Startups with scaling ambitions dashed amid plummeting venture capital funding opportunities due to coronavirus, could re-emerge into significant growth opportunities if they can ride out the immediate economic downturn.
That’s according to RMIT global business and digital strategy specialist, Geoffrey Mann, who says riding out the tough economic times ahead without capital will be the greatest challenge for most startups.
“I know it’s very difficult and a lot of startups only have a short runway and rely on capital and investment to keep going, but if you do come out of this, then that’s an incredible story to tell and potentially an opportunity to grow as well, because when we do come out of this a lot of parts of the economy will have been wiped, a lot of industries destroyed,” he says.
“So it could be startups’ role to restart the economy again, getting people out there, spending money on goods and services.”
Mann says that’s especially the case for tech startups, which have seen their market relevancy surge amid the coronavirus shutdowns – in areas such as remote management and communication software, as well as online education and telehealth.
It’s a voice of encouragement in an otherwise bleak global outlook for startups looking to scale.
Seed-stage funding is projected to decline 22 per cent in this quarter globally, compared to the same period last year, according to CB Insights.
While more broadly, global private market funding this quarter is on pace to drop more than 16 per cent compared to the last quarter of 2019.
The decline in available capital is tipped to be especially pronounced in Asia, where private market funding is expected to fall 35 per cent this quarter from last year’s fourth quarter.
More locally in Australia, Mann points to early stage venture funds struggling to attract investors to high-growth potential, but risky startups.
“Angel investment is going to be the hardest to get right now, they usually take big punts on startups, but because of the current economy they are not as interested in the high risk.”
“Australian, M8 Ventures was supposed to have a $10 million first round coming up soon, but they had to put it to sleep, because of the economy.
“They’re saying it’s hard to predict what’s going to happen and it’s hard for them to put investors in the uncertain space as well.”
However Mann says latter stage A, B and C funding rounds will be impacted less than early stage seed funding, especially for startups already achieving revenue.
“There’s a lot of market information coming out saying the funding will still be there, but not to the same level, if the company is able to be seen as profitable throughout this time and the risk looks like it’s becoming more de-risked then investors will still look at those startups,” he says.
“The first thing VCs are doing is looking in their current portfolio, and saying can my current portfolio survive this.
“Once their current portfolio is under control, I think potentially they’ll be looking at adding more startups and supporting them.”
Longer term VC trends
As the immediate health crisis recedes, efforts to kick start economies are likely to provide significant opportunities for well placed startups, Mann says.
“There’s been a big push for governments around the world to support startups,” he says.
“Successful startups can grow and hire a lot of people really fast through their growth stage, especially important when the unemployment rate is so high.
“I know the Australian Government is supporting startups to an extent, but there’s a push for further support – tax breaks are a good start, but maybe looking at further subsidies or further grants as well.”
And in the longer term, Mann points to growth opportunities that came out of 2008’s global financial crisis as sign of the potential that may reside in this current crisis.
“A lot of people are questioning will we just go back to normal, or will there be a hybrid where people might work from home for two days a week and then go into the office three days a week.
“And if that is true, then online programming, online management software, online education, telehealth startups have a real opportunity to grow.
“Post GFC, a lot of successful companies were created, that includes WhatsApp, Groupon, Instagram, Uber, Pinterest and Slack.
“During challenging times, solutions can grow to massive scales.”