4 ways governments can support start-ups and save their economies

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Marc Penzel, Founder and President, Startup Genome & JF Gauthier, Founder and CEO, Startup Genome

Without startups like Zoom, WhatsApp, and Slack, the world would probably be less productive today, or worse, lonelier. Thanks to the technology these companies created – all founded shortly after the Great Recession of 2008 – we are able to stay in touch with family, friends, and co-workers despite being sequestered at home. Legislators can still work during the pandemic, and the global economy, while anemic, is trudging along.

As all this shows, entrepreneurs and the companies they build are essential to revitalize our economies—which is why government leaders must take action to protect them.

The current crisis has put start-ups and start-up ecosystems everywhere in mortal danger. They are running out of cash and watching venture capital dry out. Teams working on cutting edge technology are being disbanded, and customer demand is waning, in part because COVID-19 has rendered entire industries inoperable.

Decisive policy action is needed to avoid a catastrophe; 61% of start-ups globally are counting on it. If they are not already expecting that an existing policy will vitally support their business (45%), they are expecting that one will launch very soon (16%).

Government leaders: You have spent far too much time and invested far too many resources into your start-up ecosystem to watch COVID-19 destroy it. Don’t kill your start-ups and scale-ups, instead listen carefully to their needs and act firmly.

Here are the top four policy actions they require from you today, ranked in order of priority.

Direct grants and zero-interest loans

Cash is the number one concern for start-ups right now. Grants are considered the most helpful policy instrument they could ask for (29%), followed by loans (12%).

Money is running out. A significant number of start-ups are in what we call the “red zone,” with 41% having three months or less of cash runway left. Many young start-ups live with only a few months of cash at a time – 29% were in this situation pre-pandemic – but since December, the crisis has landed 40% more in this precarious state. Even start-ups that have raised Series A, B, or later rounds are at risk, with 34% having less than six months of runway left.

In Japan, the government is backing zero-interest unsecured loans for businesses that lost more than half of their annual sales to the coronavirus. Australia’s $500 million Business Support Fund offers $10,000 grants. Other initiatives focus on reducing overhead expenses and allow businesses to extend their runway. Examples include the US, which granted a three-month extension on tax payments, South Korea’s reduction in corporate income taxes of up to 60%, and Bahrain’s three-month rent waiver for tenants in state-owned properties.

Access to venture capital investment

If history is any indication, venture capital activity is bound to decrease in 2020. This presents a dilemma for the 18% of start-ups that need access to financing tools to boost investment.

Investors are backing out of deals. Nearly 20% of start-ups that had a term sheet before the pandemic have since had it pulled by the investor. Meanwhile, 53% of start-ups are experiencing a slower fundraising process or grappling with an unresponsive lead investor. Less than a third of start-ups (28%) have continued the process normally or already secured the funds.

In order not to create inefficiencies or unintended consequences, the government should inject venture capital using the same instrument as the private market. Taiwan for example offers start-ups six to 12 months of funding in exchange for preferred stock. The Malaysia Digital Economy Corporation (MDEC) teamed up with a networking platform and a venture capital firm to match Malaysian start-ups with suitable investors. The programme, which closed applications in April, attracted over 50 investors.

Employment support schemes

COVID-19 has affected workforces worldwide. In April, the United States lost a record 20.5 million jobs, the fastest and sharpest drop since the government began tracking the data. Under these circumstances, it’s no wonder that 17% of start-ups rank immediate support to protect employees as one of their top priorities.

Layoffs are mounting. Nearly three out of four start-ups have had to let go of employees, according to our research, with 39% of them having to lay off 20% or more of their staff and two thirds dismissing 60% or more of their full-time workers. North America has the biggest share of companies reducing headcount (84%), followed by Europe (67%) and Asia (59%).

The German programme Kurzarbeit (shorter work-time) allows employers to furlough employees part-time. The workers agree to a reduction in working time and pay, with the government covering up to 67% of an employee’s lost wages for up to 12 months. The scheme has been lauded for its role in Germany’s rapid recovery from the 2008-09 crisis. In Austria, a similar programme covers up to 90% of lost salary.

Promoting customer demand

One in ten founders believe that programmes to create and increase demand are the most helpful policy responses for their business. It makes sense considering consumer spending is down, and the effects are expected to be long-lasting, according to McKinsey & Company.

Three out of every four start-ups work in industries severely affected by the COVID-19 crisis. Although most have experienced a modest decline in revenue, a notable number of companies (16%) have lost more than 80%.

Hire start-ups to help solve agencies’ issues. For example, the Canadian government’s Innovative Solutions Canada (ISC) helps fund innovative start-ups by identifying the needs of government departments and challenging entrepreneurs to address them. It pays companies for their services while allowing them to test their prototypes in the real world.

Save your start-ups and scaleups

Government leaders, take these insights to heart. The global start-up economy, valued at $2.8 trillion in 2019, had been growing more than 10% each year prior to the global pandemic, or about three to four times faster than the rest of our economies. Act decisively, and start-ups will help you save your economy in return.