Global Startup Ecosystem Report flags risk of mass extinction event for startups globally

• Globally, 4 out of every 10 startups have 3 months or less of capital runway
• Ecosystems need to invest now to not lose progress made in the past 10 years

Not surprisingly, the latest Global Startup Ecosystem Report 2020 by Startup Genome takes a close look at the Covid-19 triggered crisis that is impacting startups. Describing the period up to Dec 2019 “the calm before the storm”, the report highlights that the general outlook was positive with a cumulative of 85 ecosystems having produced unicorns or had billion-dollar exits.

“When we analyzed companies in the Billion-Dollar Club - exits or private companies in technology with over $1 billion in valuation - between 2013-2019, only four ecosystems in 2013 had produced unicorns or billion-dollar exits. Today (in 2019), a cumulative 80+ ecosystems have done so,” the report states, describing this as “astounding”.

Silicon Valley holds the No 1 rank among the Top 30 Global Startup Ecosystems with New York City and London tied at the 2nd place. The Asia-Pacific representatives in the Top 30 include Beijing (#4), Shanghai (#8), Singapore (#17), Bangalore (#26) and Hong Kong (#29).

Four new Asian entrants on the list include R&D powerhouses - Tokyo (#15) and Seoul (#20), and Chinese cities – Shenzhen (the advanced manufacturing hub at #22) and Hangzhou (home to Alibaba at #28). “A major beneficiary of this democratization of tech is the Asia-Pacific region, which has gone from having 20% of top ecosystems in 2012 to 30% of them today.”

Meanwhile, the list of Top 100 Emerging Ecosystems featured Mumbai (#1), Jakarta (#2), Guangzhou (#5) and Kuala Lumpur (#11). By ecosystem value, Jakarta came up top with US$ 26.3 billion, followed by Guangzhou (US$ 19.2 billion) and Kuala Lumpur (US$ 15.3 billion).
 

The post-Covid-19 crisis and the impact on global ecosystems

“If we were publishing this report in December 2019, our reporting on the state of the global startup economy might have stopped there. But the Covid-19-triggered economic crisis has hit — the worst global downturn since 1929 — and the startup economy is being severely affected by it.”

Four out of every 10 startups today are in the Red Zone, meaning three months or less of capital runway. The two main shockwaves sending them reeling are capital shock and demand. “This means that they will collapse if they do not raise additional capital and their revenues and expenses remain unchanged, risking a mass extinction event for startups globally.”

The fundraising process has been dramatically disrupted with 18% of startups with term sheets hit by their funding round cancelled by the investor, while 54% had their funding round delayed or the lead investor become unresponsive.

Furthermore, venture capital funding has dropped by 20% globally in the three months of 2020. Meanwhile, China, the first country hit by the crisis, had funding fall by over 50% relative to the rest of the world as reported by the World Economic Forum.

“If we focus on startups on Series A+ only, we see that 35% have 6 months or fewer of capital – a troublesome figure given how long it takes to raise a Series B or later round, especially in the current environment,” said the report.

On the revenue side, about 72% of startups saw their revenue drop since the beginning of the crisis, with the average startup experiencing a decline of 32%. Only about 12% of companies are experiencing significant growth.

“However, the news is not all gloomy: Every crisis creates opportunities, and this crisis is no different. Over 50 unicorns were created in the Great Recession (2007-2009) alone, as Startup Genome data shows. The list of companies funded during the Great Recession is impressive. It includes Facebook, LinkedIn, Palantir, and Dropbox — all of these based in the Bay Area. This shows the need for funding startups during down periods.”
 

Downstream effects and ecosystem policy

In the founder’s note, JF Gauthier (pic), also CEO of Startup Genome, touched upon a key learning point from its research since 2011 – most startup policies fail. “But only behind closed doors do we tell each other when policies fail. They fail despite the dedication of the local policymakers to do good, because they are defined without learning from the failures and successes of others and without knowing how to adapt those learnings to the local reality.”

In response, Gauthier declares: “It is time. Time to come together as a global community to learn faster and more deeply from each other. From the beginning it has been central to the mission of Startup Genome to build a global knowledge network and offer the best policy advice directly and through peer learning,” he said.

The report highlights how high-performing startup ecosystems like Silicon Valley, New York, London, and Beijing “will continue to produce tremendous innovations and create astounding value” because of the depth of talent, experience and capital that may retract but will remain post-crisis.

But the same does not hold true for emerging ecosystems, where failures now will leave deep scars. “Talent that gets laid-off might make a permanent switch to working for big corporates or move to another city altogether. The same is true for founders who might have to close their businesses. Ecosystems need to invest now to not lose the progress made in the past 10 years,” the report urged.

The report suggests: “The first major goal of governments should be to inject capital quickly to save at least 80% of startups that are at risk of folding in 2020. The second goal should be to inject capital to increase the rate of new seed and Series A investments over the next two years, to ensure these types of investments do not drop as dramatically as they did during the 2008 recession.”

While a survey conducted indicates that 31% of founders would like grants for company liquidity, Startup Genome believes grants are not the most effective way of helping startups due to it being complicated and slow. “They are unlikely to help startups in time, and taxpayers do not receive value for the money — since they bear all the risk and none of the gain.”

Instead, the report suggests the use of equity funding instruments such as convertible notes and guarantees for equity investors to inject new capital that directly benefits existing VC funds. “By only providing a cash runway to half of startups, investors will then be forced to concentrate capital to save top startups and future returns, and will use their own capital if more is needed,” it says, highlighting the U.K.’s Coronavirus Future Fund as “the only example of a well-structured government equity support fund.”