The struggle of start-up businesses against COVID-19

During the COVID-19 crisis many start-ups have continued to play a role that is essential for the economy. Some of them have reacted rapidly and flexibly to the pandemic, and have been instrumental in helping people of many countries to change their modus vivendi within a few short months, whether by offering digital tools for their work, their education, their access to food and to medical services or through innovations in medical supplies and services.

Start-ups are crucial drivers of economic growth and the creation of employment, and are often powerful catalysts of innovation. However, it is also worth noting that although start-ups currently play a key role in the economy, the number of new ones  has been reduced by the COVID-19 crisis, which also threatens the survival of the existing ones or restricts their growth. Registrations of new businesses have decreased significantly in recent months, and the lack of newly created businesses has serious implications for the economy, and for employment in particular.

We analyse, below, the challenges faced by these emerging businesses, and also the business opportunities that could arise, now and in the years to come.

CONVERTING VULNERABILITY INTO ADAPTABILITY

Clearly, most start-ups are facing various serious challenges as a result of the COVID-19 crisis, because they are more vulnerable than many other companies. Their activities tend to be more risky than those of other SMEs (small and medium-sized enterprises);  and, moreover, they are usually heavily dependent on a small team of founding partners, and in a pandemic this increases their vulnerability even more.

At a time like this, so much affected by economic uncertainty, and with incomes affected by confinement and by a big fall in demand, start-ups become even more fragile financially because they need liquidity in the short term, but investors’ enthusiasm is cooling off.

The best response to the vulnerability of these businesses is to protect them with measures aimed at their financial fragility. These should include measures to maintain liquidity in the short term, such as guarantees for loans, direct lending, donations or subsidies.

We must take into account the fact that, as the statistics prove, the world of the entrepreneur is adaptable. There are increasing numbers of start-ups that have more consolidated projects (23% of start-ups are in the growth phase, and this is a high percentage compared with the 20% of last year). This means that each of these projects already has a product that has been validated by returning customers and by positive market metrics. That is why it is necessary to deal with the challenges early on, by supporting liquidity and the availability of financing, but also by serious efforts to develop the ability of emerging companies to take advantage of new business opportunities. It is also important to promote adaptability, improving policies which reduce the number of barriers to the entrepreneurial spirit, providing incentives for business creation and increasing the potential for businesses that can help to accelerate recovery and conserve the new jobs in the long term.

23% of start-ups are in the growth phase, and this is a high percentage compared with the 20% of last year. This means that each of these projects already has a product that has been validated by returning customers and by positive market metrics.

DISSIMILAR SITUATIONS IN EUROPE

France has created a fund of 4,000 million euros to support liquidity during the starting-up phase, including the financing rounds; Germany has announced a programme of personalised help during the starting-up, which extends and facilitates the financing of venture capital; the United Kingdom has announced a “confinement fund” for innovating companies facing financial difficulties. And in Spain? The Government has begun work towards introducing a Law of Start-Ups, for which there is so much demand in this sector. 

Indeed, the most recent information about the crisis from the Spanish Association of Start-Ups is that “the situation has worsened, mainly because of the loss of customers, various problems with investors and their rounds, and also because of the lack of liquidity. Almost half have had to make difficult decisions, such as the decision to reduce their staff”. In fact, more than 60% of them have seen the rounds in which they were involved either cancelled or postponed.

For these reasons we have to regard COVID-19 as a challenge not only for existing start-ups but also for people who wish to create new ones. Nevertheless, we have to remember that a recession is often a period of intensified restructuring which can ultimately lead to a stronger and more resistant economy. Indeed, even when the number of registrations of new companies is generally decreasing, many innovating and successful businesses, including start-ups, appear in periods of crisis. Examples are Dropbox, Uber, Airbnb, WhatsApp, Wallapop and Pinterest, which were founded during or immediately after the last worldwide financial crisis.

Many innovating and successful businesses, including start-ups, appear in periods of crisis. Examples are Dropbox, Uber, Airbnb, WhatsApp, Wallapop and Pinterest, which were founded during or immediately after the last worldwide financial crisis.

A NEW WORLD. NEW MARKETS.

By definition, a start-up is a business model which had two singular and differentiating characteristics: a strong component of innovation and a model for exponential growth. These can be, and are, great allies in these present times. Everything is a matter of perspective. Periods of crisis are not only challenging, they also provide entrepreneurs with new opportunities, because emerging businesses can help to confront the new limitations created by the difficult circumstances for health and the economy. We give, below, some examples that are relevant to the COVID-19 period.

First, there are opportunities for start-ups which introduce (or improve) radical innovations which can be, and have been, useful in the short term. Today, examples could be innovations such as videoconsultations in ‘telemedicine’, remote personal care, the delivery of products to one’s home, the processing of food products, ‘teleworking’,  on-line education or the tracing of contacts. In fact, support has been provided so that emerging businesses can satisfy these short-term needs through specific political interventions, including a call from the European Commission for start-ups whose technology can be applied to the treatment, testing, monitoring or other aspects of COVID-19 outbreaks.

Secondly, and most importantly, this pandemic has already caused lasting changes in society, consumers’ habits and needs which represent valuable business opportunities for emerging businesses which can anticipate these changes. For example, the demand for teleworking, e-commerce, education and healthcare services will all change in the short-to-medium term, and cities will end up transforming themselves.

This pandemic has already caused lasting changes in society, consumers’ habits and needs which represent valuable business opportunities for emerging businesses which can anticipate these changes.

Owing to the needs arising as a result of the coronavirus, according to the Mapa del Emprendimiento 2020 (the 2020 Map of Entrepreneurship), of Spain Start-up, organised by South Summit, the following trends will predominate this year: fintech (finances), eHealth (health) and edtech (education), being the three strongest industries, and being at the top of the ranking. In a way, the COVID-19 crisis has served as an accelerator and incubator for start-ups worldwide, because in the space of a few months it has driven forward projects which have had strong impacts on society, employment, medicine and the environment.

CONCLUSIONS

1. Dealing with short-term financing.

Satisfying the short-term financial needs of existing and newly created start-ups (for example, with guarantees for loans, direct lending, grants or subsidies),and helping to assure employment. In this way, and supported by a good programme of fiscal incentives, we ensure that financing will continue to be available from investors, ‘business angels’ and funds, at all stages of their development.

• Reducing the number of barriers to the entrepreneurial spirit.

Minimizing the administrative burdens on start-ups by implementing much simpler procedures. It is important to reduce bureaucracy to make it easier to create and develop this kind of business, and to receive national and foreign investment.

• Increasing the potential for businesses.

Promoting business training and continuous learning to facilitate the transition from (un)employment to entrepreneur. In addition, to maintain the investments in the ecosystem, to ensure, in particular, that the business incubators and accelerators continue to perform this important function in the medium term.

The COVID crisis has brought many things to light. Among them are the need to progress in the boosting of entrepreneurial projects and in making the world a place where it is easier to create start-ups, to make them grow and consolidate, and to make them capable of competing on equal terms with the big names in the economy. Today, many of them are certainly struggling to keep their activities going. That is why it should be natural for entrepreneurs to adapt, commit themselves to innovation, and re-adjust the focuses of their businesses on the needs of the market. And most importantly: eliminate pessimism permanently, and opt for a positive attitude in order to progress. 

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Author: Joan Margarit, Marketing and Communication analyst.

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