What should start-ups expect during the Covid-19 crisis?

2 Apr 2020

Image: © Syda Productions/Stock.adobe.com

A new report looking at the impact of Covid-19 said a funding drought could wipe out many start-ups but ‘crisis begets opportunity’.

Research and policy advisory organisation Startup Genome has published a report detailing the impact that Covid-19 may have on start-up ecosystems around the world, suggesting that up to $28bn in start-up investment could be lost globally in 2020.

The report, which is the first in a series, looked at the potential ramifications for business in the US, the Americas, Europe, Africa, the Middle East, Asia and Oceania.

Future Human

Although the economic fallout from the pandemic could be very significant, Startup Genome’s report said that “crisis begets opportunity” and highlighted lessons that could be learned from previous recessions.

Learning from China

The report examined the impact that Covid-19 has had on China’s start-up ecosystem, as this is where the effects of shut-downs and reduced spending were first felt. In January and February 2020, China’s industrial output dropped by 13.5pc while retail sales decreased by 20.5pc year on year.

“Chinese VC deals have contracted between 50 and 57 percentage points relative to the rest of the world since the onset of the crisis, as our analysis shows,” the report said.

“If a drop like that happens globally, even just for two months, approximately $28bn in start-up investment will go missing in 2020, with a dramatic impact on start-ups.”

‘A six-month drought in VC deals could wipe out a large portion of start-ups’

The report suggested that many new start-ups will struggle to raise new rounds of funding and that the first to run out of cash “will be those who started to fundraise in the last few months, nearing the end of their runway before the crash”.

“With start-ups needing to raise money every 12 to 18 months, with three to six months’ worth of cash at closing, a six-month drought in VC deals could wipe out a large portion of start-ups,” the report stated.

The impact could potentially be worse due to the reduction in customer purchasing power and disappearing suppliers caused by ongoing containment measures around the world.

VC funding in previous recessions

The report said it’s worth examining what happened in previous recessions. Although fewer dollars were invested, more companies got funded.

“This suggests that businesses that are able to become cash efficient might become even more likely to raise money following a recession, albeit at lower valuations and lower total funds raised. Even more importantly, these estimates based on the Chinese and Asian experiences as well as past history are not destiny,” Startup Genome said.

The organisation added that start-up communities and VC funds have the opportunity to actively change the outcome by improving the situation for founders and for the economy. It also suggested that a recession could offer new opportunities to start-ups as it may be easier to acquire talent.

Startup Genome said that more than half of Fortune 500 companies started during a recession or bear market, and that more than 50 tech unicorns were founded during the last financial crisis between 2007 and 2009, including the likes of Asana, Quora and Airbnb.

Employment in start-ups

The report also examined the significant number of people in the US seeking unemployment insurance in March 2020. With more than 3.3m unemployed in the third week of March, the figure is five times higher than the previous record from October 1982.

“As Covid-19 continues to trigger more lockdowns and quarantines, the economic toll, on top of the more dire human life toll, will be tremendous,” the report added.

However, it said that start-ups are a major engine of job creation in modern economies, so governments and business leaders need to act together to help workforces.

The report suggested that during recessions, large corporations tend to focus on cutting down staff while the companies hiring tend to be young firms expanding their operations and growing through particular opportunities coming from the crisis.

“There is reason to be optimistic about economic restarts following the shutdowns,” the report said. “China, the first place to be hit by the virus, is slowly coming back to work: offices are being used again and manufacturers like Foxconn (the maker of most iPhones in China) announced they will be back to normal productions schedule around the end of March.”

The report also highlighted that LinkedIn data from China is suggesting that the number of companies hiring is slowly rebounding, but is yet to reach its previous levels.

Kelly Earley was a journalist with Silicon Republic