Understanding the Full Effects of Covid-19 on the Startup Eco-System

The global startup economy was responsible for bringing in approximately $3 trillion in revenue between 2016 and 2018. However new studies show that billions of dollars have been lost during the global crisis of COVID-19. According to a report by the startup Genome, venture investing fell by a significant 50% in China one of the world’s leading hubs for startups. The trend suggests that if the decline continues $28 billion in startup investment will go missing globally this year. 

A startup is a young company founded by one or more entrepreneurs to develop a unique product or service to deliver to the market. The eco-system is formed by startups in their various stages interacting as a system to create new startups. The eco-system is established in three stages which are; Formation which requires devising mission, vision, and strategy. Validation which necessitates a lean startup and Growth that comprises scaling up. Startups in their genesis are tasked with raising a substantial amount of capital through investment to further develop their product for the market.

Like all facets of the economy, the startup ecosystem has been severely hit as a result of the pandemic causing a lot of changes in the way it functions. Some of the effects brought about by the crisis are explained below.

Most startups have had to renegotiate their workspace contracts. Co-working is one of the most fundamental aspects of startups which requires that all employees work within the same area to maximize output and efficiency. However, because of the social distancing measures that have been implemented over 60% of startup firms have either had to renegotiate or cancel their workspace contracts because people are unable to leave their homes to go to work.

Prospective capital has been lost due to investors pulling out due to all the uncertainty in the economy. 41% of startups are threatened by the “red zone” meaning that they have less than three months’ worth of capital liquidity left. Before this many of the startups were already in a fix economically and the current situation has made things worse.  Investors are selling startup stocks at discounted prices to retain some of the venture capital that was invested. 

The effects of covid on startups

According to JF Gauthier and Arnobio Morelix, authors of the Startup Genome Report, the crisis has hurt startups that were in the middle of fundraising capital. Venture-backed startups however only represent a fraction of what constitutes an enormous ecosystem. Tech startups that rely on cash flow rather than venture capital are in trouble because business is not being carried out and the liquidity required to keep the business sustainable has dried up.

Aggressive cost reduction has caused many startups to let go of their employees. To acquire new customers startups spend large sums on marketing budgets most of which have been slashed to cut back on costs. 74% of startups have had to terminate contracts of full-time employees to balance the books a significantly downgrade costs. According to the data collected from the Roger Lee Retirement Plan Provider, over 204 startups have had to let go of 16,299 people to stay afloat during the crisis.

Sharp declines in revenue have been recorded. 16% of the startups according to the report have experienced declines in their revenues by over 80%. Startups have been finding it extremely difficult to get their products to their customers because of all the restrictions that have been put in place. This has caused businesses to significantly drop thus leading drastic drops in revenues recorded. However, a small minority of startups have experienced bursts of growth during this period. Studies have shown that 12% of startup businesses have been recording exponential increments in revenue during the first quarter of the year which shows that every crisis creates opportunities. 

Netflix has seen a 28% increase in the revenue.
Netflix, a streaming giant, has seen a 28% increase in revenue.

The improvement and decline in revenue have been unevenly distributed due to the two business models, B2C (Business to Consumer) and B2B (Business to Business). The B2C models where services are given to the consumer have experienced revenue growth while B2B models have shown a decline. For instance, Netflix reported a 28% increase in revenue while Shell recorded loses in the excess of 20$ billion.

The value of the startup economy to the economic ecosystem is unprecedented and cannot be ignored thus certain methods have been implemented to ensure that startups survive the ongoing economic crisis.

Tax breaks and loan guarantees have been provided to alleviate the overwhelming costs and preserve business liquidity. The low-interest-rate environment that has helped funnel money into venture funds has allowed companies to survive on debt and leverage.

Payroll supplementation policies are being made to support the employees of the various in the U.S, the New Business Preservation Act has been introduced to try and evenly distribute venture capital around the country.

Financial experts have advised startups to forego expanding into new markets and instead focus on customer retention.

Barriers to fluid labor markets are being removed such as occupational licensing and non-compete agreements. Such barriers hinder business recovery which will be required after the pandemic seizes.

In conclusion, the truth is that normalcy will return. Social distancing measures will abate and routines will resume however at differing speeds. It is paramount that the startup economy is shielded and protected from the consequences of the current global crisis so that in the end it acts as an avenue through which the world’s economies can be revived.

The writer is a legal scholar at Makerere University Law School.





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