Are We Facing the Extinction of Startups?

Photo credit: iStockphoto/Snowshill

Overwhelming amounts of data are pointing to a global economic downturn amid the COVID-19 pandemic. Gita Gopinath, director of the research department at International Monetary Fund (IMF) calls it “the worst recession since the Great Depression, and far worse than the Global Financial Crisis.”

From the U.S. to Europe to Asia, sharp GDP declines accompanied by record-high unemployment rates have plunged many economies into recession.

Even as countries and states are lifting the lockdown measures, all signs indicate a protracted recovery.

The market importance of startups

According to Startup Genome, an organization that works to enhance startup success and ecosystem performance everywhere in the world, the key to economic recovery is startups.

In a four-part series tracking the impact of COVID-19 on global startup funding, they make a compelling case.

Part Four shows how, with a sequence of graphs and statistics, most of the net new jobs in the economy are created by startups and they are “especially more relevant now as our society becomes increasingly digital”.         

In Part Two, Startup Genome points out that the world’s transition to a digital economy means that tech startups and their ecosystems have increased in importance. Jobs that tech startups create are “more sustainable, because they are better adapted to our economic future.”

Before COVID-19, the global startup economy was booming. In 2019, it was “valued at USD 2.8 trillion and growing over 10% per year, about three to four times faster than the rest of our economies.”

COVID-19 accelerated digital transformation. In some cases, digitalization of business operations happened almost overnight, as businesses readjusted to cope with new measures and changing consumer behaviors.

Forced to overcome obstacles such as bureaucracy and an unwillingness to disrupt existing work processes, many businesses focused on the future with an openness to try new technologies, sparking a new mindset. We should recognize this unique opportunity as a chance for digital professionals to try all manner of tactical ideas without fear of failure.

Job creators vs. job destroyers

The last crisis in 2008 saw startups contributing heartily to the economic recovery, where employment in the IT industry grew while job creation in the overall economy was negative. Over 50 tech unicorns, jointly valued at USD 145.2 billion, were founded during the 2007-2009 recession years.

Copyright: Startup Genome

The last two recessions show that there is a huge drop in global VC investments, which when projected to our current context, was “the equivalent of a decline of up to USD 86.4 billion.” Furthermore, recovery to pre-contraction levels took one to three years. With technology IPOs, the recovery is even slower, following 90% drops after the last two recessions. Tech IPOs in the U.S. have not yet recovered to pre-recession levels even in 2019, still 55.3% lower than in 2007.           

The report observes that new and young firms are the main net job creators in the economy, and older firms are net job destroyers — especially true during recessions. With the recent high unemployment rates, Startup Genome insists that the “economy needs startups now even more than usual.”

Danger in startup deaths

A Startup Genome global survey reveals that 65% of all companies have less than six-months’ worth of cash and 74% of startups have had to let go of their full-time employees.

JF Gaultier, Startup Genome founder and chief executive officer, and Arnobio Morelix, the company’s chief innovation officer caution that “we are at a risk of a mass extinction event for tech startups.”

“Governments need to act now to support these companies so that their ​digital innovation and economic recovery capabilities are not decimated​,” warn Gauthier and Morelix. “This is especially true for emerging ecosystems — those without the decades of experience and capital pool in places like Silicon Valley.”

Citing cost-benefit policy investments in startups, Startup Genome urges governments to inject six months’ worth of cash into tech startups. “The sum of exits — a proxy for economic value — was USD 322 million for a typical sample of 10 U.S. Series A startups funded in 2006 or 2007.”

An Unprecedented Opportunity

Since the onset of the crisis in December 2019, global VC funding has dropped by 20%.

And yet, the current milieu actually presents us with an unprecedented opportunity to redefine robust economic strategies and implement new programs that can drive lasting change. Compared with traditional business models, “96% of startups can continue working during lockdowns, even if there is significant disruption.”

According to Gauthier and Morelix, every crisis creates opportunities: “For instance, over half of Fortune 500 companies started during a contraction, and over 50 unicorns were created in the Great Recession alone, as Startup Genome data shows. The COVID-19 crisis is no different: 12% of startups have seen their revenue grow by 10% or more since the beginning of the crisis, and 1 out of every 10 startups are in industries actually experiencing growth.”

Closing the jobs gap

Startup Genome advocates a series of steps for policymakers. They include increasing capital in the hands of angels and Series A funds by about 100% and saving 80 to 90% of existing VC-backed startups, especially those at Series A and B, amongst others.

As we transit to a digital economy, traditional job losses will increase. With digital transformation expedited by the current crisis, the role of tech startups will only become more important. If governments do not step up to support the global startup economy, the labor market devastation caused by the carnage of COVID-19 will leave behind a jobs gap that is impossibly difficult to close — especially when there are few startups to create the jobs.

So, will the startup boom peter out as funds run dry and governments focus on protecting their incumbent enterprises? We will know soon.

Photo credit: iStockphoto/Snowshill