Can our startup scene survive Covid-19?

Published on the 16/04/2020 | Written by Jonathan Cotton


Startup scene during Covid19

While elements of the tech sector are in high demand, the startup community wonders where the next round of funding is coming from…

While Covid-19 sweeps the world, there are a few winners emerging in the carnage. Facebook has had a good month; so has the videoconferencing industry (with one exception).

But down at the startup-end of the tech sector, it’s a different story. As investment sharply declines and funds are quickly burnt through, the question on every pair of lips is: Where is the next round of funding coming from?

The impact of the Covid-19 crisis on tech investment is being felt worldwide, and the effect on China has already been significant.

“Covid-19 is a system shock that will place pressure on startups for the next 12-18 months at least.”

“Chinese VC deals have contracted between 50 and 57 percentage points since the onset of the crisis in the first two months of the year, relative to the rest of the world,” says a new report, The Impact of COVID-19 on Global Startup Ecosystems, produced by Startup Genome.

“If a drop like that happens globally, even for just two months, approximately US$28 billion in startup investment will go missing in 2020, with a dramatic impact on companies.

“If the drop in investments continues much further beyond two months and the Covid-19 shocks trigger an economic contraction, we can look at the previous two recessions (2000-2001 and 2007-2009) as historical analogies for the current moment.”

It’s certainly a grim prediction. What does the Covid-19 catastrophe mean for tech startup investment? The New Zealand VC community is doing what it can to keep the flow of money open for high potential start-ups attempting to weather the coronavirus storm.

“The rationale for early stage investment in high growth tech ventures is compelling in good times and bad,” argues Suse Reynolds, chair of the Angel Association.

It’s a time of high emotion, she says, but it’s also the moment to double down on our tech potential – not back away from it.

“New businesses are responsible for almost all net new job growth,” says Reynolds. “AirBnB, Xero, Slack, Vend and Uber were all born out of the GFC. Stay tuned for the next round of these ventures.

“None of us are immune to the emotions of scarcity being whipped up by #Covid-19. It’s frightening, anxiety-generating stuff. But we must work hard not to let emotion override reason and reality. The sun always comes up.

“A well-managed, suitably-sized portfolio may deliver an IRR of 20-30 percent. In an era of low to negative interest rates, this is appealing.”

And the rationale for backing startups goes beyond financial returns, says Reynolds.

“Successful early-stage investors are also motivated by the knowledge they are supporting the creation of businesses that make the world a better place – ameliorating climate change, developing cures for disease, bringing people together, creating new jobs and developing disruptive ways of delivering more sustainable value to people and the planet,” she says.

Early criticism that the New Zealand Government’s Stimulus Package excluded startups – by requiring applicant companies to be trading for more than a year – has now been responded to. The stimulus scheme now includes businesses that ‘have experienced a minimum 30 percent decline in revenue’ when compared to ‘a reasonably equivalent month for a business operating less than a year’, or ‘a high growth business that has experienced a significant increase in revenue’. (View the revised declaration here.)

Nevertheless, such stimulus will only suffice temporarily and as such, it’s tomorrow’s tech leaders who are most vulnerable today.

“Currently it is hard to anticipate the full extent and duration of the Covid-19 pandemic in New Zealand or its impact on the globe in the longer term,” says Greg Shanahan, MD, Technology Investment Network.

“However, as our economy emerges from it, technology exports will likely lead the way. New Zealand has a growing number of large technology businesses that are embedded in major markets providing what are often essential services internationally. These companies are resilient, agile, ambitious and know how to execute.”

Expect the slump to last at least a year, says Rob Vickery, co-founder of Hillfarrance Venture Capital. In the meanwhile, hold on tight to big-picture, he says.

“Covid-19 is a system shock that will have a significant impact on the global financial markets and will place pressure on startups for the next 12-18 months at least,” says Vickery.

“This pressure will manifest itself in the form of longer fundraising cycles, fewer sources of startup capital, reduced valuations and the need to extend their runway and reduce burn.

“This is a time for impactful and thoughtful investment into promising founders that have a bold, long-term vision; a product road-map that has the potential to drive significant value to its customers and a business strategy that is focused on sustainable and profitable growth from the onset.

“I expect that Covid-19 will be the catalyst for the creation of a number of multi-billion dollar companies who are looking for their first brave investor.”

Questions or comments...

  1. Sunita Patel

    We are a startup business and have not had much success in getting help besides the wages subsidy.
    The investor based funder knows that we are a month behind schedule and it is not a tenable situation if we don’t get a cash injection or loan from the the government

    Reply

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