Startup Genome reveals the fragile state of the early stage ecosystem

• 41% of startups globally have three months or less of cash runway left
• Of startups that had a term sheet before the onset of the crisis, nearly 20% have had the term sheet pulled
• Since the beginning of the crisis 74% of startups have had to terminate full-time employees

Data from over 1000 startups in 50 countries

Back in 2011, as we built the early foundations of our advisory business, we were inspired by a landmark study into early stage tech companies. This was the Startup Genome Report, a 68-page in-depth analysis on what makes early-stage startups successful. A subsequent report into premature scaling transformed thinking about startup failure as we later covered in our blog.

Fast forward to today and Startup Genome has become a world-leading innovation policy advisory and research firm, having advised the ecosystem development strategy and action plans for more than 40 governments in the last year. Their latest report, The Impact of COVID-19 on Global Startup Ecosystems: Global Startup Survey, has provided us once again with incredible insight, this time into the state of the startup ecosystem at this perilous time.

These findings are informing the development of our own thinking around funding strategy development amid the Covid crisis and beyond. Here we assess the key findings together with our own perspectives for the way ahead.

The key topic areas assessed in this latest research were Capital, Talent and Jobs, Market, Operations and Management, and Policy. There were 1070 respondents, across every continent and in over 50 countries, and the research was undertaken between March 25h and April 17^th.

Key findings from the research

The full white paper can be downloaded here. The most striking insights, together with our perspectives, are:

1. 41% of startups globally are threatened in what we call “red zone”: they have three months or less of cash runway left. Many very young startups live with only a few months in cash - 29% were in that situation already before the crisis - but the crisis put 40% more of them in that precarious position.

Duet perspective: This is a deeply concerning data point and places more companies in danger than we had previously thought. Looking in more depth at startups that have raised Series A, B, or later rounds, 34% have less than 6 months’ worth of cash and this is inside the time taken to raise new capital even in normal times.

2. Of startups that had a term sheet before the onset of the crisis, nearly 20% have had the term sheet pulled by the investor, and 53% have seen the process slow down significantly or have faced an unresponsive lead investor. Only 28% have either had the process continue normally or secured the funds.

Duet perspective: We generally assume that around half of all startups are somewhere in the funding process at any point in time and the research confirms this. From the data around 17% of these companies already had some form of term sheet – of which 1 in 5 has been cancelled. The UK media is not really picking up on this, which suggests this may be more of a US phenomenon, or UK companies are just not broadcasting their fate.

3. 74% of startups saw their revenues decline since the beginning of the crisis. The most common type of change in revenue is a relatively modest decline. However, a sizable share of companies were very heavily hit: 16% of startups saw their revenue drop by more than 80%.

Duet perspective: It appears that the major reason for the drops in revenue come from the effect of the crisis on industries those startups serve. Three out of every four startups work in industries severely affected by the COVID-19 crisis. The big question for every startup (and their investors) is whether this effect is temporary or whether there is a lasting (structural) change, and this could take months to determine.

4. At the same time, a small minority of companies are actually experiencing growth. 12% of startups have seen their revenue increase by 10 percent or more since the beginning of the crisis, and one out of every 10 startups are in industries actually experiencing growth.

Duet perspective: Every crisis creates opportunities. For well capitalised startups that find their products in demand they can now press the advantage. Should investors come calling they can tell a story of real resilience and the opportunity to double down on their market. For undercapitalised startups (those with anything less than 18 months of runway, and so the majority of this cohort), there is a good story to tell but the race is on to raise new funds.

5. The hurt and the growth are not evenly distributed. On the positive side, B2C startups are about three times more likely to be in industries experiencing growth in the face of the COVID-19 crisis when compared to B2B startups. On the negative side, B2B startups serving Large Enterprise clients are more likely to be in industries adversely affected by the crisis than both B2B startups serving Small and Medium Enterprises and B2C startups; and are the least likely to be experiencing an increase in sales.

Duet perspective: Our earlier impressions from the market were that B2C startups would suffer the most due to a drop in consumer spending, but it is now clear that B2B startups serving Large Enterprise clients will have the toughest times. The effects of Covid have taken longer to trickle down in the big corporates, so the jury is out on how resilient current revenue forecasts will be in the coming weeks.

6. Since the beginning of the crisis 74% of startups have had to terminate full-time employees. North America is the place with the biggest share of companies reducing headcount (84%), followed by Europe (67%) and Asia (59%).

Duet perspective: Startups, certainly at early stage, are lean machines at the best of times, so seeing these levels of reductions is again very worrying. As the research shows, most of the cuts so far have been relatively small - about half of the companies reducing their workforce have laid off 20% or less of their staff.

The argument for Government intervention

This research provides compelling evidence that the global startup ecosystem is in perilous condition. Liquidity remains the overriding concern.

According to Startup Genome, about 60% of founders are receiving assistance or expect government policies to support their businesses directly or indirectly. Over 90% of those startups currently getting aid, or expecting policy help soon, are receiving or looking for support from national governments.

In the UK, much is riding on the prospects for the Future Fund that was announced by the Government last week. This is part of a £1.25 billion coronavirus package to protect firms driving innovation and will be a lifeline for many.

About the author: John Hall is CEO and co-founder of Duet Partners. His 30-year tech career began with major US semiconductor and software companies, and was based in Silicon Valley during the '90's. Before Duet he was CEO of a VC-backed consumer electronics company, sold in 2009 following several rounds of capital raising. In the past 10 years since starting Duet he has advised dozens of founders on the startup to scaleup journey and is a retained Board advisor to a number of UK technology companies.