ARTICLES

The Impact of COVID-19 on Global Startup Ecosystems

As our world is shaken in the most dramatic way imaginable, it is time for our global startup community to get closer, support, and learn from each other. 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.
Arnobio Morelix
on avril 01, 2020

To better understand the impact of this crisis on startup ecosystems and to help founders and policymakers get through the storm, Startup Genome is 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.

Acknowledgments
The authors are grateful to the founders all over the world working to get through the COVID-19 crisis, and all the ecosystems working hard to support them. We are also incredibly grateful to the whole Startup Genome team who made this work possible, especially Marc Penzel, Stephan Kuester, Tricia Whitlock, Adam Bregu, Lais de Oliveira, Patricia Russ, Pavan Kumar, Utkarsh Jain, Poorva Mendiratta and Shekhar SIngh Parihar — who together make up Startup Genome’s COVID-19 Taskforce.

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.


To continue Startup Genome’s mission of supporting startup success globally, we are closely monitoring the situation and what it means for founders and ecosystems. We are reshaping our global knowledge network with our Members across 25 countries to collect public and private policies being enacted and will be sharing them through a series of articles, posts and knowledge platforms. You can sign up to get in the loop on future installments and initiatives coming from this series here

1) The Impact of COVID-19 in China and The World’s Startup Ecosystems
In order for startups to survive this crisis, it’s important to understand what’s happening elsewhere through the successive waves of shock hitting regions ahead of where we might be, and identify the public policy and private actions having a positive impact.

Let’s first look at ground zero of the crisis and learn from the Chinese experience as a baseline for what can happen in the rest of the world. 

China’s industrial output already dropped 13.5% in January and February while retail sales decreased by 20.5% year-on-year. The drop in VC total investments was even more acute.

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. 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 startups.

When we break down the numbers by region, we see that China saw the biggest drop in funding, followed by the rest of Asia. This is not surprising considering the importance of Chinese capital throughout Asia’s startup ecosystems and the start of the virus in Taiwan and Korea in January.

It’s important to note that this drop in VC deals is not a seasonal dip due to the Lunar (or Chinese) New Year. The previous three years show an equal or higher number of deals in January as compared to December. You can find more analysis and charts in our COVID-19 and Startup Ecosystems Series, of which this report is the first installment.

Of course, the changes in numbers may not only be due to the COVID-19 pandemic. Data on startups is never perfect, and what we present here is no exception. For example, funding rounds can take a while to show up in funding databases. To address that issue we focused on Series A and later rounds, which have lesser delays in reporting – unlike seed rounds. The trends we report here are supported by our partners and friends on the ground.

If a drop like what we saw in China happens globally, approximately $28 billion in startup investment will go missing in 2020, with a dramatic impact on startups. Many startups will be unable to raise a new round of funding. The first to run out of cash will be those who had started to fundraise in the last few months, nearing the end of their runway before the crash. 

It is difficult to assess how big of a percentage of startups will fail, but with startups 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 startups – and worse if we consider the potentially fatal direct and indirect blow to one’s business model and operations (e.g. reduction in customer purchasing power, disappearing suppliers, etc).

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Source: Arnobio Morelix, Startup Genome calculations from Pitchbook

2) Lessons from the Dot-Com Bust and the Great Recession
In addition to recent experiences of China and Asia more broadly, we can look at past recessions for historical analogies for what could happen in the future, especially if COVID-19 triggers a recession, which the International Monetary Fund said is already happening.

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In past recessions, total annual drops in global VC investments were between 21.6 (2001-2002) and 26.3 percent (2008 to 2009) — the equivalent of a decline of up to $86.4 billion in global VC investments, when projected to our current context. In addition, 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).


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Nonetheless, 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: we can actively change them and take action to improve the situation for founders and the economy.


3) The Best and Worst of Times

Crisis begets opportunity in more than one way. As economies get upended, certain markets grow and open up. Startups might be able to create conversations and acquire talent in a way that were not possible during economic booms. For this reason, and as our friend Dane Stangler wrote, over half of Fortune 500 companies started during a recession or bear market.

In addition, over 50 tech unicorns started during the recession years of 2007-2009 and they are valued at a collective $145.2 billion, as Startup Genome data shows. These unicorns include Asana, Quora, and Airbnb; which started because the founders were having a hard time paying their rent. While the opportunities arising from this crisis will obviously be different from the ones during previous crises, they will still exist.

In the third week of March 2020, 3.3 million people in the United States filed for unemployment insurance. This is the largest such number of people losing their jobs in a single week since the Department of Labor started publishing these figures in 1967, and nearly 5 times more than the highest recorded previous number in October of 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.

So far, the countries reported to be most affected by the virus — places like the US, Italy, China, Spain, and Germany (the top five countries with the most cases at the time of this writing) — tend to be richer economies. The human and economic impact could be even more frightening as the pandemic takes hold in less developed places.

Considering this scenario and the fact that startups are the number one engine of job creation in our modern economies, it is imperative for governments and private leaders to learn from each other and act in a concerted fashion. New and young companies create most of the net new jobs in the economy. This is particularly true during recessions, when massive 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.



“The lockdown that COVID19 has imposed on the global economy is having a disproportionate impact on countries with larger informal and SME sectors. Emergency public health and food security programs are being initiated in many places such as Rwanda, to protect the most vulnerable and prevent a humanitarian crisis. Digital entrepreneurs have joined the fight with solutions that range from education for behavior change, crowdsourcing food and medical supplies, enforcing social distancing, to building more sophisticated public health risk assessment capabilities. We need to be proactive in helping startups navigate these difficult times, because they will be the engine for job creation and economic recovery once this wave of the pandemic subsides“ - 
Jean Philbert Nsengimana, Former Minister of Information Technology for Rwanda and Startup Genome Advisory Board Member

Nonetheless, there is reason to be optimistic about economic restarts following the shutdowns. China, the place first hit by the virus, is slowly coming back to work: offices are being used again — as we see from our ecosystem partners in the country — and manufacturers like Foxconn (the maker of most of iPhones in China) announced they will be back to normal productions schedule around the end of March. Supporting this trend, LinkedIn data shows Chinese hirings slowly rebounding, though not anywhere near the previous levels.

To continue our mission of supporting startup success globally, we at Startup Genome are closely monitoring the situation and what it means for founders and ecosystems. We are reshaping our global knowledge network with our members across 25 countries to collect public and private policies being enacted and will be sharing them through a series of articles, posts and knowledge platforms.

We are finding some promising initiatives. Denmark is covering 75% of salaries for companies that do not cut staff, Germany is offering to cover 60% of the new salaries for employees reduced from full to part-time, and the UK is considering a “Runway Fund” with a convertible note scheme for companies that cannot access bank loans.


This report is the first installment of Startup Genome’s COVID-19 and Startup Ecosystems Series. You can subscribe to and contribute public and private policy solutions — and be among the first to get the future issues in the series — by signing up here.


Read the full Report, Methodology and Framework on our reports page.


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