covid-19 has accelerated an inevitable shift towards digitization: In some ways, covid-19 is like a preview of the future, says El Samaa. “The companies coming to the forefront now, all of which are tech-reliant, would have been huge in ten years’ time, but covid-19 has accelerated the growth of these technologies. And I think this is here to stay. Automatically any investor will find these models interesting.”

But ultimately, for infrastructure-related companies, the crucial success factor is reducing physical interaction: Social distancing will remain a necessity for an indefinite period. And this experience will change human behavior, with future decisions being based on new perceptions of risk weighed against the necessity of face-to-face contact, says Ahmed El Alfi, chairman of Sawari Ventures and the Greek Campus, and co-founder of Flat6Labs. So it is logical to suppose that the trend we can already see — of infrastructure startups that reduce or eliminate in-person contact being the ones that survive or even thrive in this period — being one that will continue well into the future.

Correction (29/04/2020): Mayday’s 1Q2020 revenue is EGP 1.2 mn. A previous version of this story incorrectly stated it as EGP 500k.

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