Over the last weeks and months our global economic system has been shaken to its core, impacting not only multinational corporations and traditional enterprises, but also the state of startup ecosystems all around the world.
Startup Genome reports that at the beginning of this year, the number of Chinese venture capital Series A+ deals went down to 26% of the December levels, which amounts to a drop of 57%-points in comparison to the cumulative value for the rest of the world. In a similar situation globally, around 25,5 billion EUR in startup investments could go missing in just two months. Should the crisis last longer, this could result in a decrease of up to 78 billion EUR in VC investments in 2020.
Governments are slowly stepping up
With an absence of inflow from sales or venture capital, governments and public institutions around the world are beginning to step in. Germany has announced support for startups by means of short-term financial assistance worth around 2 billion EUR. Israel Innovation Authority is going to provide an immediate infusion of 165 million EUR to the high-tech industry as an initial measure for dealing with the crisis, whereas Austria just signed off on a significant support package for the local startup ecosystem.
Similar Challenges all around the World
Markus Raunig, Managing Director of AustrianStartups, describes the current situation as followed: “85% of startups in Austria are negatively affected by the corona crisis. Revenues have decreased by 50% on average and 42% of the startups are struggling with the suddenly extremely difficult fundraising environment. Consequently, the Austrian government has announced a rescue fund for startups that doubles up investments in startups that are affected by the crisis with public money, as well as taking over a 50% guarantee for a new VC fund to be set up in the coming weeks.”
On the other side of the pond, James Mister, Executive Director for Bavaria’s US Offices in the Bay Area and Silicon Valley, sees the current situation as a wake-up call for a startup bubble, that has seen company valuations rise to astronomical highs in the months leading up to the crisis: “Investors are becoming less risk averse, revising growth projections, and may even be reducing committed capital.For startups the game is to find ways to generate revenue while extending their runway by, for example, streamlining operations and reigning in discretionary spending. In some cases, this has unfortunately led to layoffs – even companies that had reached their Series E round if they were exposed to business and leisure travel, shared mobility, etc. COVID-19 may not bode well for the sharing economy for the next 18-24 months—and by then social distancing behaviors may be the new status quo.”
Back in Europe Heiko Huber, Managing Director of Munich-based TechFounders reports: “Many markets have disappeared overnight – B2B sales in particular are hardly possible in the current situation, and investors are focusing on securing their existing portfolios. At the same time, many founders have shown tremendous agility when it comes to adaption of their business models, improvement of capital efficiency, or refocusing on their core product.”
In Israel Shuli Shwartz, Managing Director of Technion DRIVE Accelerator in Haifa is witnessing similar developments within the Startup Nation’s ecosystem:“Fundraising in some cases halted, and is expected to be more difficult in the coming year or more, with company valuations expected to be way more conservative. Attention is currently given to lowering the burn-rate in order to sustain a runway for 18 – 24 months, while inward-working on the product.Especially early stage startups, that depend on angel investment might face major difficulties due to the downturn in the global financial market in which a big chunk of potential angels` money is invested.”
A Light at the End of the Tunnel
However, Shwartz adds, the crisis can also be turned into opportunity: “In the US more than half of the Fortune 500 companies were created during a recession phase, and over 50 tech unicorns were founded between 2007 and 2009. New tech verticals like telehealth or high -tech automation processes in industrial environments and supply chains can arise as the winners of this situation.” In addition, investors have shown positive signals in verticals such as AR/VR, home fitness, or tools for distributed teams. Raunig highlights that it is also important to consider startups as part of the solution to the crisis, whereas Huber concludes“If we can help innovative companies to maneuver through the current crisis, we have the chance to create an even stronger ecosystem afterwards. “
A light at the end of the tunnel.