How the COVID-19 pandemic is starving tech startups worldwide

Many are running out of investment money just as revenues dry up, even as they cut costs. The situation is particularly dire for enterprise-focused startups.

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De an Sun (CC0)

Silicon Valley and other centers of tech startups may have seemed immune from the COVID-19 pandemic, as software developers, marketers, and others already used to working digitally shifted to largely working at home as lockdowns became mandated throughout much of the world a month ago.

But a new survey of the tech startup sector across the globe shows that a high percentage of the industry is poised to starve and go out of business over the coming months as the capital and revenues that sustain them dry up. Startup Genome, a U.S.-based global policy advisory company to tech startups (and governments seeking to support tech startups), surveyed 1,070 startups across 50 countries in March 2020.

On the surface, startups’ operations seem little affected

The pandemic has had a fairly limited effect on tech startups’ operations due to the ability for many employees to work at home, the Startup Genome survey shows.

lockdown operatiional effects - tech startups due to COVID-19 Startup Genome

But in looking a startups’ finances and market conditions, the survey paints a dire picture. Not only are investors pulling back funds — and even canceling the term sheets that represent funding commitments — but whole segments targeted by startups are in serious trouble, meaning the potential market for tech innovations beyond the short term is also at risk.

Enterprise-oriented startups suffer more

The target markets for tech startups have been affected differently by the COVID-19 pandemic, though all have been affected significantly. On a percentage basis, fewer large enterprises have closed due to the pandemic than in other segments. But a higher percentage of enterprises (66%) have been affected significantly — retailers, logistics providers, agriculture and food processors, commercial real estate firms, manufacturers, and medical providers have all had their businesses upended even as they remain in business to some degree. A smaller percentage (10%) of enterprises have been unaffected.

That difference in impact on enterprise-focused startups is reflected in startup revenues. For the 26% of tech startups that have seen revenues rise since the pandemic, consumer-oriented firms are three times more likely to see growth due to the pandemic than enterprise-focused startups. And tech startups focused on larger enterprises versus those focused on small businesses and medium enterprises are struggling the most to get revenue.

Why? Large enterprises are slashing expenses quickly, while locked-down consumers are shifting their consumption patterns toward digital products and services, which benefits tech companies more than other businesses, said Arnobio Morelix, chief innovation officer at Startup Genome.

target market effects - tech startups due to COVID-19 Startup Genome

A PwC report shows that about half of 313 US CFOs surveyed in early April expect to reduce IT costs by cancelling or deferring less-critical projects in 2020 as result of lost income and higher business costs. But more CFOs expect to cut facilities/general expenses (82%), lay off staff and contractors (67%), or reduce operations costs (55%) than expect to reduce IT costs (54%).

Management consulting firm Janco Associates still expects that the U.S. will see IT job growth in 2020; it predicts 95,400 new IT jobs will be created for a total of 3.7 million US IT jobs; that's up from 90,200 new IT jobs created in 2019.

But even if enterprise IT investments remain fairly stable in 2020, tech startups may well find less opportunity from enterprise customers, based on the survey’s conclusions.

Many tech startups don’t have the reserves to survive

Regardless of target market, about two-thirds of tech startups don’t have the capital to survive past September: 10% can’t survive as is past April; 31% can’t survive as is past June; and 24% can’t survive as is past September. Another 21 percent can’t make it intact past March 2021, leaving just 10% with enough reserves to survive beyond a year.

months of runway - tech startups due to COVID-19 Startup Genome

Of the startups surveyed, half had been trying to raise venture capital or other funding before the pandemic hit. A third of those seeking money had either signed or verbally agreed to term sheets. Of those with formal or informal term sheets, a third saw the funding canceled or their funders go silent. Nearly half saw the funding process slow. The cancellations, frozen status, and slowdowns thus affect nearly two-thirds of the startups that were seeking funds, making it harder to survive once their current funding runs out.

Morelix notes that Chinese startups saw their funding decline by more than 50% just in the first two months of the COVID-19 crisis in China, where the active cases skyrocketed and lockdowns were imposed two months before Europe and then North America were struck. When the survey was taken, Europe and North America were in just their first month of the crisis, so the survey may underreport the actual funding declines in those regions.

As funding became more difficult to get, tech startups' income also began to dry up. More than a quarter (26%) lost between 60% and 100% of revenues since the pandemic. But, as noted, another 26% actually saw their revenues rise so far during the pandemic.

change in revenue - tech startups due to COVID-19 Startup Genome

How tech startups are cutting costs

To save money and increase how long they can survive — what venture capitalists call “runway” — startups have begun laying off staff. Only 5% avoided staff reductions. Nearly half of respondents (49%) laid off as much as 20% of staff; another 21% laid off as much as 40% of staff; 14% laid off as much as 60% of staff; and 12% laid off as much as all their staff.

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The cuts weren’t limited to just staffers, of course. Tech startups are looking to cut expenses wherever possible to lengthen their runways. Asian startups have reduced costs less than those in North America and Europe, though they started to cut costs a few weeks earlier, likely due to China’s geographic and business proximity – making the risk more apparent in Asia sooner than elsewhere.

regional expense cuts - tech startups due to COVID-19 Startup Genome

Limited financial lifelines are available

With millions of businesses suffering — and tens of millions, perhaps hundreds of millions, of people in the same boat — tech startups are competing for the same general-relief resources offered to all businesses.

The Startup Genome survey shows that 38% of tech startups have not been helped, and don’t expect to be helped, by government policies. Of those surveyed, 46% say they are getting help now, and another 16% believe they will be helped soon.

If tech startups could get aid, what would they want? The Startup Genome survey says getting financial grants is the top request, at 29%, followed by other means to boost investments (18%), help to protect employees such as with wage support (17%), and loans (12%). In other words, like every other entity affected: they need  money to keep going.

policy support needed - tech startups due to COVID-19 Startup Genome

Copyright © 2020 IDG Communications, Inc.

  
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