A new report highlighting the impact of Covid-19 on Europe’s start-up economy has outlined what type of start-ups are succeeding under the current circumstances, and which start-ups could be most vulnerable.
On Wednesday (22 April), a new report was published by European Commission-backed platform EuropeanStartups.co, which highlighted how Europe’s start-up economy has been affected by the global coronavirus pandemic.
EuropeanStartups.co, which was set up by Dealroom and Sifted, was launched to provide more insight into European entrepreneurship while creating more alignment between the private sector and policy makers.
The initiative launched with an inaugural report, “What does it take? How can Europe’s startup ecosystem recover from the current crisis?”, which examines how fit the ecosystem is to withstand this unprecedented crisis.
Identifying opportunities and threats
Pēteris Zilgalvis, co-chair of the European Commission’s fintech taskforce, said: “In just three weeks, Europe has effectively shut down much of the infrastructure that it has taken for granted for decades. This change is both destroying traditional business models and creating new opportunities, often for emerging tech companies.
“Right now we need to identify the opportunities for and correctly understand the threats to European start-ups so that we can create policy and make decisions that help to continue the progress that has been made in recent years to create a healthy, ambitious tech sector across the EU.”
Zilgavis said that the record levels of capital raised in 2019 and strong growth across a variety of start-up sectors has put early-stage tech businesses in a “position of strength” to deal with the crisis.
Despite that, the report found that a third of start-ups are vulnerable to the current crisis. The report analysed 18,000 European venture-backed companies and found that each tends to fall into one of four categories.
These categories are those for which the crisis is net positive (food delivery, health-tech, logistics and collaboration tools such as video conferencing); those for which it is defensible (frontier tech, gaming, streaming, marketing and fintech companies); those which are vulnerable (lending, proptech and fashion tech); and those which are most affected (travel tech and mobility).
Dealroom estimates that a third (6,000) of European tech companies fall into the most affected and vulnerable category, while around half (8,600) will fall into the defensible category and a fifth (2,600) are likely to see net benefits.
A range of challenges
In the EuropeanStartups.co report, it was noted that the challenges for start-ups across those four categories are “starkly different”. Companies that are thriving in these circumstances need to find ways to manage rapid growth and respond effectively to increased demand, while maintaining supply chains and customer satisfaction.
On the other hand, companies in the middle category are facing operation challenges, a shrinking lead pipeline, heightened cash awareness and runway worries. In the most affected category, 14pc of companies could see revenue fall to zero and in some businesses may collapse.
A separate report, released earlier this week by Startup Genome found that 41pc of start-ups have less than three months of runway and could fold within the next quarter if they do not find a way to raise additional capital or cut expenses significantly.
The EuropeanStartups.co report states that “even in a normal business environment, more start-ups will fail than succeed”, which is a sentiment echoed during the week by critics of the UK government’s £1.25bn bailout fund for start-ups.
“The high mortality rate of start-ups means it is vital to make sure that any government support for the sector is targeted at those companies that would, in usual circumstances, have a strong chance of succeed,” the report said.
According to the report, European start-ups provided approximately 2m jobs in 2019 and are “adding more new jobs each year than any individual sector”.
The report looked at the cities that have the greatest populations working in start-ups. London led, with 290,000 employed in start-ups. Paris is behind with 100,000 employed in the sector, followed closely by Berlin which has 78,000 employed in the sector.
“Cities like Amsterdam have 48 start-up jobs per 1,000 inhabitants, while Stockholm has 38 per 1,000 inhabitants,” The report reads. “Right across the EU, job creation in the tech sector was growing more than 10pc per year up until the end of the first quarter of 2020.”
It was noted that many companies are currently undergoing an accelerated digital and omnichannel shift, which presents “huge opportunities” for tech founders and start-ups that can help enable this shift.
Avi Meir, CEO and co-founder of TravelPerk, said: “The current crisis has affected us all, but I’m confident that the tech sector will not just survive, but eventually thrive again. The European tech ecosystem was in a good place right up to the start of March, with companies raising money and hiring in droves.
“The crisis is exposing many areas where tech-driven solutions could help people, society and business. I am confident that in time we will be able to get back to business and make even faster progress than we did before.”