Global economic crises often become extinction events for startups. The COVID-19 crisis has been no exception, and many startups across the globe remain perilously close to the edge of closing up shop. Young companies and founders remain on edge, knowing that things can change in their communities seemingly in an instant.
Policymakers should be aware that startups contribute meaningfully to both local communities and to the global startup economy as a whole. With that in mind, they should be laser focused on helping startup companies and the wider ecosystem get through the COVID-19 crisis intact.
There will of course be a time down the road where COVID-19 is no longer a threat to our health and our economy. The famous adage, “This too shall pass” comes to mind. When the threat subsides, many facets of life we’ve come to know will likely return, including in our economy.
But what if startups don’t survive the turmoil? We believe there is much to be done by government agencies and organizations in order to save startups and keep them humming along until things go back to “normal.”
Why Policymakers and Leaders Must Act Now
With so much happening around the world, it can be difficult to track the impact of COVID-19 on startups. But the data, of which we have been collecting since March through our COVID-19 impact survey, is clear — startups need help now and if policymakers don’t work to support them, the economic effects will be dire.
Startups in Serious Trouble
While big-name startups may have lots of cash on hand or have been in the press for “pivoting successfully” during the COVID-19 crisis, many startups are struggling. Global venture capital funding has dropped roughly 20% since the onset of the pandemic in December 2019, creating ripple effects throughout startup ecosystems.
According to our COVID-19 Survey, as of mid-2020, more than 40% of startups globally are in the “red zone” when it comes to cash, meaning they have 3 months or fewer of runway. Basically, if these companies do not change their cash flow situation and are unable to raise additional funds soon, they will fold. When it comes to funded startups that have raised Series A or later rounds, a third have less than 6 months worth of cash, creating a danger zone because fundraising is simply more challenging now.
Startups Can Improve the Economic Recovery
Policymakers may wonder if it’s OK to not intervene at all and let these startups in the red zone perish, following the theory of letting the strong companies survive and letting the weak business fall off. While this may be attractive in some circles, it’s a short-sided gambit that underestimates the value of startups and threatens the future.
For many years, startup ecosystems around the globe have proven to drive productivity. This is because startups not only are a good engine for jobs, but without startups, there’s less innovation at larger corporations and at small- and medium- sized businesses (SMBs) as well. Startups also play a role in pushing the public sector forward by providing huge efficiency gains in governmental organizations and public services, and by helping establish competitive regulatory environments.
Many governments have already assisted in the creation of knowledge economies, so in many ways they also need to protect existing ecosystems in which they’ve already invested. Governments must act now to help startups affected by COVID-19, and they have good reason for saving jobs and businesses.
As we argued in our recent white paper, governments actually stand to make money by injecting at least 6 months worth of cash into technology startups. Even with a negative 10% return on equity, the cost per job saved is 41% lower for startups than for SMBs, respectively costing $14,766 or $24,928 per job saved. It simply costs less to save a job in a startup than elsewhere.
Technology startups offer a higher job multiplier because they often pay high wages, they export more frequently, and attract foreign direct investment (FDI) from international investors. Startup jobs are also more “future-proof” as the economy transitions to more digital services, as people working these jobs will have more in-demand skills down the road.
Startup Ecosystem Size Matters for Growth
Outside of protecting startups, what other incentives do policymakers have to protect the innovation ecosystems impacted by COVID-19? As academic Michael Porter has postulated for traditional industries and Startup Genome has demonstrated for startup ecosystems, the size of an industry cluster greatly matters for its overall performance. Because of network effects, the economic impact of each additional startup grows as the ecosystem grows. As Startup Genome research shows, the larger the ecosystem, the higher the performance and average value of each startup.
For instance, in an ecosystem with 1,000 startups (approximately the size of the Montreal ecosystem), each startup adds on average $5.1 million in economic value while at 2,000 startups, each startup adds an average of $6.9 million. For 3,000 startups, the figure hits $8.7 million per company, and at 4,000 startups (approximately the size of the Boston ecosystem), value per startup jumps to $10.6 million on average. Another way to look at this: an ecosystem that is three times larger (1,000 vs. 3,000 startups) produces five times more economic value. And indeed the opposite applies. Reducing the number of startups would slash the value of an ecosystem exponentially.
As such, preserving the number of startups in an ecosystem helps protect overall economic value. Policymakers should never forget this.