Covid-19 is an unprecedented challenge for all businesses. For startups at the most vulnerable phase of their development, however, it is a potential existential crisis. Despite this, government aid during the crisis has often neglected startups, favouring incumbents and national champions. This is a mistake: startups are the biggest job creators in Europe, and the greatest hope for a fast economic recovery.
It is vitally important that the startup ecosystem not only survives but prospers, both during and after this crisis. Startups are the lifeblood of a competitive economy: they challenge incumbent companies, offer new and diverse employment opportunities and give consumers choice.
As startups face a collapse in demand and funding, governments must act to safeguard the startup ecosystem. Without adequate support in the form of financial aid packages and startup-friendly legislation, governments risk smothering the very engines of Europe’s economic recovery.
Driving the recovery
Startups have always embodied the dictum ‘never waste an economic crisis’. Over half of all Fortune 500 companies were founded during a downturn, and more than 50 unicorns were founded in the recession following the Great Financial Crisis. Innovative startups drive economic recovery and create employment.
The current crisis has been catastrophic for people and businesses around the world, yet it also presents significant opportunities for startups. Over 3.9 billion people have been quarantined in 2020. As a result, digital sectors have exponentially grown in the same period. Telework and video conference platforms have more than tripled, e-commerce and food delivery have doubled in size. Gaming, delivery, e-sport and ed-tech have also all experienced exponential growth during the Covid-19 crisis.
Startups have also been at the forefront of helping to solve the problems created by the pandemic, and promise to play a significant role in the development of vaccines and tracking apps that will help economies return to normal. For example, Italian biotech startup Takis Biotech has pivoted from developing cancer treatments to working on a COVID-19 vaccine. Velmio, a startup developing a pregnancy health app in Estonia, pivoted to use its technology to develop a COVID-19 tracing solution.
According to a recent study 18% of startups have done a pivot into a new area since the start of the crisis. These are living examples of the flexibility that startups have demonstrated in the face of the crisis.
However, for startups to drive the economic recovery, the ecosystem needs to be nurtured through the current downturn. Whilst other sectors have received government funding, startups have been excluded from many government schemes. Many startups report significant difficulties in accessing any crisis funding at all. In Germany, for example, none of a €2 billion package of industrial support has gone to startups. Given the amount of government spending which is now going into shoring up industries around the world, it all risks failure if the startup ecosystem collapses. This concern was highlighted in a recent letter sent by startup communities to Commissioner Vestager.
As government spending and involvement in the market increases, (the EU proposal of a potential €750 billion recovery package is one example), the risk is that governments will pick industrial champions to nurture and protect from competition without appreciating the damage this can do to startups trying to get into the same market.
At the same time, there is also a focus on new and potentially sweeping horizontal legislation in Europe on Artificial Intelligence and Digital Services which if not introduced carefully, will significantly undermine the startup ecosystem.
These pressures present a potential perfect storm for the startup ecosystem. The triple threats of Covid-19 drying up funding and consumer demand, governments picking industrial champions to protect and legislation which threatens to smother the startup business model are each troubling in their own right. Together they pose a potential existential crisis for the sector.
Making their voices heard
As we emerge from the lockdown, startups will be the biggest job creators in Europe. Now is the moment for the startup community to ensure that its voice is heard in the corridors of power, to get the support these businesses need.
This is why Allied For Startups (AFS) is launching a new High Level Advisory Board, to amplify this voice and ensure that governments hear. The Advisory Board will help AFS to better understand the regulatory and business challenges and to be better placed to advocate for startup-friendly policies. This group will play a major role in ensuring that startups are not an afterthought as governments rethink their approach to the economy.
Startups can rebuild our economies, if only governments let them. Smart policy to support startups will benefit the startup community of course, but it will also benefit consumers, who now more than ever rely on the solutions that innovative startups provide. But more importantly again, policies friendly to startups offer our struggling economies a model for growth that we desperately need. We would be foolish not to grasp it with both hands.