Impacts of COVID-19 on the Startup Ecosystem
As the world continues to grapple with the impacts of COVID-19, nearly every industry has been impacted in one form or another due to both macro and microeconomic effects. American and European markets are both feeling a squeeze on capital, while governments are attempting to minimize the economic damage by injecting trillions of dollars into stimulus funding. The startup ecosystem, while diverse in its constituents, is also experiencing a momentary paradigm shift – and for better or worse this has produced a number of new scenarios.
Transition to Online-Based Events and Remote Working
For some ventures this transition provides little impact and is “business-as-usual”. Startups that are already primarily web-based may only be minimally affected by this development, while overall startups may be finding both a workflow and cost efficiency to conducting business meetings remotely. While working remotely has long been a hallmark of the flexibility that startups are comfortable with, this development does represent a significant shift for startups growing in major hubs (San Francisco, New York, etc.) that have grown to increasingly utilize coworking spaces such as WeWork.
In the short term, some coworking spaces are providing relief for tenants by forgoing collection on payments, which could provide a valuable cash flow assistance to fledgling startups. The longer term implications of this could result in a resurgence of remote working – particularly if it can be demonstrated that no loss in productivity is seen from remote working, and better yet if efficiencies can be identified.
Free Services, Innovation, and Community-Based Initiatives
While many startups are experiencing a drop-off in sales or a tightening of access to funds, the temporary economic slowdown is providing startups with an opportunity to innovate and explore unfamiliar strategies and even products. Free trials, consultation, and an emphasis towards product demos have surged in the market to create a virtual tradeshow ecosystem where startups are vying to get their products exposed to as many clients as possible. If clients and customers enjoy a service that they can’t pay for today they will surely want to tomorrow. Fintech startups have noticeably fared well in this regard, as Forbes recently reported a slew of startups offering free trials and demos.
List of Relevant Articles
Impact of COVID19 on startup equity investments?
Unsurprisingly, the most severe impact on the Startup Ecosystem has been at the investment level, which has resulted in depletion of cash flows and layoffs across many sectors. According to Dealroom, it is estimated that tech companies have lost close to €400 billion since January, with significant pullback in deals being observed throughout Asia and Europe. North America is also soon expected to see similar pullbacks, as a recent assessment has shown only $67B in private-market funding startups in 2020, down from a $77B forecast. Additionally, 65% of venture capital funds are reporting delays to investments, representing a sharp turnaround in economic optimism for the Startup Ecosystem.
The drying up of cashflows has caused a proportional response in startups attempting to hold onto assets and minimize losses – an early assessment shows already 6,000 layoffs and furloughs across 50 different startups have been put in place in the United States. Sectors seeing declines in demand are particularly at-risk, potentially leaving many startups out in the dark with no pathway to launch during this period. In the United States, a relief bill for small business loans totaling $350 billion was passed by Congress for release, but at this moment it is still unclear as to how many and which businesses will be eligible or accessible for this funding, and which startups will qualify for the stimulus’ criteria.
Other governments are also trying varying approaches, as France and Germany have initially pledged 4 and 2 billion dollars respectively to prop up start-up cashflows. It is currently unclear what metrics are being applied to qualify startups as eligible for this funding, or if this initial funding boost will be part of a series of funding rollouts that progresses throughout the economic downturn. It is also unclear how the evolution from short-term to long-term perception will shape investment perspectives, as the extending of the crisis might usher in a new norm of financially lean investing and startup valuation.
From an investor’s perspective, investment strategy will end up involving a stricter focus on due diligence, particularly with respect to contingency and mitigation plans. Julie Yoo, (Partner at Andreessen Horowitz and cofounder of Kyruus) said this shift towards mitigation will necessarily “force the conversation around how strong is the value proposition that you have”, challenging businesses to have flexible approaches in their go-to-market strategies. Another structural problem created by this emphasis on diligence is the lack of resources available to investors to properly vet and assess their deals. “Strategic investors (providers venture capital funds) are going to slow down because COVID-19 will require all hands on deck, and so many of the staff that generally are involved in the diligence process will be reallocated to deal with COVID-19-related issues” mentions Emma Cartmell (Cartmell LLC), further emphasizing the dilemma of resource allocation that investment firms are facing. However, many VCs are well equipped with strong cash reserves and should be expected to continue business as usual with regards to their operating ability.
In the short term, investors are also split on how to interpret the longevity of this crisis. Whereas many healthcare startups are seeing a surge in demand that might merit a positive funding outlook, many investors are still cautious on whether or not the current impacts of the crisis on both the healthcare s
Conversely, some investors are seeing upsides to investing in a bear market, where startups may be asking for lower valuations to get their product to market. Emma Cartmell (angel investor, founder of Cartmell LLC) notes that “with the reduction in funders, I think that VCs will negotiate harder and look to get better deals”, which despite being disappointing news to startups represents a continuity of business activity for 2020. Additionally, it presents a challenge to businesses to focus on core business components and overall core qualities – skipping on non-essential functions and operating within the methodologies of a lean startup.
ystem and other markets represent long-term changes or just a momentary phase. In a similar fashion, this has correlated to many businesses not trying to adjust their strategy or approach in the face of the crisis, choosing to weather the storm instead. “I think a lot of the companies in the market are not building tools specifically for situations like this,“ Jeffrey Ries, managing director at Healthbox, told MobiHealthNews with respect to healthcare companies. „They are trying to build long-lasting solutions to fight chronic disease and improve operations. Hopefully something like this is not long lasting.”
Overall the startup world is facing dynamic challenges on both the investor side and the startup side. With a shortfall in funding, an emphasis on lean startups and lower valuations may emerge, and startups may be forced to focus on core business concepts more astutely. Finally, many older and legacy businesses are facing a technological reckoning, as many manual and person-driven functions are forcing businesses to upgrade their outdated technological tools – a topic that will be explored in the upcoming article.
Winners and Losers
The dynamic and almost-overnight paradigm shift that the outbreak has caused on businesses has caused significant shifts across all verticals, for better or for worse. A quick look reveals the strugglers and stars in this market:
- Social Media Ventures (and social media based initiatives): It’s no surprise that online activity has surged during global quarantine conditions, with 44% of worldwide respondents indicating that they are increasing their social media consumption during the crisis according to a Statista study. with Twitter and Facebook boasting a 40% and 18.5% surge respectively in hiring.
- Streaming Services: According to Dealroom, streaming services such as Zoom and TelaDoc are outperforming the market by nearly 40%, resulting in nearly $50B increase in market cap since January 2020 for the 2 companies alone.
- Healthcare Apps: Unsurprisingly, healthcare apps have seen a dramatic surge in downloads and usage, particularly those providing service for self-diagnosis and self-treatment. Sifted reports that apps like Kry (Sweden), Babylon (UK), and Qare (France) have seen a 240% increase in downloads this year. The growth has been so tremendous, in fact, that startups are now dealing increasingly with the difficulty of sustaining month-over-month double digit growth and how to rapidly scale up. No doubt, these challenges will be an interesting case studies for future startups seeking to achieve or experiencing similar growth.
Both a Winner and a Loser:
- Food Delivery Services: This one is a mixed bag that is difficult to unpackage. At first glance, the conventional wisdom points to a surge in Delivery App Usage, particularly for groceries. Target and Walmart have seen record surges in app downloads (hitting over 50,000 for single day downloads compared to 25,000 average in February). Despite these retailers keeping venues open, consumers are shifting dramatically to avoiding public spaces and opting instead to order their groceries online. While other delivery services such as Instacart have seen similar spikes in services, Doordash and UberEats have seen a tumultuous period of mixed results not yielding the same growth – attributable to the fact that restaurant demand is down 44% and nightlife demand down nearly 70%. Further complicating matters for these apps, many users are reporting dissatisfaction with the spikes in prices, and restaurants are also contesting the current profit sharing model set between restaurants and Delivery apps, setting up an unclear future full of litigious battles. Delivery apps may be able to adjust, and the data is still early, but the contentious relationship between restaurants and Delivery Apps may be significantly tested during this period.
- Travel and Tourism: With a sharp downturn in travel due to global travel restrictions, as well as the shuttering of many hotels, travel and tourism has taken the biggest hit in this crisis. Lyft, Expedia, and Square are all posting 50% or greater depletions in their market cap, with very few options of innovating or pivoting to new sectors available for these and similar companies. One noteworthy example of a startup’s ability to weather the storm through a diversified service is Uber, as UberEats’ surge in usage has softened the blow somewhat for Uber. Still, the company is down 42% in market cap in 2020, leaving Uber still searching for a solution to nearly a 60% dropoff in usage.
- Fintech: At a basic glance, Fintech companies are a mixed bag of results, with TechCrunch noting that the “new reality is not merely that some fintech companies are doing a bit better or a bit worse. Instead, it’s that some are sharply down, some are flat, and some are soaring.” Overall, e-commerce including Paypal are posting tremendous losses, and the amount of fintech deals is down sharply in 2020.– On the positive side, however, sectors such as Blockchain, contactless payment technologies, and automated payment solutions. As many businesses are experiencing the strain of not having onsite staff to manually process checks, leading businesses to seek commercial card products to salvage their payment processes.
A good exercise is to go to tech-crunch and search COVID19 and skim through articles there – there should be a lot of material there.
How COVID-19 Outbreak Will Affect the Startup and Entrepreneur Ecosystem
5 ways COVID-19 is impacting Fintech Startups
Here some insights I also saw on how the startup businesses can cope up with the pandemic: