This is what COVID-19 did to start-ups in China

As our world is shaken in the most dramatic way imaginable, it is time for our global startup community to get closer, support and learn from each other. Some of us remember the crash of 1987 and the dotcom bubble bursting in 2000, in addition to the 2007 financial crisis. Not only is its human impact horrible, but the current economic crisis is more sudden and could easily end up being worse – unless a couple of promising drugs that hospitals started administering this week end up being very effective.

In order for our startups to survive, it is important to understand what is happening elsewhere and the successive shockwaves hitting regions ahead of us; and to identify the public policy and private actions that are having a positive impact.

Let’s first look at ground zero of the crisis and learn from the Chinese experience as a baseline for what can happen in the rest of the world.

China’s industrial output already dropped 13.5% in January and February while retail sales decreased by 20.5% year-on-year. Because venture capitalists (VC) invest on medium and long-term potential, the impact was much more acute.

Chinese VC deals have contracted between 50 and 57 percentage points since the onset of the crisis. If a drop like that happens globally, even for just two months, approximately $28 billion in startup investment will go missing in 2020, with a dramatic impact on startups.

When we break down the numbers by region, we see that China saw the biggest drop in funding, followed by the rest of Asia. This is not surprising considering the importance of Chinese capital throughout Asia’s startup ecosystems.

This drop in VC deals is not seasonal and it is not due to the Chinese New Year. The previous three years show an equal or higher number of deals in January, compared with December.

Of course, the changes in numbers may not only be due to the COVID-19 pandemic. Data on startups is never perfect and what we present here is no exception: for example, funding rounds can take a while to show up in funding databases. To address that issue we focused on Series A and later rounds, which have shorter delays in reporting – unlike Seed rounds. The trends we report here are supported by our partners and friends on the ground.

If a drop similar to what we have seen in China happens globally, approximately $28 billion in startup investment will go missing in 2020, with a dramatic impact on startups. Many startups will be unable to raise a new round of funding. The first to run out of cash will be those who had started to fundraise in the last few months, nearing the end of their runway before the crash.

It is difficult to assess the proportion of startups that will fail, but with startups needing to raise money every 12 to 18 months with 3 to 6 months’ worth of cash at closing, a 6-month drought in VC deals could wipe out a large portion of startups – and worse if we consider the potentially fatal direct and indirect blow to one’s business model and operations (e.g. reduction in customer purchasing power, disappearing suppliers, etc).

How ecosystems can act

Considering this scenario and the fact that startups have become the number one engine of job creation in our modern economies, it is imperative for governments and business leaders to learn what can be done from each other and act in a concerted fashion.

It is also important to remember that while startup failures will increase, such a crisis also radically opens up the competitive landscape to those who can weather the storm. For this reason and, as our friend Dane Stangler wrote, about half of Fortune 500 companies started during a recession or bear market.

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