The Importance of Well-Designed Startup Funding Policy in Times of Crisis

Governments, Don’t Let your Startups and Scaleups Die
JF Gauthier
on April 28, 2020

Policy makers leading advanced startup ecosystems around the globe have spent far too much time and invested far too many resources to watch the COVID-19 crisis wash it all away. To avoid this fate, an aggressive emergency policy response is required.

Building on the world’s first global startup survey on the impacts of the COVID-19 crisis on startup operations and liquidity, this report dives into the critical capital and financing issues facing startups at this period of time. Drawing on Startup Genome’s proprietary research base as well as the insights compiled from the analysis of previous periods of economic uncertainty, this report explains both the rationale for a venture capital injection policy and explicit actions that should be undertaken now related to the design and operationalization of such policies.

This report stands as the third emergency policy response report for global startup ecosystems, alongside our earlier Global Startup Survey on COVID Impact and the Global Policy Knowledge Base, as well as our ongoing Research Series.

Key issues from this funding policy white paper:

1) Tech Startups Are Key to Economic Recovery

  • Last year, the global startup economy was valued at $2.8 trillion and growing over 10 percent per year, about three to four times faster than the rest of our economies.
  • With the world’s transition to a digital economy, technology startups and their ecosystems have become more important and the jobs they create more sustainable, because they are better adapted to our economic future. The current crisis has accelerated the digitization of the offline economy, making tech companies even more important.
  • In the wake of the last crisis, startups contributed strongly to the economic recovery. By 2011, employment in the ‘Computer Systems Design and Related Services’ industry had grown by 2.6 percent per year from pre-recession level, while in the overall economy job creation was negative, at -1.2 percent. The 2.6 growth rate is higher than that of large sectors including healthcare.
  • Startups funded during the Great Recession had slightly higher exit multiples over total money invested than those funded during economic expansions, and VC returns for recession-year startup investments were, at 13 percent, higher than for all but one of the years in the decade, from 1997 and on, with startups including Facebook, LinkedIn, Palantir, and Dropbox.

2) Drop in Private Investments, Death of Startups

  • In the crisis of 2007-2009, which might well prove to be milder than the one we have just entered, venture capital investment deals dropped 30 percent (2008 to 2009) for Series A investments in software in the U.S. Drop in Series B investments was even sharper: 48 percent.
  • While it took 4 quarters for the U.S. Series A and B venture investments to drop from their peak in 2008-9, a few weeks ago we had already documented a drop of 50% of Chinese Series A investments.
  • Our global startup survey revealed that 65 percent of all companies, including 34 percent of Series A+ startups, have less than 6-month worth of cash and 74 percent of startups have had to let go of full-time employees, with 26 percent of them having to let go of 60 percent or more of their full-time staff.
  • Because size matters—ecosystems that are 3 times bigger produce 5 times more economic value—governments must act to prevent a massive extinction of startups and dispersion of their high-value talent pool.

3) Cost-Benefit of Policy Investments in Startups

  • Governments stand to make money by injecting six months worth of cash in tech startups. Even if we assume a negative 10 percent return on the equity, the cost per job saved will be 41 percent lower for startups than for SMEs, respectively costing $14,766 and $24,928 per job saved.
  • Startups offer a higher job multiplier because of the higher wages they pay, their higher rate of exports and of FDI (foreign direct investment) from international investors. They are also more “future-proof” as we globally transition to a digital economy.
  • The sum of exits—a proxy for economic value—was $322 million for a typical sample of 10 U.S. Series A startups funded in 2006 or 2007.

4) Defining Your Goal as Government

  • The first goal for policymakers should be to increase capital in the hands of angels and Series A funds by about 100 percent.
  • The second goal should be to save 80 percent to 90 percent of existing VC-backed startups, and especially those at Series A and B.

5) Key Policy Principles for Supporting Startups

  • Depending on whether startups could qualify for SME payroll support programs, allocate 12.5 to 25 percent of all early stage investment made in local startups in the last eight quarters (ending Q1 2020) to a policy relief fund.
  • Extend 6-month worth of cash to VC-backed startups by funneling government funds to VCs through a Fund of Funds structure; then letting VCs to distribute the funds to their portfolio startups putting their unique expertise and intimate knowledge of each startup to work—and that without asking VCs to co-invest, but rather letting them do so at their discretion.
  •  In addition to the specific guidelines above, there are five key principles governments should follow in supporting their VC-backed startups: Design for Immediate Flow of Government Money to Startups, Do Not Expect VC firms to Lead and Spread the Money, Do Not Create a New Instrument or Trigger New Terms, Provide Great Flexibility in Terms of Use of Funds, Align Investor Incentives with Those of the Government.
  • To increase venture capital investments during the crisis and recession, match Angel investments at a ratio of 3 to 1 (three parts public to one part private funds), seed-stage investments by institutional investors at a lower ratio of 2 to 1, and Series A investments at a ratio of 1 to 1.

In the coming weeks and months Startup Genome will continue publishing insights on the impact of the coronavirus crisis on startups, and building tools for governments and ecosystems to support their startups through the crisis. You can sign up here to
get it.

If you are a policymaker or ecosystem support organization and would like to deploy the COVID-19 Impact Global Startup Survey in your community and get detailed insights about what is happening on the ground (and how your ecosystem stack up with what is happening globally), please reach out to Adam Bregu (

Nearly 1,500 respondents have answered the survey across every continent and in over 50 countries. If you are a startup and want to take the survey to share what is happening in your business and market, you can take it here. Your input is crucial.

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