COVID Crisis and Startups: End of the World or New Opportunities?

In short:

• COVID-19 crisis opens new opportunities for start-ups
• The number of young, innovative, or growth-oriented companies will rise
• The number of VC-affined start-ups remains reasonably stable

If the corona pandemic is already shaking international corporations and entire economies — how can new and unknown startups survive? Do we have to prepare for the end of the global start-up boom? Is it just a fair-weather sport, isn’t it?

“You could come to this conclusion”, says Prof. Nikolaus Franke, scientific director of the Professional MBA Entrepreneurship & Innovation in Vienna, Austria, “But the exact opposite is the case.”

Why times of crisis are particularly suitable for starting a business and why even more people are right now? Let’s explore some of the reasons.

Learn from the history

The COVID-19 pandemic and the efforts to combat it represent one of the most massive shock changes since the end of World War II. We experience it as a dramatic economic crisis and a social and political ordeal: The gross domestic product has fallen, unemployment figures have exploded, the number of bankruptcies is rising steadily and the national debt is getting completely out of hand in many countries. Investors and consumers are unsettled.

You’d think: It’s not a good time to start a business.

But a look back can sometimes be very enlightening. Even in the great financial crisis of 2008, the world seemed to be facing an abyss.

What many of us may not be aware of is that especially in this time of falling stock exchange prices and economic shocks, many extremely successful and innovative companies such as Uber, Airbnb, WhatsApp, Instagram, Pinterest, or Slack were founded.

But why is that? Three specifics of a crisis make it possible:

1. More potential entrepreneurs = more startups

First of all, there are more potential company founders. During the COVID-19 pandemic, savings programs are running in bigger companies. Budgets are frozen. Promising projects are being put on hold. There are also hiring freezes and dismissals of highly qualified workers.

All of this creates a large base of people who see opportunities, who are looking for and sometimes have to look for new opportunities. Successful startups are often founded by people who are suddenly pushed out of their personal comfort zone.

2. The demand shifts = entrepreneurial opportunity

The current pressure to work from home leads to increasing demand for communication media and team platforms. The lockdowns encourage online shopping, delivery services, and entertainment software, among other things. Increased hygiene requirements increase the demand for disinfectants.

At the same time, however, new needs also arise. Masks, rapid COVID-19 tests, and vaccines are examples of this. Increased demand, in turn, creates the scope for innovations and new business opportunities that company founders need.

3. Supply side: sluggish tankers vs. responsive motorboats

Thirdly, the new type of demand meets the supply side, which opens up opportunities for startups. Many existing companies are preoccupied with themselves. They are struggling to survive. Cost reduction programs and restructuring make long-term investments difficult, as innovations are.

In addition, large companies have notorious weaknesses in terms of flexibility and speed of reaction. Even medium-sized companies are often much faster.

The difference between large and small companies is often illustrated by comparing tankers and speedboats. And if medium-sized companies are reminiscent of speedboats in their agility, then startups are like jet skis.

No economic form of organization is even remotely as agile as a small team of founders. Neither bureaucracy nor coordination requirements hold them back. There are no structures established in the past that tenaciously resist change.

If you have an idea in the morning, you will have already taken the first steps towards implementation by noon. In this way, startups can make a significant contribution to quickly compensating for the imbalance between supply and demand caused by the crisis — and thus helping to overcome the crisis.

“Startups are an important engine for innovation and growth. Venture capital is the fuel that drives startups forward and gives the founders the space they need to develop their performance and passion. The financial ecosystem effectively shapes the development of young companies.”

Prof. Dr. Dirk Honold, Professor of Corporate Finance, Georg Simon Ohm Technical University, Nuremberg, Germany

Work from home formula works in favor of startups

The measure of many companies to send their employees home offers start-ups that specialize in the home office and remote solutions an immense increase in users — and profits of companies who innovate in remote solutions area. Software such as Zoom, Teamviewer, Slack, Skype, or Microsoft Teams have become indispensable and any startup that wishes to dedicate itself to making remote work easier, including remote access to corporate IT, as well as cloud-based cybersecurity solutions, is destined for success.

The switch to the home office is much easier for start-ups in general, as all the necessary information, settings, and programs are already available due to the digital business models.

Capitalizing on lockdowns

These days, people spend more time at home. Start-up business models that specialize in consumer and leisure virtual activities are winning through the crisis.

Social life is increasingly taking place virtually. Particularly in demand are e-commerce business models (Amazon, Zalando), furniture stores, hardware stores and interior decorators (Home24, Wayfair), online delivery services from supermarkets (REWE To Go, Picnic, HelloFresh) and restaurants (Uber Eats) as well as gaming and streaming services.

Some of the other startups that did exceptionally well in 2020–2021 are:

Bulb: online and offline submissions of electrical meter readings.

IG Wines: live trading and online wine cellar platform.

Checkout.com: cross-border contactless payments, credit card acceptance.

Wool Culture: all things wool and yarn eCommerce.

Depop: eCommerce platform for new and used fashion.

What3Words: simplified geolocation for B2B and B2C.

All Plants: vegan home food delivery.

Social life is severely restricted. Start-ups that have defied the exceptional situation are, for example, the “Houseparty” app, which enables virtual, informal get-togethers, or the start-up ArtNight, which has changed its corporate concept from stationary to virtual painting workshops.

Other business models that are being strengthened by the pandemic are companies that specialize in claim management for travel bookings and the collection of travel vouchers. Countless booked trips could not be started due to the lockdown and travel warnings, especially due to the newest COVID-19 variant, Omicron, rising across the globe.

Claims for damages against travel agents and airlines have been raised. To make traveler’s life easier, the start-up RightNow specializes in the reimbursement of canceled travel bookings and the assertion of claims for travel vouchers.

Necessity is the mother of invention

Those who can adapt quickly can benefit from this exceptional situation. The media report on corporations that began during the COVID-19 crisis to partially convert their production and manufacture urgently needed medical goods. This change process in corporations is, however, lengthy, slow, and exhausting.

Young, innovative companies have an advantage because of their speed of reaction.

Young fashion labels are now sewing respiratory masks (The Helping Leopard). The start-up Aroma Filter (a manufacturer of coffee filters) now also produces the necessary respiratory protection masks. Filter manufacturers are more and more in focus. The demand for industrial filters to prevent the spread of the virus continues unabated.

The rise of HealthTech

Other industries that defied the crisis very well are FinTech and HealthTech (health technology) industries, which are dominated by start-ups.

FinTech business models are experiencing a real boom due to the increased acceptance of contactless payment and the increasing use of online banking. All of this is always about big data, IoT, and artificial intelligence.

HealthTech start-ups are also benefiting from the crisis. HealthTech business models are providers of medical software, such as for the management of clinical studies and the digital transformation of healthcare providers. Digital medical records, online treatments, and medical advice, as well as virtual diagnoses, are more in demand than ever. Some of the flourishing startups in this area include:

Echo: pharmacy and prescription filling service.

Babylon Health: remote health advice and telehealth assistance.

The pharmaceutical industry is also benefiting from the crisis which doesn’t need explanation. In addition to online pharmacies, demand is also increasing from disinfectant manufacturers and developers of COVID-19 rapid tests with saliva samples.

The boom of digital business concepts

The trend is not new. These days, companies with a digital agenda and digital-first concepts are winning. Start-ups can do just that. The speed at which digitization is being driven forward in companies was increased in the exceptional situation of COVID-19 and new emerging variants.

The demand for digital manufacturing is increasing. The focus is on companies with solutions for the digitization of production processes. In addition to product lifecycle management (recording of product and factory design, simulation, and production), this also includes the digital supply chain which includes coupling ERP systems with supply chain management, customer experience, and human resources management.

VCs as the preferred source of funding

Finances are another reason why not all startups were equally affected. Compared to the overall decline, the number of start-ups with an affinity for venture capital — i.e. young companies that would like to finance their future growth with external equity capital — remained fairly stable.

VC investments boomed in 2021 which resulted in the rapid growth of VC-funded startups. Venture capital funding has many benefits:

• The decision about funding is usually made quickly
• VCs are more agile than traditional sources of funding
• Startups get access to an investor’s vast network of contacts
• Startup founders can leverage fund’s business savvy and experience

According to Crunchbase, the VC-fuelled record funding continued through the entire 2021 with $160 billion invested globally, which is 78 percent year over year more than 2020.

And despite the pandemic, venture capital funding in 2020 was 14% compared to 2019, Bloomberg numbers say. In 2019, $34.2 billion was invested by VCs across 2,215 deals in the USA (Venture Pulse).

What’s even more promising, early-stage funding grew the most. Discover what ArieGuard can do for your startup.

Conclusion

The COVID-19 pandemic is affecting everyone, both new and old companies. COVID-19 pandemic shows society just how vulnerable it is. Flexible business models with innovative minds as well as digital concepts with quick adaptability can benefit from the exceptional situation.

Start-ups are adaptable, creative, and digital-first. They should emerge successfully from the crisis. The future will show which start-ups can use the current situation positively in the long term to achieve market leadership or increase profitability.