A year ago, it was estimated that the “global startup economy” created nearly $3 trillion in economic value between 2016 and 2018. Now, billions of dollars of that economic value may be leaking away, likely by the day.
In a new report out today, my friends at Startup Genome have taken a first pass at how the global pandemic is already affecting startup ecosystems. The biggest impact has been in China, since COVID-19 hit there first. In the short period from November-December 2019 to January-February 2020, venture investing fell off a cliff in China. Just since the beginning of this year, Chinese venture investing has dropped by over 50 percent relative to the rest of the world.
If other parts of the world experience declines of similar magnitude, “$28 billion in startup investment will go missing” this year alone. That will mean more layoffs than have occurred already in many startup hotspots. Already, according to Dealroom, since the end of January, tech and internet companies in Europe have lost almost €400 billion in total.
These numbers are staggering.
Across Asia, we may be seeing additional effects. Corporate venture investors piled into late-stage funding rounds in recent years, driving up valuations. Some of those investors now appear to be selling (FT:$) their startup stakes at discounts. If Startup Genome’s analysis is an indication, we could see similar moves in the United States and Europe. In 2019, nearly four in 10 corporate venture capital deals globally were in North America, virtually the same share as Asia. In 2008 and 2009, corporate venture investors pulled back more sharply, and earlier, than others.
Startup Investments in China and Asia, Dec 2019-Jan 2020.
Venture-backed startups represent only a fraction of what constitutes a vibrant startup ecosystem. Tech startups that don’t have VC money (which is most of them), trying to build their companies on cash flow, face serious shortfalls. In every region, there will be plenty of potential high-growth companies who don’t attract venture capital but who are important job creators. Their potential trajectories will be stunted by the current crisis. Small businesses that are not growth-oriented—but no less important for the ecosystem—are already hurting because of forced closures and falling sales.
Yet venture-backed companies have large multipliers: high-tech companies create four or five other jobs for every job they create directly. The economic hit they take over the next two quarters will radiate outward. And as JF Gauthier and Arnobio Morelix, authors of the Startup Genome report, point out, the crisis will hurt startups that were in the middle of fundraising and will likely be a “fatal” blow to many.
Hopin’ in the Gloamin’
As the Startup Genome report notes, and as I’ve written before, there could be reasons for optimism. Good companies do emerge out of recessions. More than 50 tech unicorns, the report finds, were founded during the recessionary years of 2007-09. Over half the companies on the Fortune 500 were founded during a recession or bear market.
Even if overall VC funding is down, moreover, it could mean that more companies get funded after the downturn. The Startup Genome report shows that, after the 2001 and 2008-09 busts and recessions, the number of companies funded by venture capitalists grew rapidly. From 2010 to 2014, for example, the number of VC deals grew by at least 25 percent each year.
Startups in some areas, such as delivery, are understandably doing well thanks to greater demand today.
Those glimmers of hope offer little amelioration, of course, to founders and employees in most other sectors—they are feeling the pain today. And, there is no guarantee that the recovery from this recession will look like the past. This is something different.
What Is Being Done to Help Startups
Encouragingly, the rapid increase in resources devoted to startup ecosystem development over the last several years means governments now recognize the importance of targeting startups for assistance. In France, the government is looking to help companies that were in the middle of raising a round of financing. Tax breaks and loan guarantees are also planned.
In Germany, too, the government is searching for ways to help startups survive. The British government has rolled out aid specifically for the self-employed—that may not help all startups but will assist a significant number of entrepreneurs.
In the United States, Congress has authorized billions of dollars in new loan guarantees , expanded disaster loans, and grants through the Small Business Administration. There is some question as to whether or not individual venture-backed startups can qualify for these measures, but that appears to be in the process of being worked out. The New Business Preservation Act, introduced into the U.S. Senate, would try to help distribute venture capital around the country. That could be helpful since, according to Pitchbook, the crisis will likely mean a reduction in VC available to regions outside the major tech hubs.
What else should governments and others be considering when it comes to the COVID-19 crisis and their startups?
First: Life Support
Emergency support to businesses—young, small, venture-backed, local—is the right first move. The bakery down the block, the flower shop around the corner, the fintech startup in the offices above the bakery, the life sciences startup in the research park off the next highway exit—they all need immediate help to get through this shock. Throwing money at the problem probably is the best option right now.
It’s likely true that some businesses that are unproductive or at least not succeeding—and those classified as “zombies”—will receive support and sustain themselves. The low-interest-rate environment that has helped funnel money into venture funds has also meant that a lot of companies have been able to survive on debt and leverage. We’ll have to be ok with this. Market forces aren’t exactly operating smoothly right now. The “reallocation” dynamics that economists talk about have been stifled for the moment.
Recovery will come, eventually. Lockdowns will abate. Normal routines will return at varying speeds. Then what? What can public and private organizations do to help the startups that emerge scarred but determined from the crisis? What should be done to help all the companies that will be founded in the coming months?
Second: Ecosystem Support
Let’s think about some of what we’re already learning in the midst of the crisis. I’ll just mention three here, but it would be good to hear from you as to what you think the crisis means for ecosystem support and development.
First, one of the winners from this crisis is and will be big business. This means corporate engagement with startups—a long-recognized yet mostly unrealized dimension of ecosystem development—will be crucially important. Many have tried to get this right; few have. It’s time we really figured it out.
Second, barriers to fluid labor markets need to go. Some states have moved to fast-track licensing for healthcare providers to expedite migration from other states. This should call into question the existence of such barriers in the first place. Occupational and professional licensing, noncompete agreements, and more—these will hinder business creation and recovery. Reform yours now.
Third, the failures of testing are by now well-documented and can largely be ascribed to regulatory hurdles and bureaucratic bungling. This should alert us to the importance of smooth and efficient processes for technology commercialization. You can bet that there will be a wave of new companies, if there isn’t already, that form to take on major challenges in public health, infectious disease, logistics, precision medicine, and more. They deserve efficient processes that have innovation and social benefit as the objectives.
There is certainly more that can and should be done. Soon, your ecosystem leaders will be able to turn their attention from life support to ecosystem support. By paving the way for existing startups and those soon to be in existence, they can help ensure that 20 years from now we will be tallying the number of leading companies founded during the COVID pandemic.