Several European countries started announcing ‘Exit Plans’ from the current lockdowns. But as the world is starting to flatten the curves, the economic impact is just beginning.
Earlier this week the NVCA (North American Venture Capital Association) issued a white paper detailing the impact of the current capital crunch on startups:
- Expect more layoffs (currently over 30,000) according to this layoffs tracker and expected to grow for up to 10%-50% as startups struggle to secure funding
- Dry powder of US funds $120 billion is likely to fall short of demand, as a lot of capital is reserved for follow ons
- Non-traditional startup funding sources (like family offices and corporates) expected to pull back from the market (“likely to follow economic trends in recessions of moving capital from high-risk illiquid assets to lower-risk liquid assets“)
- Less flow of new capital caused by reduced LP commitments, mainly caused by institutional LPs who find themselves over exposed to the private market after pulling back from public equities
- Slow down in IPOs and delay in VC liquidity, which in turn places more demand on dry powder
USA – SBA Loans and PPP
Help is not exactly on the way. The $349 billion aid package issued by the US Government and distributed in the form of SBA loans was quickly gobbled up by a large number of applications, many of which were from venture-backed or PE-backed startups. While Startups are technically eligible, having less than 500 employees and being impacted by the crisis, some of them, as the New York Times reports, didn’t turn to their investors for capital, but rather took a loan (which in some cases can be forgiven and doesn’t have to be repaid for money losing businesses) to buy them time in this crisis.
Unfortunately, this pool of capital quickly dried up, leaving many small businesses empty handed and creating public backlash on how the money was distributed, stating that banks gave concierge treatment to their richest clients (which isn’t surprising). As Bloomberg’s report states, just because you CAN apply, doesn’t mean you SHOULD.
Prominent US VCs advised startups not to apply for SBA loans. As Albert Wenger, Partner at Union Square Ventures, wrote: “there is a money grab going on right now by some venture backed startups that this program absolutely should exclude“. Mark Suster at Upfront Ventures said: “Applying for a government loan that was created to serve US small businesses and employees in the times of an economic crisis is not something you should do just because all of your peers are telling you that you should.“
UK – Future Fund, a £500 million match funding for high-growth companies
As of April 29th lockdown measures are still in place in the UK, and with over 20,000 casualties, Boris Johnson said that the UK is now at a maximum risk point, but concerns of a second waive arise. The UK chancellor announced a £1.25 billion government support package which includes two parts:
- Future Fund – a new £500 million loan scheme (£125,000 to £5,000,000) for high-growth firms, in which the government will provide matched funding to investment raised from private investors
- A £750 million of targeted support for small and medium sized businesses focusing on research and development.
According to the Covid-19 impact report by research firm Beauhurst:
- 5,070 UK companies are at a ‘severe’ or ‘critical’ risk
- 615K startup and scaleup jobs are at risk
- Later stage startups are at the most risk
- Across the board, tech sectors and verticals are the most likely to experience a positive or low impact.
- VoIP, EdTech and eHealth have fared particularly well, with very few companies at risk.
- Proptech is one of the few exceptions to this, with most companies falling within the moderate impact category, due to the current freeze on the property market.
Startups are preparing for tough times ahead and taking measures to extend runway and mitigate the impact of Covid-19. According to a recent survey of 200 startups, conducted by some of the largest UK VC funds, showed mixed results on impact. Sifted conveniently summarised the results:
- 60% have successfully renegotiated their workspace rent or are in the process of doing so
- 43% have stopped online advertising
- 30% of startups have cut salaries across the company by at least 15%
- 49% of respondents have frozen hiring, another 32% have slowed hiring
- 68% of respondents expect full-year revenues to drop more than 25%
Israel – 500M NIS to cash strapped startups
On the health front, there are signs of recovery. Earlier this week, Israel started with an alleviation of the self-quarantine measures that restricted people’s movement to no more than 100 meters from their house. With some confusing guidelines which allowed some businesses to reopen, it looks like next week many more businesses will reopen and low grade K-3 children will go back to school.
The Israeli Innovation Authority (IIA) announced last week an immediate infusion of NIS 500 million (approximately $141 million) to qualifying startups (significant IP, previous funding) and less than 12 months of runway. Startups are able to secure the matched funding up to 3 months from submitting the request. This is part of Israel’s Ministry of Finance NIS 1.2 billion (approximately $340 million) stimulus package to support the country’s struggling tech sector.
According to a survey of 87 startups by Viola Ventures, the majority of startups are taking a ‘wait and see’ approach and continue to work from home, and many will control the number of employees in the office going forward.
Meanwhile in Europe
According to the Q1 European Venture Report by Pitchbook, Q1 2020 still looked strong: the strongest quarter ever in terms of total deal value, €8.2 billion. But venture is a lagging indicator as the deals that were announced in Q1 might have been completed in the months and weeks before Covid-19.
I might go deeper on other European markets in a future post.
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Startups are not immune to the economic impact of Covid-19, but have a number of funding sources at their disposal, which should reduce their dependency on government bailouts. As pointed by Albert Wenger:
many venture backed companies have many months or maybe even more than a year of burn sitting in their bank accounts. Their investors are often deep pocketed funds who should be well reserved for follow on investments. They can get sophisticated financial advice and can access the venture debt market (admittedly not right now but probably again in a couple of months). Many of these businesses operate in the digital realm and have seen limited impact on revenues – some have even seen their revenues explode
VC Backed Startups and PPP: Do You Really Need It?
Many startups won’t survive this, but those that do will come out stronger of this crisis. What seems certain is that depending on the speed of recovery in the US, it might be a marathon, not a sprint, for the UK and Israeli startups to survive this period and they require rethinking the strategy and taking steps to conserve cash and extend runway. As Adam Fisher (Bessemer Israel) recommended:
“You need to change your projections and prepare for a deeper crisis and hope for the best. Put an emphasis on efficiency and don’t assume that at some stage everything will return to be the way it was before”
Israeli Tech Recovery Depends on America’s Ability to Overcome Covid-19
I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.
I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
Nice summary of data from around the world, thanks Eze!