The Impact of COVID-19 on Global Startup Ecosystems
It is time for our global startup community to get closer, support, and learn from each other.
Making Fast and Accurate Decisions Through a Crisis
Some of us remember the crash of 1987, the dot-com bubble burst of 2000-2001, and the 2007 financial crisis. With COVID-19, not only is the economic crisis sudden, the human impact is also horrific. In this report, the key findings are:
- Chinese VC deals have contracted between 50 and 57 percentage points since the onset of the crisis in the first two months of the year, relative to the rest of the world. If a drop like that happens globally, even for just two months, approximately $28 billion in startup investment will go missing in 2020, with a dramatic impact on companies.
- If the drop in investments continues much further beyond two months and the COVID-19 shocks trigger an economic contraction — which is happening globally, according to the IMF — we can look at the previous two recessions (2000-2001 and 2007-2009) as historical analogies for the current moment. In those cases, the total drops in global VC investments were between 21.6 and 29.3 percent over twelve months — the equivalent of a decline of up to $86.4 billion in global VC investments, when projected to our current context. After the past two recessions, global VC investments took one (2007-2008) and three (2000-2001) years to recover to pre-contraction levels. Related, technology IPOs in the U.S. dropped by 90 percent following the last two recessions, and tech IPOs in the U.S. have not yet recovered to pre-Recession levels, with the number of IPOs in 2019 (34) being 55.3 percent lower than in 2007 (76).
- Crisis begets opportunity in more than one way. During the past two recessions, although fewer dollars were invested, more companies got funded, suggesting 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. In addition, over half of Fortune 500 companies were created during a recession or bear market, and over 50 tech unicorns, collectively valued at $145.2 billion, were founded during the 2007-2009 recession years. These include Airbnb, which was created because the entrepreneurs behind it could not afford to pay rent at the time.
- New and young firms are the main net job creators in the economy, and this is especially true during recessions, when older firms are net job destroyers (Part C of this report). Recently, the U.S. saw unemployment insurance requests hit 3.3 million people in a single week: the highest such number recorded since 1967, when the Department of Labor started publishing these figures. The need for net new jobs means the economy needs startups now even more than usual.
- Governments in many places around the world are helping founders through these difficult times. Denmark, for example, is covering 75% of salaries for companies that do not cut staff, while Germany is offering to cover 60% of the new salaries for employees reduced from full to part-time.
COVID-19 and Startup Ecosystems Series
We are launching the COVID-19 and Startup Ecosystems Series, of which this is our first installment, as well as a Global Policy Database for governments to learn from each others’ initiatives.