Investment in Progress

COVID-19’s Impact on Startup Investments

Repercussions from the financial strain caused by COVID-19 are still being felt across the globe. When news of the pandemic finally made the front page, uncertainty rose—and this is not a feeling that most investors welcome.

To offset potential losses, they liquidated their holdings while some turned to safe haven assets, like gold. A breakdown by FXCM shows the resulting volatility of the equities market in detail, which says a lot about how investors tend to think and react during a time of uncertainty. In a nutshell, they sell their assets and hold off on making any more investments.

Why Startups Are Affected

The thought of funding sources drying up is a scary one for startups. Without investors willing to pour in financial support to hopeful entrepreneurs, how will startups ever get off the ground? Bootstrapping and raising money from family and friends can only take you so far in the competitive world of startups. Many could be considered high risk, especially those that suffered from significant drops in demand amidst the pandemic.

That’s why venture capital firms in particular are being more selective than ever and shifting their focus from growth potential to profitability in a time of crisis. Unlike angel investors, VCs are primarily interested in business ventures poised to generate large profits in the future, as it means healthy returns for investors. But in the current context, startups with promising growth potential could face steep hurdles in acquiring funding now. That is, if their profitability during the pandemic is strained. It’s also why AAIA President Hansi Hansmann noted that pre-revenue startups could provide a better investment opportunity. Because they’re still at the early stages of the startup lifecycle, the risk is not as high as startups who have already launched in the market.

With their profitability at a precarious stage, startups need financial support now more than ever. A survey by LocalGlobe and Dealroom reveals that 43% of European startups have stopped hiring, 28% reduced their hiring, and 17% committed to laying off 10% of their staff. The pandemic also forced cultural adjustments, as many organizations shifted to a remote work setup or significantly reduced their office space. To help startups out, the Austrian government responded with its own COVID-19 package for startups, which consists of a Startup Support Fund and guarantees for VC funds. A €50 million budget is available for the Startup Support Fund, which innovative companies that have been founded within the past five years are eligible to apply for. The VC fund also has a €50 million budget and its chosen applicants can receive financing from €200,000 up to €1 million. Though the situation is far from ideal, the government and private backers are giving their support to startups throughout the crisis.

European Startup Funding is Rebounding

After a slow start, funding in the European startup scene eventually picked up. Overall, Crunchbase News reported that VC funding decreased by 17% for the first three quarters of 2020 since 2019, which was saw the most overall funding over the last decade. However, Q3 in 2020 also showed very strong funding results, particularly in September when it reached $10 billion. Even more impressive is the fact that 20 European companies were able to raise rounds surpassing $100 million in Q3, 2020. These include Klarna, Karma Kitchen, Synk, Mirakl, and Mollie. Vienna’s own investment and trading platform Bitpanda raised $52 million, the largest in Europe’s series A funding round of the year.

Unsurprisingly, the biggest winner of the EU startup scene is tech. While startups in the travel and hospitality industries were folding, tech startups were even reaching unicorn status. Hopin, a virtual conference software, is among the European startups worth more than $1 billion within their first year. European tech is robust right now, and it’s attracting even non-European investors, says VC firm Atomico. More than 550 US-based investors now participate in VC funds on the continent, while nearly a quarter of EU startups have at least one backer from the US or Asia.

What to Expect in 2021

Things are looking up for the European startup market, particularly for tech-based startups. Experts predict that tech will continue to boom and more startups will acquire the coveted unicorn status, on pace with US-based tech startups. It’s fair to say that the COVID-19 pandemic has upended almost every sector and startups are no exception. But startups that are on track to make a profit, all the while maximizing their growth potential, are slowly regaining the confidence of investors. And with the AAIA pushing for a renewal of the Startup Support Fund, things are looking up for new entrepreneurs.

In addition, one can also expect the startup scene to become increasingly digitalized. A direct effect of the pandemic, the digital shift may have been done out of necessity, but it appears that it’s here to stay. There will be more remote and adaptable teams, as well as focus on cybersecurity and data ethics. Startups who adopt these practices will also provide them with an advantage over the competition, especially now that people are spending more and more time online.

Finally, now that COVID vaccines are available, the global economy is on the road to stabilizing. This means investors will be more likely to support businesses again. As such, if vaccine distribution goes smoothly, startups have a lot to look forward to this year.

by Risa Jane