The wider economy might be hurting, but some start-ups are attracting investment despite the economic downturn, especially those offering technology that allows society and business to maintain everyday activity.
The start of the pandemic in late December 2019 led to an investment crisis that saw Chinese venture capital deals fall 50 to 57 per cent in the first two months of the year relative to the rest of the world. Since then, the disease has travelled round the globe, causing significant economic harm alongside the major health crisis, in its wake.
If investment and deal levels drop to a similar extent globally, even for just two months, approximately $28bn in start-up investment will disappear during 2020 according to a new report by Startup Genome and Pitchbook.
In 2019, the “global start-up economy” was estimated to have delivered almost $3 trillion in economic value between 2016 and 2018, but an investment slump created by the coronavirus could lead to billions of dollars of that value leaking away.
To understand the impact of COVID-19 on the early-stage investment climate so far, 500 Startups, an early-stage venture fund, surveyed seed and early-stage investors to identify the effects on the pandemic on the start-up ecosystem. Of those surveyed, 68% said the pandemic would negatively affect their investments while 63% expect COVID-19 to impact early-stage investing for up to two years.
This potential fall of investment has major ramifications for wider economies as start-ups backed by venture-capitalists often have large multiplier effects. High-tech companies can create up to four or five jobs from every original role, and they are also key drivers of innovation. Therefore, if venture capital investment in start-ups shrinks, the wider economy will shrink also.
Yet venture-backed start-ups represent only a fraction of the ecosystem. For others, the consequences of the coronavirus downturn are more serious. For example, start-ups in the midst of fundraising are likely to be dealt a “fatal” blow according to the Startup Genome report, as slowing activity causes cash flow issues, or stunted growth.
To protect the start-up ecosystem against the full force of the economic turmoil created by the pandemic, analysts recommend start-ups examine operating costs for possible reductions, forego expansion into new markets and instead maintain focus on customer retention. But even with these measures, the sector is feeling the pain. According to data from Human Interest, a total of 204 US start-ups made 16,229 employees redundant between March 11 and April 8.
However, despite these worrying figures, green shoots of investor interest seem to be appearing in sectors that help address COVID-19 effects.
According to data provider Preqin Ltd, $21bn of venture capital was raised during Q1 2020 as investors sought early-stage deals in areas where the coronavirus has created heightened demand. For instance, venture capital funding for telemedicine companies surged in the first quarter of 2020 to $788mn, more than triple the $220mn telemedicine companies raised in the first quarter of 2019, while start-ups focused on remote work solutions saw a 42% rise in investment during the same period. Increased demand for robotic solutions, autonomous driving, and advanced supply chain technology that delivers efficiency without the requirement of human-to-human contact has also lifted, signalling a shift in the economy that has ignited an investment trend that is set to continue.
Consequently, if actors within the start-up ecosystem can be agile and offer innovative solutions to the new world post-pandemic, they are set to thrive. For instance, when tracking fundraising deals in China that happened during the outbreak period, there were clear investment trends in robotics, education technology, supply chain logistics and frontier technologies. These deals included a 100 million Yuan ($14.1mn) series B fund raising for Narwal Robotics, a maker of autonomous cleaning robots, and in Shanghai-based Encoo, which specialises in robotic process automation (RPA) to automate a wide range of business processes to optimise efficiency, attracted 211.6 million yuan ($30mn) in series B funding deal that closed on March 16.
In addition, the COVID-19 pandemic has led to a surge in investment in educational institutions as the world was forced to rapidly pivot to online instruction. Indeed, at the end of March, Yuanfudao - a start-up set up in 2012 with 400 million users - set a record for the largest fundraising deal in edtech raising 7 billion Yuan ($1bn).
The trend of investment in start-ups that suit the new socially distanced world is now being mirrored outside of China. For example, Swiss start-up Komed Health’s platform, custom-built for hospitals, to improve productivity, increase patient satisfaction and drive more efficient use of the existing infrastructure, has so far received a funding of EUR 2mn. Meanwhile, Swedish start-up Mavenoid’s troubleshooting platform that enables companies to digitise and automate basic customer support services to maintain high quality customer service, raised almost $10mn during March. The company says the new capital will be used to invest further in product development and to fuel international expansion, including tripling the size of the team size over the next 12 months.
In Germany, Munich-based start-up IDEE secured funding from QuarterMoore on the back of its coronavirus prevention application. The cybersecurity company provides identity verification solutions using blockchain technology and public key cryptography to reduce the spread of the coronavirus by sharing and updating health statuses.
The trend of continued venture capital and private investment to support the start-up ecosystem during the pandemic has led governments to join the cause. In France, for example, the government is looking to help companies that were in the middle of raising a round of financing, whilst in Germany, the government is compiling a strategy to help start-ups survive. In addition, the United States’ New Business Preservation Act recently introduced into the U.S. Senate, was designed to help distribute venture capital around the country, due to awareness that start-ups outside of established tech hubs like San Francisco will also need help.
Although the coronavirus has claimed many lives and created an unprecedented economic shock around the world, things will eventually normalise. Indeed, such a significant event is likely to realign priorities in every way, which could lead to entirely new industries emerging. For example, over 50 tech unicorns founded during the recessionary years of 2007-09 and over half the companies on the Fortune 500 were founded during a recession or bear market. Therefore, while many start-ups feel the pain of the pandemic, if they are able to realign their offering to highlight their relevance in a COVID-19 world, investment, growth and success may still come their way.
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