THE IMPACT OF COVID-19 ON GLOBAL START-UP ECOSYSTEM Part 2

• Resources
• June 30, 2020

Capital

Start-ups are now facing difficulties accessing capital. The Chinese ecosystems were hit first, with funding declining by over 50% in the first two months of the COVID-19 crisis. Then they were followed by Asian ecosystems, and then by most of the world.

An astounding 41% of start-ups are in what we call “red zone,” with three months or less of cash runway left. This means that four out of every 10 start-ups will die in the next three months if they do not raise additional capital and their revenue and expenses remain unchanged. The number of companies in the red zone is up by over 40% since December 2019.

The situation is less dire for companies that have raised Series A, or B+ deals in the past. More than a third, or 34% of them, have less than 6 months’ worth of cash a danger zone in the current situation where fundraising is difficult.

In addition to risking future financing prospects for start-ups, the crisis is also derailing ongoing fundraising. Half of the start-ups were trying to raise money pre-crisis. Of those, most had only been pitching, but 17% had a term sheet from investors.

For those with term sheets, just over one out of four have continued to have a normal fundraising process, either getting the funds or with the process going on as expected. The remaining companies have had their fundraising derailed, with 19% of those who had term sheets noting investors had cancelled their rounds.

Talent and Jobs

The number of unemployment claims continues to mount around the world. In the U.S. alone 2 2 million people lost their jobs during the first four weeks of extended lockdowns and shelter-in-place orders. These four weeks have the sad distinction of both destroying more jobs than the 18-month-long Great Recession (2007-2009) and wiping away the 21.5 million jobs created in the economic recovery in the U.S. since then. While some of these workers might find new jobs and ultimately not add to the total toll of unemployed long-term, the economic prospects are frightening.

Start-ups, unfortunately, have had to make difficult decisions regarding their teams. For companies with full-time staff, 74% have had to let go of full-time employees. Most of the cuts so far have been relatively small—about half of the companies reducing their workforce have laid off 20% or less of their staff. But it is reasonable to expect more cuts in the future.

When we break down that share by the top three continents for start-up activity, North America is the place where most start-ups have had to lay off employees (84%), followed by Europe (67%) and Asia (59%).

U.S. companies (the lion’s share of responses in North America) probably had to lay off more employees in part because of the relative lack of payroll protection programs, when compared to Europe, as well as having a regulatory environment for labour markets that is more friendly to layoffs as well as contract and part-time work.

When we broaden the scope to look at all staff, including contractors, part-time workers, and consultants, the vast majority of companies 95%  have reduced labor costs.

Market

An overarching problem for start-ups as a whole, and the economy in general, is the significant drop in demand and thus revenues. Since the beginning of the crisis 74% of start-ups have seen their revenues decline. The most common type of change in revenue is a relatively modest decline one out of every four start-ups saw their revenue decline by less than 20 percent. However, a sizable share of companies was very heavily hit: 16% of start-ups have seen their revenue drop by more than 80%.

A major reason for the drops in revenue comes from the effect of the crisis on the industries these start-ups serve. Three out of every four start-ups work in industries severely affected by the COVID-19 crisis. 

At the same time, a small minority of companies is experiencing growth. Every crisis creates opportunities. For instance, over half of Fortune 500 companies started during a contraction, and over 50 unicorns were created in the Great Recession alone,. 

The COVID-19 crisis is no exception. 12% of start-ups have seen their revenue increase by 10 percent or more since the beginning of the crisis, and one out of every 10 start-ups are in industries experiencing growth. Hurt and growth are not evenly distributed. B2C start-ups are about three times more likely to be in industries experiencing growth when compared to B2B start-ups. This is likely coming from a mix of companies (especially large enterprises) slashing expenses quickly, while consumers are changing their consumption patterns towards spending a higher relative amount of time and money online (which benefits tech companies more than it does ‘traditional’ businesses).

 Operations and Management

When we look at cost-cutting measures across all categories, over two-thirds of startups have reduced their expenses since December 2019, with 42% doing cuts of more than 20%. Some companies have cut costs very aggressively, with more than one out of every 10 companies reducing costs by over 60%.

When we look across continents, North American businesses were slightly more aggressive in terms of cost-cutting, with a higher share of them reducing costs by 60% or more.

In terms of timing of main cost-cutting decisions, Asian startups started cutting costs a little bit earlier, but not by much.

Nonetheless, despite the squeeze in reducing costs, tech start-ups are uniquely situated to continue operating even in lockdown scenarios. Unlike many traditional businesses, 96% of start-ups can continue working during lockdowns, even if there is a significant disruption.

Policy

About 60% of the founders are receiving assistance or expect government policies to support their businesses directly or indirectly.

Over 90% of those start-ups currently getting aid, or expecting policy help soon, are receiving or looking for support from national governments. 29% are also being supported by city and state governments

According to founders and start-up executives, the top four most helpful policy responses for their businesses would be, in order:

 #1 Grants to preserve company liquidity (29%);

 #2 Instruments to boost investment (18%);

 #3 Support to protect employees, like payroll supplementation (17%); and

#4 Loans to preserve company liquidity (12%).

 A lot has changed in the last month, and that’s just putting things mildly. Since the last week or two, in the most literal sense, the world has stopped as everyone watched with disbelief the coronavirus pandemic spread its reach across every corner of the globe.

In just a couple of weeks, the preventive measures for COVID-19 have already started showing drastic effects. In the last month, Italy went under country-wide lockdown, California and New York, the two major states in the US have also announced emergency status, and several other countries are exercising lockdowns up to various degrees.

In the times where people need to stay indoors and away from each other, the challenges start-ups face, particularly the ones with a high physical component, are only increasing. The world posts the coronavirus pandemic, where research for cures is on the peak, companies like Google and Zoom are coming through for entrepreneurs and start-ups, allowing them to leverage their tech solutions.