COVID-19 pandemic has led to crisis all of a sudden, and the tech community has been forced to adjust and be creative. One thing that showcases strength and optimism in times like this is how the tech community is able to band together to get through the storm –founders, and policymakers altogether.
Being on the front line of the ecosystem, Startup Genome is launching the COVID-19 and Startup Ecosystems Series that is authored by JF Gauthier (Founder & CEO, Startup Genome) and Arnobio Morelix (Chief Innovation Officer, Startup Genome).
It also launches Global Policy Database for governments to learn from each others’ initiatives.
What happened in China
The first installment highlights the importance of looking at what happened to China as the ground zero of the crisis –and learning from the Chinese experience as a baseline for what can happen in the rest of the world.
Chinese VC deals with contracting 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. 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.
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In numbers, if such a drop happens globally, it can result in approximately US$28 billion missing startup investment this year. Many startups will be unable to raise a new round of funding and for those who had started to fundraise in the last few months, they are now 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 (reduction in customer purchasing power, disappearing suppliers, etc).
However, Startup Genome emphasises on the imperfection of data in startup ecosystems. For example, funding rounds can take a while to show up in funding databases.
So to address that issue, in this report Startup Genome focussed 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.
Now VS past economic recessions
The first installment of the report also compared what happened in just two months as a result of the pandemic to two previous economic recessions (the dot-com bubble burst of 2000-2001, and 2007-2009). The total drops in global VC investment during both past periods were between 21.6 and 29.3 per cent over twelve months, or equal to up to US$86.4 billion, according to the IMF.
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As a result, after the past two recessions, global VC investments took one (2007-2008) and three (2000-2001) years to recover to pre-economic contraction levels. Specifically for technology IPOs in the US, it dropped by 90 per cent following the last two recessions, and tech IPOs in the US 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).
Things are looking up
However, during the past two recessions, 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.
In addition, over half of Fortune 500 companies were created during a recession or bear market, and over 50 tech unicorns including Airbnb, Asana, and Quora, collectively valued at US$145.2 billion, were founded during the 2007-2009 recession years.
Another thing that happened during recessions is how it created a lane for new and young firms as the main net job creators in the economybecause older firms had become net job destroyers. Startups might be able to create conversations and acquire talent in a way that was not possible during economic booms.
Recently, the US 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.
In regards to banding together, governments in many places around the world are helping founders through these difficult times. Denmark, for example, is covering 75 per cent of salaries for companies that do not cut staff, while Germany is offering to cover 60 per cent of the new salaries for employees reduced from full to part-time.
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.
What now?
“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,” said Jean Philbert Nsengimana, Former Minister of Information Technology for Rwanda and Startup Genome Advisory Board Member.
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“Digital entrepreneurs have joined the fight with solutions that range from education for behaviour 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,” he continued.
Today, China, the place first hit by the virus, is slowly coming back to work: offices are being used again — and manufacturers such as Foxconn (the maker of most of iPhones in China) announced they will be back to normal production schedule around the end of March.
Supporting this trend, LinkedIn data shows Chinese hirings slowly rebounding, though not anywhere near the previous levels.
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Image Credit: Victor He on Unsplash
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