Start-ups are undoubtedly important drivers that promote job creation and economic growth. They also promote significant radical invention and innovation. Unfortunately, the ongoing Coronavirus pandemic has challenged various start-ups, as they are more prone to economic shocks of the pandemic than old incumbents are. Even as businesses from all sectors feel the virus’s repercussions, start-ups are particularly vulnerable and face formidable challenges.
Compared to small and medium-sized ventures, start-ups engage in high-risk business activities, lack formative relations with suppliers and customers, and have limited access to traditional funding. As such, in this period of significant economic uncertainty, start-ups increasingly become financially fragile. The guide below outlines some serious challenges facing start-ups and policy responses that can shield the economy during the crisis.
Start-up Challenges during the Pandemic
Diminished Cash Flow
Even during normal times, start-ups often have difficulties accessing sufficient cash flow to run their businesses. With the ongoing pandemic, start-ups have trouble accessing the already limited cash and managing the available amounts, which is crucial for small businesses’ growth. Entrepreneurs should focus on preparing for the second round of lockdown and preparing a budget with minimal or no investor input.
A Drop in Company Value
The pandemic’s onset led to an unexpected change in valuations, which led to a demand shock. With decreasing demand and supply caused by several governments’ restrictions, the stock markets crashed, which went down with the value of every business. With a faltering economy, there is an increase in crime rates, which impeded investments. Attracting willing investors during such periods is also close to impossible.
Getting proper leadership during a period of crisis is also hard. Entrepreneurs find it difficult to lead an entire company with an uncertain future in the business world. However, regardless of the situation, business leaders should maintain transparency with their employees and investors. Leaders should also measures that ensure the business’s smooth operation, such as automating payrolls. This minimizes conflicts between start-ups and employees or suppliers, which may lead to legal action.
Effects of Social Distance
Restrictions placed by governments such as social distancing and lockdown rules also have an impact on start-ups. It became mandatory for all businesses to remotely run their operations, which can be a complicated task for start-ups. Entrepreneurs had to learn how to delegate tasks to remote employees swiftly, which complicated business operations.
Policy Response to Shield Startups
Most governments introduced various policy responses that cautioned the economy from the crisis that targeted financial fragilities, especially for small businesses. These measures aim to sustain short-term business needs, such as through direct lending, subsidies, grants, and loan guarantees. The policies should also consider the specifics that directly support start-ups.
Some countries introduced measures that focus specifically on start-ups. Among them include France, which introduced a EUR 4 Billion specifically directed to supporting start-up liquidity. Similarly, the United Kingdom released a co-financing fund that supports innovative start-ups facing financial challenges. Germany also set aside a tailored start-up aid aimed at expanding and capital financing.
A reduction in the introduction of new firms often has a catapulting social and economic effect. So to say, data from a study estimated that even a 20% reduction in the number of start-ups results in a 0.7% drop in employment. Similarly, the low number of new firms resulting from such pandemics leads to long-term effects in business dynamism.
Start-up Opportunities during the Crisis
Despite the serious economic challenges facing start-ups during the Covid-19 crisis, the long-term effects on new firms, employment, and innovation can be reduced. This can be achieved by taking steps to support the existing start-ups and creating a favorable environment that fosters the creation of new firms. Despite the recessions witnessed during the pandemic, several successful ventures emerged amidst the crisis. Start-ups such as Airbnb, Pinterest, Uber, Dropbox, Slack, Skype, and Zoom have made a breakthrough.
This indicates that the crisis presented not only challenges but also new opportunities that start-ups can capitalize on with radical innovations addressing the changing preferences and customer needs. Innovations in other sectors, such as telemedicine, remote care, online education, home delivery, and teleworking, are excellent opportunities for start-ups that have enjoyed support from targeted policy interventions.
The entire financial climate dramatically changed due to the lockdown and restriction rules to curb the ongoing pandemic. Despite the health issues, the pandemic brought along financial crisis, with start-ups facing unmeasured challenges. The outbreak induced a change in customer habits and change in business operations. However, it also uncovered priceless business opportunities that innovative entrepreneurs can leverage.
That aside, policymakers should put in place beneficial measures that support start-ups and small businesses. They should also consider various interventions aimed at increasing awareness of beneficial opportunities during the pandemic.