Startups are an important system of growth in both developed and emerging markets. They facilitate increased productivity and more employment opportunities, thus playing a major role in socio-economic development. However, the startup ecosystem has been affected globally because of the global pandemic of COVID-19.
The pandemic is not only challenging the survival of existing startups but is also reducing the creation of new startups. The missing new startups have serious consequences on the economy, majorly on employment. Efforts are required to handle these short-term challenges and also fuel the growth of new startups. It is important to boost entrepreneurial potential by reducing various entrepreneurial barriers and helping the startups to grasp new business opportunities.
Impact of Covid-19 on Startups
Startups had to face significant challenges because of the pandemic caused by Covid-19 as they are the most vulnerable to the shock brought by the pandemic as compared to older companies. This is because they are involved in more risks as compared to small and medium-sized firms. It is also difficult for the founders to explore various funding opportunities for their startups.
According to Dealroom, when the pandemic just started, since January 2020, technology and education companies in Europe lost almost 400 billion in total. Tech startups that did not have enough Venture Capital money tried to build their startup by relying on the cash flows faced serious shortfalls due to the pandemic. The number of startups falling into this list is staggering.
As per The authors of the Startup Genome report, the pandemic hit startups that were in the middle of the fundraising. The results were fatal and the startups could not withstand such a major loss and eventually collapsed.
Mentioned below are the four major consequences of Covid-19 on the startup ecosystems:
An overall problem for the economy during the ongoing pandemic is the significant drop in demand, resulting in a drop in revenue too. Since the beginning of the pandemic, 74% of the startups saw a major decline in their revenues.
16% of the startups saw a revenue decline of more than 80% whereas most of the startups saw a revenue decline of less than 20%. The major reason for the revenue decline is the effect of the crisis on various industries that these startups serve as three fourth of the startups worked closely with the industries severely affected by the pandemic.
However, it is noteworthy that when the majority of the startup ecosystem was going through losses, a very tiny minority of startups were growing. For example, half of the fortune 500 companies during the recession period.
Scarcity of Venture Capital:
The Chinese startup ecosystem was hit first due to the pandemic with over 50% funding decline in the first two months of the COVId-19 crisis. This was followed by the Asian startup ecosystem and in no time most of the global startup ecosystem fell prey to the pandemic. Forcefully, about 40% of the startups had to halt their operations temporarily or permanently.
According to a report, almost 41% of the global startups were put in the red zone implying that startups would die if they do not raise additional capital for their startup given that their expenses remain unchanged. 9 or of 10 startups in India experienced a major revenue decline when the lockdown conditions were severe in the country.
The pandemic also risked the financing prospects for the startups along with derailing the ongoing funding opportunities. Half of the startups were trying to raise money before the pandemic but only 17% of them could share the term sheet with the investors.
Many people lost their jobs during the pandemic and this unemployment continued to increase at an alarming rate during the lockdown. In the United States, 22 million people lost their jobs in the very first four weeks of the lockdown.
Even the startup founders had a tough time as they had to make difficult decisions regarding their employees and team structure. Startups engaged in cost cunning to meet the ends by letting go of their full-time employees. You must be surprised to know that almost 74% of the startups had to let go of their employees.
Most startups had to let go of their full-time employees from North America. This was followed by Europe and Asia. The startups of the United States had to lay off their employees in part because of proper payroll protection programs.
Many startups had to rely on cost-cutting to keep themselves operational and survive the pandemic. Around two-thirds of the startups were involved in cutting down the expenses out of which 42% of startups did cuts of more than 20%.
Some companies had to cut costs very aggressively. More than one out of 10 companies reduced costs by over 60% to survive through the crisis. These were majorly the businesses from North America who were aggressive in the cost-cutting. Asian startups adopted cost-cutting sooner however they did not cut many costs.
Despite various adverse effects of the COVID-19 pandemic of the startup ecosystem, there could be reasons for optimism. As a wise man once said, good companies do emerge out of recessions. During the recession years of 2007-09, more than 50 tech unicorn companies were founded and half of the companies on the Fortune 500 were also found during bear markets. There is no guarantee that recovery from this pandemic will look like the recovery from the economic recessions of the past but who doesn't like little glimmers of hope? Startups are critical for the global economy, innovation, and employment generation, and thus, building a resilient startup ecosystem is important.
Building a startup ecosystem that rises
Recession is the time of restructuring that might lead to a stronger and more resilient economy where the startup ecosystem flourishes. Talking about withstanding the major economic disruption caused by the COVID-19 pandemic, steps taken to support existing startups and the creation of new firms can help mitigate the long-term effects of the pandemic on employment and innovation.
The number of new business registrations generally reduces during recessions, we cannot ignore that time and time again, most innovative startups have emerged from the crises. Pinterest, WhatsApp, Airbnb, Uber, and dropbox, all were founded during the global financial crisis or just after it. This proves that despite the crisis being a challenge for businesses, it opens new horizons for entrepreneurs to come up with a business plan to address the inefficiencies created by the crises.
There are ample opportunities for the startups to introduce or upscale already existing innovations to provide a useful solution to the people in the short run. These opportunities can be in the field of providing medical equipment, home delivery services, telemedicine, online education, remote working, personal care. Startups that provide solutions to such short-term needs can grow even during the pandemic.
Luckily with the rapid increase in the resources deployed by the government to promote the development of startup ecosystems over the last few years, the government now understands the need and importance of startups to build a resilient economy. Thus, the government sector is taking initiatives to help founders build their startups.
For instance, the France government is looking to help the startups that were in the middle of their funding process and they have also planned tax breaks and loan guarantees. The British government also announced special aid for the self-employed that might not support startups much but would help a significant number of entrepreneurs. The New Business Preservation Act is also introduced in the US that would help to divide the VC evenly amongst the country. This is an empowering decision as according to the Pitchbook, the crisis would mean a reduction in VC outside the major tech hub region.
Let us look at a few other things that can be considered in the COVID-19 crisis to build a resilient startup ecosystem.
First and foremost, providing support to small businesses, young businesses, venture capital-backed businesses, and local businesses would be the smart move. Providing them with money is probably the best option right now.
Some businesses that are unproductive or not succeeding along with the companies who have been classified as zombies can sustain themselves if they receive support. The low-interest environment that can help funnel money to Venture Capital would mean a lot for the startups. They will be able to survive on debt and leverage.
The reallocation dynamics have been suffocated due to the COVID-19 crisis soo markets are not likely to be operating smoothly right now but the recovery will come eventually.
Tackle various short term challenges
Things would become easy for the existing startups if their short-term financial needs have been taken care of. Policies that guarantee loans, direct lending, and subsidies will be crucial for the startups.
Government can raise awareness about various existing measures and upcoming initiatives that can help startups and founders to adapt to the COVID-19 crisis.
Providing support to the research and development for radical innovations that help in tackling the crisis could be done. Further investments in skills and online training especially during the COVID-19 can encourage upskilling of the startup workers and prevent depreciation of skills.
Promoting Entrepreneur and Entrepreneurship
It is important to maintain investments in the startup ecosystem to ensure that the incubators provide proper guidance and mentoring to the potential entrepreneurs and existing startups.
Facilitating access to the international markets along with promoting network developments can be very vital in strengthening the startup ecosystem. The universities and businesses can collaborate to promote industry application of innovation.
Particular attention to the disadvantaged groups can be given by promoting entrepreneurship training in combination with benefits for displaced workers and lifelong learning. This is likely to facilitate unemployment to entrepreneurship transition.
From all the things you could learn from the crisis, the major one is that the big businesses are the winners of this crisis. This implies that community engagement is crucial for startups.
Startups need a smooth and efficient process for technology commercialization. The crisis has highlighted various loopholes and inefficiencies that require our immediate attention. Many new startups will be set up to provide a solution/alternative to various public challenges like logistics, medicine, etc. These startups should have efficient processes that have innovation and social benefits.
By paving the way for existing startups and other startups that are yet to be set up, we can ensure that 20 years down the line, we have a substantial number of companies founded during the COVID-19 crisis.
Providing incentives and removing barriers to entrepreneurship
Ensuring the innovative startups receive funding at all stages of their development can help to build a stronger startup ecosystem. For instance, additional public funds could be provided to the public VC umbrella fund investors. This can be used in co-investment with other private investors for the financing rounds of the startups. This will simplify venture capital financing.
Administrative burdens could be removed for startups by implementing simplified procedures and transitioning to e-government practices. Possible barriers need to be removed from the entrepreneur status, seen particularly during and after the pandemic. This can be done by providing them access to health care, paid sick leaves, etc. Entitlements should be linked to individuals and not jobs.
For any country, the startup ecosystem is one of the most important economic hotspots. However, it has been severely disrupted because of the global pandemic caused by the spread of novel coronavirus. The impact of Covid-19 on the startup ecosystem can have prolonged repercussions on global economic growth and thus there is a need to build an ecosystem that rises against the odds.
Building a response is important to mitigate the crisis. Technology along with changes in the business model, sales channel, business processes can be a key enabler in building a good response against the crisis. Tech ecosystem can help the startups to serve customers better and can also increase the chances of receiving funding.